Annual report pursuant to Section 13 and 15(d)

12. Income Taxes

12. Income Taxes

12 Months Ended

Dec. 31, 2015

Significant components of the income tax provision are summarized as follows:

Income Tax Provision:

	Year Ended December 31,
	2015			2014
Current Provision:
Federal	$	(7,809,637	)	$	4,807,000
State		(850,251	)		822,900
Deferred Provision:
Federal		(331,408	)		1,745,200
State		(36,957	)		186,200
	$	(9,028,253	)	$	7,561,300

A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate on income before income taxes for the years ended December 31, 2015 and 2014 is as follows:

	Year Ended December 31,
	2015		2014
Expected federal income tax at statutory rate		35.0%		34.0%
State income taxes, net of federal deduction		2.1%		4.3%
Permanent differences		-0.1%		10.9%
Change in valuation allowance		-16.9%		0.0%
		20.1%		49.2%

The Company provides for income taxes using the liability method in accordance with FASB ASC Topic 740 “Income Taxes”. Deferred income taxes arise from the differences in the recognition of income and expenses for tax purposes. Deferred tax assets and liabilities are comprised of the following at December 31, 2015 and 2014:

	December 31,
	2015			2014

Deferred income tax assets:
Allowance for bad debts	$	67,948		$	28,300
Stock options		709,375			423,200
Goodwill and intangible assets		7,525,665			–
Beneficial conversion feature		602,681			–
Charitable contributions		505			–
Net operating loss carryforwards		1,144,633			–
Valuation allowance		(8,585,313	)		–
Total deferred income tax assets	$	1,465,494		$	451,500

Deferred income tax liabilities:
Property and equipment	$	(344,356	)	$	(513,600	)
Derivative mark to market adjustments		(1,121,138	)		–
Goodwill and intangible assets		–			(162,500	)
Total deferred income tax liabilities	$	(1,465,494	)	$	(676,100	)

Net deferred income taxes:
Current	$	–		$	28,300
Non-Current		–			(252,900	)

	$	–		$	(224,600	)

Management has reviewed the provisions regarding assessment of their valuation allowance on deferred tax assets and based on that criteria determined that it should record a valuation allowance of $8,585,313 against its deferred tax assets. The Company has net operating loss carryforwards totaling $2,949,285 generated in 2015 and expiring in 2035.

The Company recognizes the consolidated financial statement impact of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than–not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

The Company is subject to income taxes in the U.S. federal jurisdiction and the states of Florida, North Carolina, New Mexico, New Jersey, California and Tennessee. The tax regulations within each jurisdiction are subject to interpretation of related tax laws and regulations and require significant judgment to apply. As of December 31, 2015, returns have been filed for tax years 2014, 2013, 2012, 2011, 2010, 2009, 2008, 2007, 2006 and 2005 and remain open for IRS audit.

In the second quarter of 2015, the Company received notice that the IRS had placed a lien on it related to unpaid 2013 taxes due. The taxes due were paid and the lien was lifted in September 2015.

On September 3, 2015 the Company was notified by the IRS that its 2013 Federal income tax return was selected for examination. The IRS is currently in the process of examining the return and the Company’s supporting documentation. As of December 31, 2015, the Company has not received any proposed adjustments to its 2013 Federal income tax return from the IRS.