Note 9. Income Taxes

As a result of the CPM Acquisition, Fuse became the sole managing member of CPM and as a result, began consolidating the financial results of CPM. CPM is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, CPM is not subject to U.S. federal and most applicable state and local income tax purposes. As a partnership, CPM is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by CPM is passed through to an included in the taxable income or loss of its members.

Fuse is subject to U.S. federal income taxes, in addition to state and local income taxes.

The components of income tax expense (benefit) are as follows:

	For the Year Ended December 31, 2017		For the Year Ended December 31, 2016
Current:
Federal	$	-	$	-
State		40,818		51,627
		40,818		51,627
Deferred:
Federal		-		-
State		-		-
		-		-
Total Income tax expense (benefit)	$	40,818	$	51,627

Significant components of the Company's deferred income tax assets and liabilities are as follows:

	December 31, 2017			December 31, 2016
Deferred tax assets:
Net operating loss carryover	$	172,704		$	224,381
Intangibles		40,342			-
Accounts receivable		81,927			-
Compensation		57,458			80,850
Inventory		25,792			-
Total deferred tax assets		378,223			305,231
Deferred tax liabilities:
Prepaid expenses		-			-
Property and equipment		(2,945	)		2,795
Total deferred tax liabilities		(2,945	)		2,795
Deferred tax assets, net		375,278			308,026
Valuation allowance:
Beginning of year		(308,026	)		(700,713	)
(Increase) decrease during year		308,026			392,687
Ending balance		-			(308,026	)
Net deferred tax asset	$	375,278		$	-

In 2016 and 2017 CPM is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, CPM is not subject to U.S. federal and certain state income taxes. Any taxable income or loss generated by CPM during 2016 and 2017 is passed through to and included in the taxable income or loss of its members. Accordingly, our consolidated financial statements for 2017 do not include a provision for federal or state income tax purposes.

Fuse is treated as a corporation for U.S. federal and applicable state and local income tax purposes. As a corporation, Fuse is subject to U.S. federal and applicable state income taxes.

A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. The Company has recorded a valuation allowance in 2016 due to the uncertainty of realization. As a result of the organizational transactions of Fuse and CPM in 2017, it is more likely than not that the tax deferred tax assets benefits would be realized.

At December 31, 2017, Fuse had $822,399 of net operating loss carryforwards which will expire from 2018 to 2037. These carry forward benefits may be subject to annual limitations due to the ownership change limitations imposed by the Internal Revenue Code and similar state provisions. The annual limitation, if imposed, may result in the expiration of net operating losses before utilization. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits. As of December 31, 2017, tax years 2012 through 2015 remain open for IRS audit. The Company has received no notice of audit from the Internal Revenue Service for any of the open tax years.

A reconciliation of income tax computed at the U.S. statutory rate to the effective income tax rate is as follows:

	For the Year Ended December 31, 2017			For the Year Ended December 31, 2016
Statutory U.S. federal income tax rate		35.0	%		35.0	%
State income taxes, net of federal tax benefit		5.8	%		1.7	%
Permanent differences		3.8	%		0.3	%
Other reconciling items		20.5	%		19.8	%
LLC flow-through structure		(59.3	%)		(42.1	%)
Valuation allowance		0.0	%		(13.0	%)
Effective income tax rate		5.8	%		1.7	%