Annual report pursuant to Section 13 and 15(d)

Income taxes

v3.23.1
Income taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income taxes Income taxes
A reconciliation of the federal statutory income tax provision to our actual provision for the years ended December 31, 2022 and 2021 is as follows:
  2022 2021
Pre-tax book income (loss) $ (2,381,360) $ 3,760,508 
Expected tax at 21%
(500,086) 789,707 
Permanent differences:
Mark to market (3,937) 6,605 
Intangible amortization (89,480) (67,008)
Paycheck protection program loan forgiveness —  (792,333)
Other 2,404  3,873 
State taxes:
Current 16,352  19,491 
Deferred (162,688) (15,672)
Other items:
Federal research and development credits (7,647) 9,551 
Deferred tax past year true-up's (46,786) (15,228)
Change in valuation allowance 668,326  84,000 
Capitalized research and development expenses 174,674  — 
Other (34,780) (3,495)
Income tax provision $ 16,352  $ 19,491 
The components of net deferred tax assets recognized in the accompanying consolidated balance sheets at December 31, 2022 and 2021 are as follows:
  2022 2021
Net operating loss carryforwards $ 9,812,000  $ 9,293,000 
R&D and ITC credit carryforwards 310,000  303,000 
Accrued expenses and other 317,000  338,000 
Intangibles 342,000  176,000 
Leases 17,000  22,000 
Accounts receivable 96,000  141,000 
Stock options 386,000  288,000 
Inventory 366,000  265,000 
Property, plant and equipment 705,000  754,000 
Other 342,000  270,000 
Deferred tax assets 12,693,000  11,850,000 
Valuation allowance (12,693,000) (11,850,000)
Deferred tax assets, net $ —  $ — 

At December 31, 2022, we had approximately $39,321,000 of Federal net operating loss carryforwards ("NOL") of which $27,366,000 expire beginning in 2023 through 2038 and $11,955,000 have an indefinite carryforward. In addition, we have $1,557,000 of state net operating losses, expiring at various dates starting in 2023 through 2041.
Effective January 1, 2022, all Section 174 research and development expenditures are required to be capitalized and amortized for tax purposes. The impact of this treatment creates a timing difference that gave rise to a deferred tax asset as of December 31, 2022.
The Tax Cuts and Jobs Act was enacted on December 22, 2017. A significant provision of the act was to reduce the statutory Federal tax rate from 34% to 21%. During 2022, our valuation allowance increased by $843,000. This increase is affected by the absorption of deferred tax attributes associated with its acquisition of American DG Energy, Inc. along with permanent book to tax differences and provision to return adjustments.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), a sweeping stimulus bill intended to bolster the U.S. economy, and provide emergency assistance to qualifying businesses and individuals, was enacted and signed into law in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows net operating losses incurred in tax years 2018 through 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The CARES Act also modifies the limitation of business interest expense for the tax years beginning in 2019 and 2020. The modifications to Section 163(j) of the Internal Revenue Code increases the allowable business interest deduction from 30% of adjusted taxable income to 50%. The modifications are not expected to materially effect us, as our adjusted taxable income is below zero for the tax years beginning in 2019 and 2020.
On January 12, 2021, we received confirmation that the Paycheck Protection Program Loan to us pursuant to the Coronavirus Aid, Relief, and Economic Recovery Act, as amended, in the original principal amount of $1,874,200 together with accrued interest of $13,659 was forgiven in full as of January 11, 2021. On September 20, 2021, we received confirmation that the Paycheck Protection Program Second Draw Loan issued to us pursuant to the CARES Act, as amended, in the original principal amount of $1,874,269 together with accrued interest of $11,386 was forgiven in full as of September 8, 2021. The PPP loan forgiveness are considered to be nontaxable for both state and federal purposes and has been treated accordingly in our condensed consolidated financial statements.
In accordance with the provisions of the Income Taxes topic of the Codification, we have evaluated the positive and negative evidence bearing upon the realizability of our deferred tax assets, which are comprised principally of net operating losses. Management has determined that it is more likely than not that we will not recognize the benefits of federal and state deferred tax assets and, as a result, a full valuation allowance has been established for 2021 and 2022 respectively.
    Utilization of the NOL and research and development credit carryforwards are subject to a substantial annual limitation due to ownership changes, as provided by Section 382 of the Internal Revenue Code of 1986, as well as similar state provisions. Ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period.
    We acquired American DG Energy, Inc. during 2017, by acquiring 100 percent of the company's stock. Accordingly, utilization of their consolidated and/or separately computed NOL and/or tax credit carryforwards will be subject to an annual limitation under Internal Revenue Code Section 382. Any such limitation may result in expiration of a portion of the NOL or tax credit carryforwards before utilization. The extent of the limitation, and related allocation and impact upon the NOL and credit carryforwards has been determined to be $391,940 per year for a 20 year period at the ADGE level. However, we have sufficient pre-merger NOLs to offset anticipated taxable income for the taxable year ended December 31, 2022 and do not expected to be limited in NOL utilization for the period.
A full valuation allowance has been provided against our loss carryforwards and, if an adjustment is required under Section 382, it would be offset by a corresponding adjustment to the valuation allowance. Thus, there would be no impact to the balance sheet or statement of operations if an adjustment were required.
We have not recorded any amounts for unrecognized tax benefits as of December 31, 2022 or 2021.
We file tax returns as prescribed by the tax laws of the jurisdiction in which we operate. In the normal course of business, we are subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. Our tax returns from tax year 2019 are still open for examination for both federal and state jurisdictions.