Income Taxes

9 Months Ended

Sep. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Note 10. Income Taxes

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

The components of income tax expense are as follows:

	For the Nine Months Ended September 30, 2022		For the Nine Months Ended September 30, 2021
Current:
Federal	$	-	$	-
State		17,305		12,723
		17,305		12,723
Deferred:
Federal		-		-
State		-		-
		-		-
Total income tax expense (benefit)	$	17,305	$	12,723

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

	September 30, 2022			December 31, 2021
Deferred tax assets:
Net operating loss carryover	$	1,555,550		$	1,262,269
Accounts receivable		82,348			104,635
Compensation		560,366			555,936
Inventory		377,609			523,131
Other		7,080			1,244
Total deferred tax assets		2,582,953			2,447,215
Deferred tax liabilities:
Intangibles		(192,813	)		(198,801	)
Property and equipment		(46,467	)		(1,522	)
Total deferred tax liabilities		(239,280	)		(200,323	)
Deferred tax assets, net	$	2,343,673		$	2,246,892
Valuation allowance:
Beginning of year		(2,246,892	)		(1,816,546	)
Increase during the year		(96,781	)		(430,346	)
Ending balance		(2,343,673	)		(2,246,892	)
Net deferred tax asset	$	-		$	-

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 recorded a valuation allowance totaling $96,781 for the nine months ended September 30, 2022 due to the uncertainty of realization. Management believes that based upon the history of losses that the Company has incurred to date and its projection of future taxable operating income for the foreseeable future, it is more likely than not that the Company will not be able to realize the tax benefit associated with deferred tax assets. The valuation allowance established as of September 30, 2022 was $2,343,673.

At September 30, 2022, the Company estimates it has approximately $7,407,379 of net operating loss carryforwards which $2,295,904 will expire during 2022 through 2038. Under Section 382 of the Internal Revenue Code of 1986, as amended ("IRC Section 382"), a corporation that undergoes an "ownership change", as defined therein, is subject to limitation on its use of pre-change tax attributes carryforward to offset future taxable income. The Company completed a 382 study and determined that there were changes in ownership in prior years which limited the NOL from 2013 and earlier, and 2014 through 2016. The 382 limitation mathematically precludes the use of approximately $1,567,395 of net operating loss carryforwards, therefore, the deferred net operating loss carryover asset excludes the portion of net operating loss that are mathematically excluded from future use by the Company.

The Company believes its tax positions will more likely than not be upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax positions. As of September 30, 2022, all the tax years remained open to examination for three years from the tax year in which net operating losses are utilized. The Company was not subject to examination by any income taxing authority as of September 30, 2022.

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

	Nine Months Ended
	September 30, 2022	September 30, 2021
Expected U.S. federal incomes as statutory rate	21.0%	21.0%
Gain on Payroll Protection Loan	0.0%	6.2%
Permanent differences	0.0%	0.0%
State and local income taxes, net of federal benefit	-3.1%	-0.8%
Change in deferred tax asset valuation allowance	-21.8%	-27.4%
Effective tax rate	-3.9%	-1.0%

Our effective income tax rates for the nine months ended September 30, 2022 and September 30, 2021 were -3.9% and -1%, respectively. This decrease from prior period is driven by the valuation allowance allocated to the deferred tax asset for the current period.