CareCloud, 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, 2015

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

15.

INCOME TAXES

For the years ended December 31, 2015 and 2014, the Company estimated its income tax provision based upon the annual pre-tax loss. Although the Company is forecasting a return to profitability, it incurred cumulative losses which make realization of a deferred tax asset difficult to support in accordance with ASC 740. Accordingly, a valuation allowance has been recorded against all Federal and state deferred tax assets as of December 31, 2015 and December 31, 2014.

The Company’s plan to repatriate earnings in Pakistan to the United States requires that U.S. Federal taxes be provided on the Company’s earnings in Pakistan. For state tax purposes, the Company’s Pakistan earnings generally are not taxed due to a subtraction modification available in most states. As a result, through December 31, 2013, the Company reported cumulative losses at the state level for the last three years, and determined that it was more likely than not that it will not be able to utilize its state deferred tax assets. A valuation allowance was recorded against all state deferred tax assets as of December 31, 2013 and the Company continued to record a valuation allowance against its state deferred tax assets through December 31, 2015. The activity in the deferred tax valuation allowance was as follows for the years ended December 31, 2015 and 2014:

	Year ended December 31,
	2015		2014
Beginning balance	$	1,902,022	$	82,052
Provision		857,619		1,819,970
Adjustments		-		-
Ending balance	$	2,759,641	$	1,902,022

Income (loss) before tax for financial reporting purposes during the years ended December 31, 2015 and 2014 consisted of the following:

	Year ended December 31,
	2015		2014
United States	$	(5,729,949)	$	(5,029,199)
Foreign		1,180,357		696,474
Total	$	(4,549,592)	$	(4,332,725)

The provision for income taxes for the years ended December 31, 2015 and 2014 consisted of the following:

	Year ended December 31,
	2015		2014
Current:
Federal	$	(68,893)	$	7,310
State		31,350		12,006
Foreign		4,060		3,845
		(33,483)		23,161
Deferred:
Federal		149,833		153,364
State		21,436		-
		171,269		153,364
Total income tax provision	$	137,786	$	176,525

The components of the Company’s deferred income taxes as of December 31, 2015 and 2014 are as follows:

	December 31,		December 31,
	2015		2014
Deferred tax assets:
Allowance for doubtful accounts	$	97,184	$	49,775
Deferred revenue		14,023		16,070
Deferred rent		3,957		3,781
Property and intangible assets		215,112		552,373
State net operating loss ("NOL") carryforwards		329,857		114,190
Federal net operating loss ("NOL") carryforward		2,211,199		1,242,278
Cumulative translation adjustment		155,143		78,768
Other		217,060		110,136
Valuation allowance		(2,759,641)		(1,902,022)
Total deferred tax assets		483,894		265,349
Deferred tax liabilities:
Earnings and profits of the Pakistani subsidiary		(483,894)		(265,349)
Goodwill amortization		(171,269)		-
Net deferred tax liability	$	(171,269)	$	-

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss carryforwards. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years.

The Company has recorded goodwill as a result of its acquisitions. Goodwill is not amortized for financial reporting purposes. However, goodwill is tax deductible and therefore amortized over 15 years for tax purposes. As such, deferred income tax expense and a deferred tax liability arise as a result of the tax-deductibility of this indefinitely lived asset. The resulting deferred tax liability, which is expected to continue to increase over the amortization period, will have an indefinite life. This deferred tax liability could remain on the Company’s consolidated balance sheet indefinitely unless there is an impairment of goodwill (for financial reporting purposes) or a portion of the business is sold.

Due to the fact that the aforementioned deferred tax liability could have an indefinite life, it is not netted against the Company’s deferred tax assets when determining the required valuation allowance. Doing so would result in the understatement of the valuation allowance and related deferred income tax expense.

A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate of 34% for the years ended December 31, 2015 and 2014 is as follows:

	Year ended December 31,
	2015		2014
Federal tax (benefit)	$	(1,546,861)	$	(1,473,127)
Increase (decrease) in income taxes resulting from:
State tax expense, net of federal benefit		(218,456)		(108,105)
Non-deductible items		17,456		21,407
Undistributed earnings from foreign subsidiaries		5,131		3,845
Deferred true-up		146,946		(87,500)
Valuation allowance		857,619		1,819,971
Additional tax goodwill		884,517		-
Other		(8,566)		34
Total provision	$	137,786	$	176,525

At December 31, 2015 and 2014, the Company did not have any uncertain tax positions that required recognition. The Company is subject to taxation in the United States, various states, Pakistan and Poland. As of December 31, 2015, tax years 2012 through 2014 remain open to examination by major taxing jurisdictions in which the Company is subject to tax. The Pakistan Federal Board of Revenue issued a tax holiday, which precludes the Pakistan subsidiary from being subject to income taxes through June 2016. It is the Company’s policy that any assessed penalties and interest on uncertain tax positions would be charged to income tax expense.

For state tax purposes, the Company’s Pakistan earnings generally are not taxed due to a subtraction modification.

The Pakistan tax holiday does not have a significant impact on the Company’s effective tax rate as all of its earnings in Pakistan are fully provided for at the U.S. Federal tax rate of 34%. The Pakistan corporate tax rate is 33%. The Company’s income taxes would not have been significantly higher as a result of the holiday.

The Company has state NOL carryforwards of approximately $7.5 million which will expire at various dates from 2033 to 2035. The Company has a Federal NOL carryforward of approximately $6.5 million which will expire between 2034 and 2035. The Federal NOL is subject to certain utilization limitations under Section 382 of the Internal Revenue Code.