Income Taxes

3 Months Ended

Sep. 30, 2022

Income Taxes

Income Taxes

4. Income Taxes. For the three and nine months ended September 30, 2022, the Company recorded income tax benefit of $190,000 and $168,000, or (1.6)% and (1.6)% of income before taxes, respectively. For the three and nine months ended September 30, 2021, the Company recorded income tax expense of $9,000 and $32,000, or 1.0% and 1.3% of loss before taxes, respectively. The income tax expense or benefit for the three and nine months ended September 30, 2022 and 2021 is comprised of federal and state taxes. The primary differences between the Company’s September 30, 2022 and 2021 effective tax rates and the statutory federal rate are nondeductible stock-based compensation, nondeductible penalties and for 2021 increases in the Company’s valuation allowance against its deferred tax assets and for 2022 decreases in the Company’s valuation allowance against its deferred tax assets and decreases in the Company’s reserve for unrecognized tax benefits.

Nine months ended September 30,	2022			2021
Federal statutory rate		21.0	%		21.0	%
Stock-based awards		0.1			(0.9	)
State taxes		3.6			3.6
Impact of uncertain tax positions		(6.2	)		(1.1	)
Valuation allowance		(20.0	)		(34.3	)
PPP forgiveness		-			10.5
Other		(0.1	)		(0.1	)
Effective federal income tax rate		(1.6	)%		(1.3	)%

The Company reassesses its effective rate each reporting period and adjusts the annual effective rate if deemed necessary, based on projected annual taxable income (loss).

Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statements and tax basis of assets and liabilities given the provisions of enacted tax laws. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which we operate, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustment to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria.

At September 30, 2022, and December 31, 2021, the Company had unrecognized tax benefits totaling $52,000 and $711,000, respectively, including interest, which relates to state nexus issues. The amount of the unrecognized tax benefits, if recognized, that would affect the effective income tax rates of future periods is $52,000. The Company recorded a decrease of approximately $679,000 in unrecognized tax benefits related to state income tax exposure in the third quarter of 2022, which reduced accrued income taxes and increased income tax benefit. The Company has determined it is no longer more likely than not that the Company will realize the tax expense.

At December 31, 2021, the Company had Federal net operating loss (NOL) to carry forward of approximately $9,700,000. As of September 30, 2022 the Company estimates remaining Federal NOL carryforwards to be approximately $2,000,000. The federal NOL utilization was limited to 80% of estimated taxable income. The estimated NOL carry-forward will be adjusted at year end for fourth quarter results.