The Joint Corp. 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, 2019

Income tax provision (benefit) reported in the consolidated statements of operations is comprised of the following (rounded to hundreds):


	December 31,
	2019		2018
Current provision (benefit):
Federal	$	—	$	—
State, net of state tax credits	47,200		39,300
Total current provision (benefit)	47,200		39,300
Deferred provision (benefit):
Federal	800		(90,000)
State	1,000		13,000
Total deferred provision (benefit)	1,800		(77,000)
Total income tax provision (benefit)	$	49,000	$	(37,700)

The following are the components of the Company’s deferred tax assets (liabilities) for federal and state income taxes (rounded to hundreds):


	December 31,
	2019		2018
			(as adjusted)
Deferred income tax assets:
Accrued expenses	$	515,800	$	361,100
Deferred revenue	4,435,400		3,092,500
Deferred rent	—		237,900
Lease abandonment	—		96,500
Lease liability	3,782,800		—
Goodwill - component 2	55,300		52,500
Restricted stock compensation	3,900		—
Nonqualified stock options	198,900		184,400
Net operating loss carryforwards	3,585,700		6,175,600
Tax credits	33,800		14,000
Charitable contribution carryover	—		15,500
Asset basis difference related to property and equipment	214,000		458,600
Intangibles	595,800		435,900
Total deferred income tax assets	13,421,400		11,124,500
Deferred income tax liabilities:
Lease right-of-use asset	(3,267,900)		—
Deferred franchise costs	(406,500)		(574,100)
Goodwill - component 1	(245,500)		(194,700)
Restricted stock compensation	—		(30,800)
Total deferred income tax liabilities	(3,919,900)		(799,600)
Valuation allowance	(9,591,400)		(10,401,600)
Net deferred tax liability	$	(89,900)	$	(76,700)

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the lack of sustained profitability over the three-year period ended December 31, 2019. Such objective evidence limits the ability to consider other subjective evidence, such as the Company's projections for future growth. On the basis of this evaluation, as of December 31, 2019, a valuation allowance of $9,591,400 has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as the Company's projections for growth. If and when the Company determines the valuation allowance should be released (i.e., reduced), the adjustment would result in a tax benefit reported in that period’s consolidated statement of operations, the effect of which would be an increase in reported net income. The amount of any such tax benefit associated with release of the Company's valuation allowance in a particular reporting period may be material.

The 2017 Tax Act was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 34% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The Company finalized the effects of the 2017 Tax Act and recorded the impact in its financial statements as of December 22, 2018 under Staff Accounting Bulletin No. 118 (SAB 118). The company recorded a tax benefit for the impact of the 2017 Tax Act of approximately $120,000 in 2018. This amount is a remeasurement of federal net deferred tax assets resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 34%.

At December 31, 2019, The Joint Corp., without the VIE, had federal and state net operating losses of approximately $13,262,000 and $17,728,000, respectively. These net operating losses are available to offset future taxable income and will begin to expire in 2035 for federal purposes and 2025 for state purposes. The Joint Corp. has research and development credits of $14,000 that will begin to expire in 2031 and $20,000 California alternative minimum tax credits that do not expire.

The following is a reconciliation of the statutory federal income tax rate applied to pre-tax accounting net income, compared to the income tax provision (benefit) in the consolidated statement of operations (rounded to hundreds):


	For the Years Ended December 31,
	2019						2018 (as adjusted)
	Amount		Percent		Amount		Percent
Expected federal tax expense (benefit)	$	731,600	21.0	%	$	22,900	21.0	%
State tax provision, net of federal benefit	315,800		9.1	%	(63,600)		(58.4)	%
Change in valuation allowance	(810,200)		(23.3)	%	51,600		47.4	%
Other permanent differences	41,700		1.2	%	13,200		12.1	%
Stock compensation	(232,600)		(6.7)	%	(40,800)		(37.4)	%
Bargain purchase gain	(5,100)		(0.1)	%	(16,100)		(14.8)	%
Return to provision adjustments	7,800		0.2	%	(4,900)		(4.5)	%
Provision (benefit)	$	49,000	1.4	%	$	(37,700)	(34.6)	%

Changes in the Company's income tax expense relate primarily to changes in pretax income during the year ended December 31, 2019, as compared to year ended December 31, 2018, and the effective tax rate was 1.4% and (34.6)%, respectively. For the years ended December 31, 2019 and December 31, 2018, the difference between the statutory federal income tax rate and the Company's effective tax rate was primarily due to state taxes, the valuation allowance, VIE permanent differences, and stock-based compensation.

For the years ended December 31, 2019 and December 31, 2018, the Company had no uncertain tax positions or interest and penalties related to uncertain tax positions. Interest and penalties associated with tax positions are recorded in the period assessed as general and administrative expenses, if any.

With exceptions due to the generation and utilization of net operating losses or credits, as of December 31, 2019, the Company is no longer subject to federal and state examinations by taxing authorities for tax years before 2016 and 2015, respectively.