Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.4
Income Taxes
 12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
Income tax (benefit) provision reported in the consolidated income statements is comprised of the following:

December 31,
2020 2019
Current provision:
Federal $ —  $ — 
State, net of state tax credits 342,832  47,133 
Total current provision 342,832  47,133 
Deferred (benefit) provision:
Federal (6,074,433) 652 
State (2,023,061) 921 
Total deferred (benefit) provision (8,097,494) 1,573 
Total income tax (benefit) provision $ (7,754,662) $ 48,706 
The following are the components of the Company’s deferred tax assets (liabilities) for federal and state income taxes:
December 31,
2020 2019
Deferred income tax assets:
Accrued expenses $ 697,411  $ 515,802 
Deferred revenue 5,109,283  4,435,474 
Lease liability 3,696,955  3,782,796 
Goodwill - component 2 51,536  55,302 
Restricted stock compensation —  3,888 
Nonqualified stock options 249,127  198,884 
Net operating loss carryforwards 2,083,643  3,585,723 
Tax credits 35,850  33,767 
Asset basis difference related to property and equipment —  213,971 
Intangibles 890,440  595,814 
Total deferred income tax assets 12,814,245  13,421,421 
Deferred income tax liabilities:
Lease right-of-use asset (3,153,951) (3,267,892)
Deferred franchise costs (291,915) (406,522)
Goodwill - component 1 (321,967) (245,446)
Asset basis difference related to property and equipment (256,487) — 
Restricted stock compensation (68,703) — 
Total deferred income tax liabilities (4,093,023) (3,919,860)
Valuation allowance (713,589) (9,591,424)
Net deferred tax asset (liability) $ 8,007,633  $ (89,863)
As of December 31, 2019, the Company maintained a valuation allowance of $9.6 million against its deferred tax assets because there was insufficient positive evidence to overcome the existing negative evidence such that it was not more likely than not that the deferred tax assets were realizable. While the Company reported pre-tax income for the year ended December
31, 2019 and 2018, the Company continued to maintain the valuation allowance through the third quarter of 2020 due to the lack of sustained profitability over the three-year period. As of December 31, 2020, The Joint Corp., without the VIE, reported another pre-tax income for the year, resulting in a cumulative three-year pre-tax profit. After weighing all the evidence, management determined that it was more likely than not that the deferred tax assets were realizable and, therefore, the valuation allowance was no longer required for The Joint Corp. As a result, the Company released the valuation allowance against all of the U.S. federal and state deferred tax assets during the fourth quarter of 2020 related to The Joint Corp., without the VIE. Accordingly, the Company recorded a $8.9 million income tax benefit for the year ended December 31, 2020 for the reversal of its deferred tax valuation allowance.
At December 31, 2020, The Joint Corp., without the VIE, had federal and state net operating losses of approximately $7.7 million and $9.8 million, respectively. These net operating losses are available to offset future taxable income and will begin to expire in 2036 for federal purposes and 2025 for state purposes. The Joint Corp. has research and development credits of $14,229 that will begin to expire in 2031 and $21,621 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 (benefit) provision in the consolidated income statements:
  For the Years Ended December 31,
  2020 2019
  Amount Percent Amount Percent
Expected federal tax expense $ 1,136,657  21.0  % $ 731,503  21.0  %
State tax provision, net of federal benefit 277,401  5.1  % 315,805  9.1  %
Change in valuation allowance (8,877,736) (164.0) % (810,190) (23.3) %
Other permanent differences 123,913  2.3  % 41,711  1.2  %
Stock compensation (398,007) (7.4) % (232,686) (6.7) %
Bargain purchase gain —  —  % (5,205) (0.1) %
Return to provision adjustments (16,890) (0.3) % 7,768  0.2  %
(Benefit) provision $ (7,754,662) (143.3) % $ 48,706  1.4  %
Changes in the Company's income tax (benefit) expense relate primarily to the release of valuation allowance in 2020, as well as changes in pretax income during the year ended December 31, 2020, as compared to year ended December 31, 2019. For the years ended December 31, 2020 and December 31, 2019, effective tax rates were (143.3)% and 1.4%, respectively. 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, 2020 and December 31, 2019, 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, 2020, the Company is no longer subject to federal and state examinations by taxing authorities for tax years before 2017 and 2016, respectively.