Income Taxes

12 Months Ended

Dec. 31, 2022

(5) Income Taxes

Information pertaining to the Company’s income (loss) before income taxes and the applicable provision for income taxes is as follows:


	December 31,
	2022	2021
Income (loss) before income taxes:
Domestic income (loss)	$(1,698,610)	$287,640
Foreign income (loss)	110,113	196,870
Total income (loss) before income taxes:	$(1,588,497)	$484,510
Provision (benefit) for income taxes:
Current:
Federal	$—	$—
State and local	4,841	(1,080)
Foreign	138,275	266,205
	143,116	265,125
Deferred:
Federal	$1,785	$1,785
State and local	1,022	8,148
Foreign	64,535	251,705
	67,342	261,638
Total provision (benefit) for income taxes:	$210,458	$526,763

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, was enacted March 27, 2020. Among the business provisions, the CARES Act provided for various payroll tax incentives, changes to net operating loss carryback and carryforward rules, business interest expense limitation increases, and bonus depreciation on qualified improvement property. Additionally, the Consolidated Appropriations Act of 2021 was signed on December 27, 2020 which provided additional COVID relief provisions for businesses. The Company has evaluated the impact of both the Acts and has determined that any impact is not material to its financial statements.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:


	December 31,
	2022	2021
Deferred Tax Assets:
Allowance for receivables	$6,190	$20,695
Deferred revenue	340,933	500,841
Share-based compensation	49,091	49,191
Accrued expenses and other liabilities	37,912	93,361
Domestic net operating loss carryforwards	19,388,081	19,567,724
Foreign net operating loss carryforwards	400,302	275,671
Tax credit carryforwards	3,106,022	3,106,022
Capital loss carryforwards	—	34,736
Fixed assets	8,628	6,491
Intangibles	54,278	87,796
Sec. 174 Capitalized Costs	433,448	—
Sub-total	23,824,885	23,742,528
Valuation allowance	(23,438,852)	(23,309,218)
Total Deferred Tax Assets	$386,033	$433,310
Deferred Tax Liabilities:
Prepaid commissions and other	(27,010)	(57,438)
Deferred state income tax	(365,240)	(387,655)
Foreign withholding taxes	(434,720)	(458,526)
Unrealized Foreign Exchange Gains	(96,714)	—
Total Deferred Tax Liabilities	$(923,684)	$(903,619)
Net Deferred Tax Liabilities	$(537,651)	$(470,309)

As of each reporting date, the Company considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. In assessing the Company’s ability to recover its deferred tax assets, the Company evaluated whether it is more likely than not that some portion or the entire deferred tax asset will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating losses can be utilized. The Company considered all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, historical earnings, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Based on these factors the Company determined that its U.S. deferred tax assets are not realizable on a more-likely-than-not basis and has recorded a full valuation allowance against such net deferred tax assets. The Company’s valuation allowance increased by $0.1 million due to operations.

As of December 31, 2022, the Company had approximately $84.6 million of federal net operating loss carryforwards, of which $79.9 million will begin to expire beginning in 2030, if not utilized, and the remaining $4.6 million of which can be carried forward indefinitely subject to 80% of taxable income. As of December 31, 2022, the Company had approximately $3.1 million of research and development tax credit carryforwards which expire at various dates beginning in 2023, if not utilized. Utilization of the net operating losses and credit carryforwards may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credit carryforwards before utilization.

The effective tax rate before income taxes varies from the current statutory federal income tax rate as follows:


	December 31,
	2022	2021
Tax at Federal statutory rate	$(333,585)	$101,747
Increase (reduction) in income taxes resulting from:
State and local taxes	79,182	(4,052)
Non-deductible expenses	18,374	22,104
GILTI	—	6,708
PPP loan forgiveness	—	(158,340)
Net effect of foreign operations	120,806	248,931
Uncertain tax positions	(9,768)	(1,499)
Change in valuation allowance	129,634	87,187
Foreign withholding taxes	63,941	206,323
Prior Period True-ups	147,363	—
Other	(5,489)	17,654
	$210,458	$526,763

Due to the change in U.S. federal tax law, the Company does not intend to indefinitely reinvest any of its unremitted foreign earnings. As of December 31, 2022, the Company has provided for additional foreign withholding taxes totaling approximately $0.4 million on approximately $4.0 million of undistributed earnings of its subsidiaries operating outside of the United States for which withholding tax applies.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows:


	2022	2021
Balance at January 1,	$79,518	$75,506
Increases to tax positions taken in prior years	—	—
Expiration of statutes of limitation	(8,221)	(5,245)
Translation	—	9,257
Balance at December 31,	$71,297	$79,518

At December 31, 2022, unrecognized tax benefits of $71,297, if recognized, would reduce the Company’s annual effective tax rate. As of December 31, 2022, the Company had approximately $41,873 of accrued interest. The Company believes it is reasonably possible that $13,316 of its unrecognized tax benefits will reverse within the next 12 months due to expiring statute of limitations. The Company records any interest and penalties related to unrecognized tax benefits in income tax expense.

The Company files federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2018 through 2022 tax years generally remain subject to examination by federal and most state tax authorities. In addition to the U.S., the Company’s major taxing jurisdictions include China, Taiwan, Japan, France and Germany. Taiwan is currently under exam for the 2021 tax year, but no material tax adjustments are currently expected.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References

Reference 1: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section 50
-Paragraph 21
-URI https://asc.fasb.org/extlink&oid=121826272&loc=d3e32857-109319

Reference 2: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section S99
-Paragraph 2
-Subparagraph (SAB Topic 11.C)
-URI https://asc.fasb.org/extlink&oid=122134291&loc=d3e330215-122817

Reference 3: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section 50
-Paragraph 17
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-URI https://asc.fasb.org/extlink&oid=121826272&loc=d3e32809-109319

Reference 4: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
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-URI https://asc.fasb.org/extlink&oid=122134291&loc=d3e330036-122817

Reference 5: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section 50
-Paragraph 14
-URI https://asc.fasb.org/extlink&oid=121826272&loc=d3e32705-109319

Reference 6: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 270
-Section 50
-Paragraph 1
-URI https://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338

Reference 7: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-URI https://asc.fasb.org/topic&trid=2144680

Reference 8: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 30
-Section 50
-Paragraph 2
-Subparagraph (a)
-URI https://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331

Reference 9: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 235
-SubTopic 10
-Section S99
-Paragraph 1
-Subparagraph (SX 210.4-08(h)(2))
-URI https://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690

+ Details

FALCONSTOR SOFTWARE INC 10-K