|12 Months Ended|
Jun. 30, 2019
NOTE 8 — INCOME TAXES
The Tax Act
In December 2017, the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act”) was enacted into law which significantly revises the Internal Revenue Code of 1986, as amended. The newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including a flat corporate tax rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted taxable income, limitation of the deduction for newly generated net operating losses to 80% of current year taxable income and elimination of net operating loss (“NOL”) carrybacks, future taxation of certain classes of offshore earnings regardless of whether they are repatriated, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits beginning in calendar 2018.
As a result of the Tax Act, the corporate tax rate decreased from a top marginal rate of 35% that was effective through December 31, 2017 to a flat rate of 21% effective January 1, 2018. Accordingly, a decrease of $8.5 million in the Company’s deferred income tax assets was recognized as of December 31, 2017, and this amount was fully offset by a corresponding decrease in the valuation allowance.
Income Tax Expense
For the fiscal years ended June 30, 2019 and 2018, the reconciliation between the income tax benefit computed by applying the statutory U.S. federal income tax rate to the pre-tax loss before income taxes, and total income tax expense recognized in the financial statements is as follows (in thousands):
For the fiscal years ended June 30, 2019 and 2018, the Company did not recognize any current income tax expense or benefit due to a full valuation allowance on its deferred income tax assets.
Deferred Income Tax Assets and Liabilities
As of June 30, 2019 and 2018, the income tax effects of temporary differences that give rise to significant deferred income tax assets and liabilities are as follows (in thousands):
For the fiscal year ended June 30, 2019, the valuation allowance increased by $5.4 million, primarily as a result of the increase in net operating losses. In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized.
NOL Carryforwards and Other Matters
The Company files income tax returns in the U.S. federal jurisdiction, and the states of Colorado and California. The Company’s federal and state tax years for the 2016 fiscal year and forward are subject to examination by taxing authorities. As of June 30, 2019, the Company has U.S. federal NOL carryforwards of approximately $81 million, of which approximately $41 million does not expire and $40 million will begin to expire in 2030. Additionally, the Company has a Colorado NOL carryforward of approximately $68 million that starts to expire in 2030.
Federal and state laws impose substantial restrictions on the utilization of NOL carryforwards in the event of an ownership change for income tax purposes, as defined in Section 382 of the Internal Revenue Code. Pursuant to Internal Revenue Code (“IRC”) Section 382, annual use of the Company’s net operating loss carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. The Company has not completed an IRC Section 382 analysis regarding the limitation of net operating loss carryforwards. However, it is possible that past ownership changes will result in the inability to utilize a significant portion of the Company’s net operating loss carryforward that was generated prior to any change of control. The Company’s ability to use its remaining net operating loss carryforwards may be further limited if the Company experiences a Section 382 ownership change in connection with future changes in the Company’s stock ownership.
The Company did not have any unrecognized tax benefits as of June 30, 2019 and 2018. The Company’s policy is to account for any interest expense and penalties for unrecognized tax benefits as part of the income tax provision. The Company does not anticipate that unrecognized tax benefits will significantly increase or decrease within the next twelve months.
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.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef