Annual report pursuant to Section 13 and 15(d)

Income Taxes

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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
Income tax benefit reported in the consolidated income statements is comprised of the following:
December 31,
2021 2020
Current provision:
Federal $ —  $ — 
State, net of state tax credits (46,031) 342,832 
Total current (benefit) provision (46,031) 342,832 
Deferred benefit:
Federal (969,628) (6,074,433)
State (277,570) (2,023,061)
Total deferred (benefit) (1,247,198) (8,097,494)
Total income tax (benefit) $ (1,293,229) $ (7,754,662)
The following are the components of the Company’s deferred tax assets (liabilities) for federal and state income taxes:
December 31,
2021 2020
Deferred income tax assets:
Accrued expenses $ 938,916  $ 697,411 
Deferred revenue 4,546,130  5,103,496 
Lease liability 5,839,233  3,696,955 
Goodwill - component 2 53,946  51,536 
Nonqualified stock options 255,921  249,127 
Net operating loss carryforwards 4,210,605  1,995,293 
Tax credits 35,850  35,850 
Intangibles 1,719,484  890,440 
Total deferred income tax assets 17,600,085  12,720,108 
Deferred income tax liabilities:
Lease right-of-use asset (5,022,052) (3,153,951)
Deferred franchise costs (122,431) (291,915)
Goodwill - component 1 (405,964) (321,967)
Asset basis difference related to property and equipment (1,902,389) (256,487)
Restricted stock compensation (98,958) (68,703)
Total deferred income tax liabilities (7,551,794) (4,093,023)
Valuation allowance (859,657) (685,650)
Net deferred tax asset $ 9,188,634  $ 7,941,435 

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.

The Joint Corp., without the VIE, has federal net operating loss carryforwards of $17.1 million and $7.7 million as of December 31, 2021 and 2020, respectively. $11.1 million of the federal net operating loss is subject to a 20 year carryforward, with a portion beginning to expire in 2036. $6.0 million of the federal net operating loss has an indefinite carryforward period.

The Joint Corp., without the VIE, has various state net operating loss carryforwards. The determination of the state net operating loss carryforwards is dependent upon apportionment percentages and state laws that can change from year to year and impact the amount of such carryforwards. If such net operating loss carryforwards are not utilized, they will begin to expire in 2025.

The Joint Corp. has research and development credits of $14,229 that will begin to expire in 2031 and $21,621 California AMT credits that do not expire.

The VIEs have net operating loss carryforwards of $29.4 million and $28.5 million as of December 31, 2021 and 2020, respectively. $17.3 million of the federal net operating loss is subject to a 20 year carryforward, with a portion beginning to expire in 2036. $12.1 million of the federal net operating loss has an indefinite carryforward period. The VIEs have various state net operating loss carryforwards. The determination of the state net operating loss carryforwards is dependent upon apportionment percentages and state laws that can change from year to year and impact the amount of such carryforwards. If such net operating loss carryforwards are not utilized, they will begin to expire in 2036. These federal and state net operating loss carryforwards are reserved with a full valuation allowance because, based on the available evidence and due to the
structures of the management service agreements, the Company believes it is more likely than not that the Company would not be able to utilize those deferred tax assets in the future. Since the VIEs are separate legal entities and do not file consolidated tax returns with The Joint Corp, the net operating losses from the VIEs cannot offset income from The Joint Corp or vice versa.
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 in the consolidated income statements:
  For the Years Ended December 31,
  2021 2020
  Amount Percent Amount Percent
Expected federal tax expense $ 1,109,334  21.0  % $ 1,136,657  21.0  %
State tax provision, net of federal benefit (382,181) (7.2) % 277,401  5.1  %
Change in valuation allowance 174,008  3.3  % (8,877,736) (164.0) %
Other permanent differences 311,360  5.9  % 123,913  2.3  %
Stock compensation (2,519,083) (47.7) % (398,007) (7.4) %
Other adjustments 13,333  0.3  % (16,890) (0.3) %
Benefit $ (1,293,229) (24.4) % $ (7,754,662) (143.3) %
Changes in the Company's income tax benefit relate primarily to the release of valuation allowance in 2020, as well as changes in pre-tax income during the year ended December 31, 2021, as compared to year ended December 31, 2020. For the years ended December 31, 2021 and December 31, 2020, effective tax rates were (24.5)% and (143.3)%, 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 (for 2020), and stock-based compensation.
For the years ended December 31, 2021 and December 31, 2020, 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, 2021, the Company is no longer subject to federal and state examinations by taxing authorities for tax years before 2018 and 2017, respectively.