NOTE 15 – INCOME TAX

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Tax calculations assume a U.S. federal income tax rate of 21% and a California tax rate of 8.84%.

Net deferred tax assets consist of the following components as of December 31:

SCHEDULE OF DEFERRED TAX ASSETS 

The income tax provision for the years ended December 31 are comprised of:

SCHEDULE OF INCOME TAX PROVISION 

The income tax provision differs from the amount of income tax determined by applying the U.S. federal and effective state income tax rates to pretax income from operations for the years ended December 31, due to the following:

SCHEDULE OF EFFECTIVE INCOME RATE RECONCILIATION 

At December 31, 2022, the Company had federal net operating loss carry forwards of approximately $4,280,000 including approximately $1,637,000 from periods prior to 2017 that may be offset against future taxable income through 2036. The Company’s federal net operating losses from 2017 and later carry an indefinite life. At December 31, 2022, the Company had state net operating loss carry forwards of approximately $4,260,000 that may be offset against future taxable income through 2042. No tax expense has been reported in the December 31, 2022 consolidated financial statements since the tax expense is offset by a valuation allowance adjustment of the same amount. No tax benefit has been reported in the December 31, 2021 consolidated financial statements since the potential tax benefit is offset by a valuation allowance adjustment of the same amount. The Company's valuation allowance increased by $480,037 and $446,137 for the years ended December 31, 2022 and 2021, respectively.

Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards for federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry forwards may be limited as to use in future years. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2018.

The Company also acquired approximately $15 million and $14 million in net operating loss carryforwards as a result of its 2022 acquisitions of AOS and Skylar, respectively. The Company believes the future benefit of these net operating losses are limited due to the change of ownership provisions.