Note 14. Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. ASC 740, Accounting for Income Taxes, requires companies to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. Due to the timing of the Company’s fiscal year. The lower corporate tax rate will be phased in, resulting in a U.S. statutory federal rate of approximately 27.6% for our fiscal year ended June 30, 2018 and 21% for subsequent fiscal years.

The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the appropriate accounting treatment when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. In the interim periods, provisional amounts are to be recorded where the income tax effect can be reasonably estimated. The Company’s accounting for the Tax Act is incomplete, but the Company has recorded the provisional estimates discussed below and will finalize and record any resulting adjustments within the one-year measurement period. The final transitional impacts of the Tax Act may differ from the below provisional estimates, possibly materially, due to, among other things: legislation by states with respect to the Tax Act; evolving technical interpretations of the Tax Act; legislative action to address questions that arise because of the Tax Act; clarification of the application of accounting standards for income taxes or related interpretations in response to the Tax Act; or updates or changes to provisional amounts the Company has utilized to calculate the transitional impacts, including impacts from changes to current year earnings and tax liabilities, and deferred tax assets and liabilities.

The deferred tax assets and liabilities of the Company are impacted by the Tax Act. The reduction in the U.S. federal corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, requires the Company to remeasure its deferred tax assets and liabilities. The Company has evaluated this change and recorded a decrease to net deferred tax assets with a corresponding decrease to the Company’s valuations allowance against deferred tax assets of $4.6 million. The Company is still in the process of evaluating the state tax impact of the Tax Act on deferred tax balances.

The Company had no income tax expense due to operating losses incurred for the years ended June 30, 2018 and 2017.

The provision for/(benefit from) income tax differs from the amount computed by applying the statutory federal income tax rate to income before the provision for/(benefit from) income taxes. The sources and tax effects of the differences are as follows: 

The tax effects of temporary differences that give rise to the Company’s deferred tax assets and liabilities are as follows:

At June 30, 2018, the Company had approximately $34.1 million of federal and state NOL carry overs that may be available to offset future taxable income.

The NOL carry overs, if not utilized, will expire in stages beginning 2034.

Based on a history of cumulative losses at the Company and the results of operations for the years ended June 30, 2018 and 2017, the Company determined that it is more likely than not it will not realize benefits from the deferred tax assets. The Company will not record income tax benefits in the financial statements until it is determined that it is more likely than not that the Company will generate sufficient taxable income to realize the deferred income tax assets. As a result of the analysis, the Company determined that a full valuation allowance against the deferred tax assets is required. The net change in the valuation allowance during the year ended June 30, 2018 was an increase of approximately $2.6 million.

As a result of the reverse merger that occurred on May 22, 2015, the Company’s previous NOL may be significantly limited. The Company has not performed a detailed analysis to determine whether an ownership change under IRC Section 382 or similar rules has occurred. The effect of an ownership change would be the imposition of annual limitation on the use of NOL carry forwards attributable to periods before the change which total approximately $421,000. Any limitation may result in expiration of a portion of the NOL before utilization. The Company recognizes interest and penalties related to uncertain tax positions in selling, general and administrative expenses.

The Company’s gross unrecognized tax benefits totaled $0.3 million as of June 30, 2018 and $0.0 million as of June 30, 2017. Of these amounts, $0.3 million and $0.0 as of June 30, 2018 and June 30, 2017, respectively, represent the amounts of unrecognized tax benefit that, if recognized, would impact the effective tax rate in each of the fiscal years.

A reconciliation of June 30, 2017 through June 30, 2018 beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):

The unrecognized tax benefit of $0.3 million at the end of June 30, 2018 is recorded on the Consolidated Balance Sheet as a reduction to the carrying value of the gross deferred tax assets.

The Company’s fiscal 2015 federal and North Carolina returns and subsequent tax years remain open for examination. The Company is not currently under examination by any taxing authorities.