Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

12. Income Taxes

For the years ended December 31, 2022 and 2021, the Company recorded income tax expense of $850 and $800, respectively. The effective tax rate is 0% for the years ended December 31, 2022 and 2021.

	December 31,
	2022		2021
Current:
Federal	-		-
State		850		800
Total current		850		800
Deferred:
Federal		-		-
State		-		-
Total deferred		-		-
Total	$	850	$	800

Income tax expense differed from the amount computed by applying the federal statutory income tax rate of 21% to pretax income for the years ended December 31, 2022 and 2021 as a result of the following:

	December 31,
	2022			2021
Federal tax at statutory rate	$	(4,039,453	)	$	(1,635,786	)
State taxes		(415,015	)		(543,984	)
Nondeductible expenses		22,081			(308,449	)
Research and development credit		(673,881	)		(897,331	)
Foreign tax rate difference					1,779
Stock compensation		204,047			150,330
True-up and rate change		386,624			26,751
Valuation allowance		4,516,446			3,207,490
Total	$	850		$	800

The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities as of December 31, 2022 and 2021 related to the following:

	December 31,
	2022			2021
Deferred tax assets:
Net operating loss carryforwards	$	30,186,203		$	28,231,596
Research and development credits		4,867,437			4,193,556
Intangibles		1,303,262			1,772,704
Fixed assets		61,295			89,979
Stock based compensation		654,860			243,970
Lease liability		87,233			-
Capitalized research costs		1,969,682			-
Accruals and others		70,982			40,173
Gross deferred tax assets		39,200,954			34,571,977
Valuation allowance		(39,088,423	)		(34,571,977	)
Total deferred tax assets		112,531			-
Deferred tax liabilities:
Right of use asset		(85,975	)		-
Deferred project costs		(26,536	)		-
Total deferred tax liabilities		(112,531	)		-
Net deferred tax assets:	$	-			-

Management regularly assesses the ability to realize deferred tax assets recorded based upon the weight of available evidence, including such factors as recent earnings history and expected future taxable income on a jurisdiction-by-jurisdiction basis. In the event that the Company changes its determination as to the amount of realizable deferred tax assets, the Company will adjust its valuation allowance with a corresponding charge to the provision for income taxes in the period in which such determination is made. The Company’s management believes that, based on a number of factors, it is more likely than not, that all or some portion of the deferred tax assets will not be realized; and accordingly, for the years ending December 31, 2022 and 2021, the Company has provided a valuation allowance against the Company’s U.S. net deferred tax assets. The net change in the valuation allowance for the years ended December 31, 2022 and 2021 was an increase of $4,516,446 and $3,207,490, respectively.

As of December 31, 2022, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $109,139,982 and $105,895,217, respectively, which will both begin to expire in 2034 with $73,802,785 of our federal net operating loss carryforward lasting indefinitely.

As of December 31, 2022, the Company had federal and state research credit carryforwards of approximately $4,870,011 and $2,637,304, respectively. The federal research credit carryforwards will begin to expire in 2033 while the California research credits carry forward have an indefinite life.

The Internal Revenue Code of 1986, as amended, imposes restrictions on the utilization of net operating losses in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses may be limited as prescribed under Internal Revenue Code Section 382 (“IRC Section 382”). Events which may cause limitations in the amount of the net operating losses that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Utilization of the federal and state net operating losses may be subject to substantial annual limitation due to the ownership change limitations provided by the IRC Section 382 and similar state provisions. The Company has not completed a study to assess whether a change of ownership has occurred, or whether there have been multiple ownership changes since its formation, due to the significant cost and complexity associated with such a study. Any limitation may result in expiration of a portion of the NOL carryforwards before utilization. Further, until a study is completed by the Company and any limitation is known, no amounts are being presented as an uncertain tax position.

The CARES Act contained modifications to Section 163(j) pertaining to the limitation of business interest for tax years beginning in 2019 and 2020. The modifications to Section 163(j) increased the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income. This modification increased the allowable interest expense deduction of the Company.

Under the Tax Cuts and Jobs Act of 2017, research and development costs are no longer fully deductible and are required to be capitalized and amortized for U.S. tax purposes effective January 1, 2022. The mandatory capitalization requirement increases our deferred tax assets and is fully offset with the valuation allowance.

The following table reflects changes in gross unrecognized tax benefits:

	December 31,
	2022		2021
Balance at beginning of year	$	1,797,238	$	1,412,668
Increase in balance related to tax positions taken during the current year		288,806		199,218
Increase in balance related to tax positions taken during prior years		-		185,352
Decrease in balance related to prior year tax positions		-		-
Decrease in balance related to settlement with tax authorities		-		-
Balance at end of year	$	2,086,044	$	1,797,238

As of December 31, 2022, $2,086,044 of the total unrecognized tax benefits, if recognized, would have an impact on the Company’s effective tax rate. The Company estimates that there will be no material changes in its uncertain tax positions in the next 12 months. In accordance with FASB ASC 740, the Company has adopted the accounting policy that interest and penalties recognized are classified as part of its income taxes. Total interest and penalties recognized in the consolidated statement of operations was zero for 2022 and 2021.

The Company files income tax returns in the US federal and various state jurisdictions. The Company’s tax years for 2019 and forward are subject to examination by the US tax authorities. The Company’s tax years for 2018 and forward are subject to examination by various state tax authorities. However, due to the fact that the Company had loss and credits carried forward in some jurisdictions, certain items attributable to technically closed years are still subject to adjustment by the relevant taxing authority through an adjustment to tax attributes carried forward to open years. The Company files U.S. and foreign income tax returns with varying statutes of limitations. Due to the Company’s net carryover of unused operating losses, all years remain subject to future examination by tax authorities.

The Company is currently seeking relief in filing of foreign tax returns related to both foreign subsidiaries that are in the process of winding down operations. In the event that they are required, and relief is not available, filings will be completed as part of the overall dissolution process. No loss carryforwards or other attributes are recorded as part of the provision for income taxes, as there will not be future income to utilize any deferred assets in those foreign jurisdictions. 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), as part as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Amendments include removal of certain exceptions to the general principles of ASC 740, Income Taxes and simplification in several other areas such as accounting for a franchise tax (or similar tax) that is partially based on income. ASU 2019-12 is effective for public business entities for annual reporting periods beginning after December 15, 2020, and interim periods within those reporting periods. The impact to the company is immaterial.