Note 10 - Income Taxes

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE 10. INCOME TAXES

The provision for federal and state income taxes for the year ended December 31, 2022 included the following:

	Year Ended December 31,
	2022
Current benefit:
Federal	$	-
State		-
Deferred benefit:
Federal		186,103
State		5,575
Valuation allowance		-
Total income tax benefit	$	191,678

Deferred tax assets and liabilities reflect the net effect of temporary differences between the carrying amount of assets and liabilities used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities at December 31, 2022 are as follows:

	December 31, 2022
Deferred tax assets:
Carrying value differences	$	203,541
Net operating loss carryforwards		1,475,901
Net deferred tax assets		1,679,442
Deferred tax liabilities:
Carrying value differences		(238,208	)
Net deferreds	$	1,441,234

A reconciliation between the Company’s effective tax rate on income from continuing operations and the statutory tax rate for the year ended December 31, 2022, is as follows:

	Year Ended December 31,
	2022
Net income tax (provision) benefit at federal statutory rate of 21%	$	172,768
Adjustments to reconcile to the effective rate:
State and local income (tax) benefit, net of federal tax benefits		14,736
W-1 Warrant mark-to-market		189,000
Stock compensation expense		(185,169	)
Other		343
Effective income tax (provision) benefit	$	191,678

As mentioned in Note 2, in as much as CBA had a single member prior to the Closing Date, it had historically been treated as a disregarded entity for income tax purposes. Consequently, Federal and state income taxes have not been provided for periods prior to the Closing Date as its single member was taxed directly on CBA’s earnings. During 2021, CBA’s historical single member made a pass-through entity tax (“PTET”) election with New York State. The PTET is an optional tax that partnerships or New York S corporations may annually elect to pay on certain income for tax years beginning on or after January 1, 2021. If an eligible partnership or New York S corporation elects to pay the PTET, its partners, members, or shareholders subject to personal income tax may be eligible for a PTET credit on their New York State income tax returns. CBA’s carve-out piece of the 2021 PTET election made by CBA’s historical single member was $112,100 and is included in the due to affiliate balance on the balance sheet as of the year ended December 31, 2021. CBA activity subsequent to the Closing Date will be consolidated within ENDI Corp.’s tax return that will be filed for the year ended December 31, 2022 and has been included in the income tax provision for the year ended December 31, 2022.

GAAP provides for the recognition of deferred tax assets if realization of such assets is more likely than not. As of December 31, 2022, the Company had federal and state net operating loss carryforwards of approximately $6.8 million. A portion of these carryforwards will expire in various amounts beginning in 2035, however the majority of these carryforwards will not expire as they were generated after December 31, 2017. The Company expects it will be able to use its carryforwards subject to expiration in full prior to 2035. Section 382 limits the use of net operating loss carryforwards in certain situations where changes occur in the stock ownership of a company. Net operating losses that arose prior to that ownership change will have limited availability to offset taxable income arising in periods following the ownership change. During the year ended December 31, 2022, the Company performed an analysis to determine if a change of control occurred as a product of the Business Combination, and has determined that a change of control is more likely than not to have occurred on August 11, 2022. Under Section 382, net operating loss carryforwards that arose prior to the ownership change will have limited availability to offset taxable income arising in future periods following the ownership change. Section 382 imposes multiple separate and distinct limits on the utilization of pre-change of control net operating losses based on the fair market value of the Company immediately prior to the change of control, as well as certain activities that may or may not occur during the 60 months immediately following the change of control. While the majority of the Company’s historic net operating losses will be limited to an annual threshold, the majority of historic net operating losses also will not be subject to future expiration. As of the year ended December 31, 2022, the Company has not provided a valuation allowance against its net operating losses as the Company expects to be able to use its net operating losses in full to offset future taxable income generated by the Company.

As described further in Note 4, during the three-month period ended December 31, 2022, the Company recorded a measurement period adjustment to the preliminary recorded fair value assigned to the Company’s acquired net deferred tax assets on the Closing Date. The fair value of acquired net deferred tax assets was increased from $0 to $1,249,556, with the corresponding decrease allocated to the Company’s residual amount of goodwill as of December 31, 2022. This adjustment was the product of the Section 382 analysis described above.

The Company is required to recognize in the financial statements the impact of a tax position, if that position is not more likely than not of being sustained on audit, based on the technical merits of the position. The Company’s policy is to record interest and penalties related to unrecognized tax benefits in income tax expense. There was no unrecognized tax benefit as of  December 31, 2022. The Company does not expect that its uncertain tax positions will materially change in the next 12 months. No liability related to uncertain tax positions is recorded on the accompanying financial statements related to uncertain tax positions.

The Company operates in various tax jurisdictions and is subject to audit by various tax authorities. To the extent of the Company’s tax loss carryovers, the Company’s federal and state tax returns will be subject to examination by the tax authorities from the earliest years in which such tax attributes arise. While the amount of those tax loss carryovers continues to be subject to adjustment, any assessment of additional tax for those prior years is generally barred, except for the three most recent years (federal) or four most recent years (state). Tax contingencies are based upon their technical merits, relative law, and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies.

During the year ended December 31, 2022, the Company reported $191,678 of income tax benefit as a result of the change in net deferred tax assets. As noted above, due to CBA’s disregarded status for periods prior to the Closing Date, no comparable income tax expenses existed for the year ended December 31, 2021.