Quarterly report pursuant to Section 13 or 15(d)

INCOME TAXES

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INCOME TAXES
6 Months Ended
Jun. 30, 2017
Notes to Financial Statements  
Note 11. INCOME TAXES

For the three and six months ended June 30, 2017 and 2016, the Company had no income tax expense (benefit).

 

As of June 30, 2017 and December 31, 2016, the components of deferred income tax assets and deferred income tax liabilities consisted of the following:

 

   

June 30,

2017

   

December 31,

2016

 
             
Deferred Income Tax Assets:            
Warrants Expense   $ 4,832,000     $ 4,186,000  
Derivatives Expense     6,443,000       4,067,000  
Net Operating Losses     19,105,000       15,242,000  
                 
Deferred Income Tax Liabilities:                
Depreciation     (1,818,000 )     (1,334,000 )
                 
Total     28,562,000       22,161,000  
Valuation Allowance     (28,562,000 )     (22,161,000 )
                 
Net Deferred Tax Liabilities   $     $  

 

For the three and six months ended June 30, 2017 and 2016, certain of the Company’s subsidiaries produced and sold cannabis or cannabis pure concentrates, subjecting the Company to the limits of IRC Section 280E. Pursuant to IRC Section 280E, the Company is allowed only to deduct expenses directly related to sales of product.

 

Permanent differences include ordinary and necessary business expenses deemed by the Company as a non-allowable deduction under IRC Section 280E, and tax deductions related to equity compensation that are less than the compensation recognized for financial reporting.

 

As of June 30, 2017 and December 31, 2016, the Company had net operating loss carryforwards of $42,623,000 and $34,940,000, respectively, which, if unused, will expire beginning in the year 2034. These tax attributes are subject to an annual limitation from equity shifts, which constitute a change of ownership as defined under Internal Revenue Code (“IRC”) Section 382, which will limit their utilization. The Company has yet to assess the effect of these limitations, but expects these losses to be substantially limited. Accordingly, the Company has placed a reserve against any assets associated with these losses.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. All tax years from 2012 to 2015 are subject to examination.

 

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative losses incurred through the period ended June 30, 2017. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth. On the basis of this evaluation, as of June 30, 2017, a valuation allowance has been recorded against all deferred tax assets as these assets are more likely than not to be unrealized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.