Income Taxes

12 Months Ended

Dec. 31, 2021

Income Taxes

Income Taxes

7. Income Taxes. Income tax benefit consists of the following:

Year Ended December 31	2021		2020
Current taxes - Federal	$	—	$	(233,000	)
Current taxes - State		42,000		42,000
Income tax expense (benefit)	$	42,000	$	(191,000	)

The actual tax benefit attributable to loss before taxes differs from the expected tax benefit computed by applying the U.S. federal corporate income tax rate of 21% as follows:

Year Ended December 31	2021			2020
Federal statutory rate		21.0	%		21.0	%
Stock-based awards		2.0			(0.8	)
State taxes		3.6			3.6
Impact of uncertain tax positions		(1.0	)		(0.7	)
Valuation allowance		(34.3	)		(19.6	)
PPP forgiveness		7.5			—
Other		—			0.8
Effective federal income tax rate		(1.2	)%		4.3	%

Components of resulting noncurrent deferred tax assets (liabilities) are as follows:

As of December 31	2021			2020
Deferred tax assets
Accrued expenses	$	507,000		$	376,000
Inventory reserve		23,000			9,000
Stock-based awards		31,000			65,000
Reserve for bad debts		88,000			33,000
Net operating loss and credit carryforwards		2,507,000			1,422,000
Other		33,000			47,000
Depreciation		33,000			52,000
Valuation allowance		(3,146,000	)		(1,946,000	)
Total deferred tax assets	$	76,000		$	58,000
Deferred tax liabilities
Prepaid expenses	$	(76,000	)	$	(58,000	)
Total deferred tax liabilities		(76,000	)		(58,000	)
Net deferred income tax liabilities	$	—		$	—

As of December 31, 2021, the Company had a Federal net operating loss (NOL) to carry forward of approximately $9,700,000 and state NOLs of approximately $7,400,000 to carry forward. The Federal NOLs can be carried forward indefinitely. The expiration of state NOLs carried forward varies by taxing jurisdiction. Future utilization of NOLs carried forward may be subject to certain limitations under Section 382 of the Internal Revenue Code.

In March 2020, Congress passed the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The CARES Act, among other provisions, allows for companies to carry back federal NOLs generated in 2018, 2019 and 2020 for up to five years for refunds of federal taxes paid. This provision created an opportunity for the Company to utilize NOLs not previously expected to be utilized. Thus in 2020, the Company reversed approximately $215,000 of its valuation allowance against the NOLs in its deferred tax assets which the Company carried back to claim a refund of federal taxes paid. The Company received this refund in 2021.

The Company evaluates all significant available positive and negative evidence, including the existence of losses in prior years and its forecast of future taxable income, in assessing the need for a valuation allowance. The underlying assumptions the Company uses in forecasting future taxable income require significant judgment and take into consideration the Company’s recent performance. The change in the valuation allowance for the years ended December 31, 2021 and 2020 was $1,200,000 and $943,000, respectively.

The Company has recorded a liability of $711,000 and $677,000 for uncertain tax positions taken in tax returns in previous years as of December 31, 2021 and 2020, respectively. This liability is reflected as accrued income taxes on the Company’s balance sheets. The Company files income tax returns in the United States and numerous state and local tax jurisdictions. Tax years 2018 and forward are open for examination and assessment by the Internal Revenue Service. With limited exceptions, tax years prior to 2018 are no longer open in major state and local tax jurisdictions. The Company believes that it is reasonably possible that a decrease of up to $665,000 in unrecognized tax benefits related to state exposures may be necessary in the third quarter of 2022, which would reduce accrued income taxes and increase income tax benefit.

A reconciliation of the beginning and ending amount of the liability for uncertain tax positions is as follows:

Balance at January 1, 2020	$	643,000
Increases due to interest and state tax		34,000
Balance at December 31, 2020		677,000
Increases due to interest and state tax		34,000
Balance at December 31, 2021	$	711,000