Ideal Power Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2017

Note 12 — Income Taxes

Income taxes are disproportionate to income due to net operating loss carryforwards, which are fully reserved. As of December 31, 2017, the Company has federal net operating loss carryforwards of approximately $43 million which will begin to expire in 2031. Management has concluded that it is more likely than not that the Company will not have sufficient foreseeable taxable income within the carryforward period permitted by current law to allow for the utilization of certain of the deductible amounts generating the deferred tax assets; therefore, a full valuation allowance has been established to reduce the net deferred tax assets to zero at December 31, 2017 and 2016.

The following is a summary of the significant components of the Company’s net deferred income tax assets and liabilities as of December 31, 2017 and 2016:

	For the Year Ended December 31,
	2017		2016
Current deferred income tax assets:
Inventory – uniform capitalization	$	11,000	$	104,000
Accrued compensation and other		93,000		136,000
Less: valuation allowance		(104,000)		(240,000)
	$	—	$	—
Non-current deferred income tax assets and (liabilities):
Net operating loss	$	8,995,000	$	11,319,000
Research and development credit		18,000		18,000
Warranty reserve		89,000		114,000
Warrants issued for services		45,000		73,000
Depreciation and amortization		47,000		17,000
Exercise of options and warrants		(33,000)		(50,000)
Stock based compensation		680,000		830,000
Intangibles and other		(466,000)		(666,000)
Less: valuation allowance		(9,375,000)		(11,655,000)
Net non-current deferred tax assets	$	—	$	—

The Company has applied the provisions of FASB ASC 740, Income Tax, which clarifies the accounting for uncertainty in tax positions. FASB ASC 740 requires the recognition of the impact of a tax position in the financial statements if that position is more likely than not of being sustained on a tax return upon examination by the relevant taxing authority, based on the technical merits of the position. At December 31, 2017 and 2016, the Company had no unrecognized tax benefits.

The Company recognizes interest and penalties related to income tax matters in interest expense and operating expenses, respectively. As of December 31, 2017, and 2016, the Company has no accrued interest and penalties related to uncertain tax positions.

The Company is subject to tax in the United States (“U.S.”) and files tax returns in the U.S. federal and certain state jurisdictions. The Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2013. The Company currently is not under examination by any tax authority.

The reconciliation between the statutory income tax rate and the effective tax rate is as follows:

	For the Year Ended December 31,
	2017			2016
Statutory federal income tax rate		(34)	%		(34)	%
Stock based compensation		1			2
Tax Reform		56			—
Valuation allowance		(23)			32
		—	%		—	%

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act contains significant changes to corporate taxation, including (i) the reduction of the corporate income tax rate to 21%, (ii) the acceleration of expensing for certain business assets, (iii) the one-time transition tax related to the transition of U.S. international tax from a worldwide tax system to a territorial tax system, (iv) the repeal of the domestic production deduction, (v) additional limitations on the deductibility of interest expense and (vi) expanded limitations on executive compensation.

The key impact of the Tax Act on the Company’s financial statement for the year ended December 31, 2017, was the re-measurement of deferred tax balances to the new corporate tax rate. In order to calculate the effects of the new corporate tax rate on the Company’s deferred tax balances, ASC 740 “Income Taxes” (“ASC 740”) required the re-measurement of the Company’s deferred tax balances as of the enactment date of the Tax Act, based on the rates at which the balances are expected to reverse in the future. The re-measurement of deferred tax balances resulted in a net reduction in deferred tax assets of $5.9 million offset with a corresponding adjustment to the valuation allowance.