Annual report pursuant to Section 13 and 15(d)

Income Taxes

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Income Taxes
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
Income tax expense (benefit) reported in the consolidated income statements is comprised of the following:
December 31,
2023 2022
Current expense:
Federal $ 178,152  $ 377,281 
State, net of state tax credits 251,428  132,520 
Total current expense
 429,580  509,801 
Deferred expense (benefit):
Federal 8,606,677  (295,011)
State 2,354,696  (146,342)
Total deferred expense (benefit) 10,961,373  (441,353)
Total income tax expense
 $ 11,390,953  $ 68,448 
The following are the components of the Company’s deferred tax assets (liabilities) for federal and state income taxes:
December 31,
2023 2022
Deferred income tax assets:
Accrued expenses $ 426,218  $ 97,148 
Deferred revenue 5,414,824  5,338,821 
Lease liability 6,697,111  6,582,122 
Goodwill - component 2 63,328  72,033 
Nonqualified stock options 378,208  339,075 
Interest expense limitation —  35,031 
Net operating loss carryforwards 3,383,391  5,285,726 
Tax credits 35,850  35,850 
Intangibles 3,907,623  3,166,533 
Total deferred income tax assets 20,306,553  20,952,339 
Deferred income tax liabilities:
Lease right-of-use asset (5,852,353) (5,694,797)
Deferred franchise costs (108,148) (100,558)
Goodwill - component 1 (673,278) (537,421)
Asset basis difference related to property and equipment (1,853,103) (2,545,455)
Restricted stock compensation 65,886  (145,956)
Total deferred income tax liabilities (8,420,996) (9,024,187)
Valuation allowance (10,853,909) — 
Net deferred tax asset ($1.1 million and $1.0 million attributable to VIEs as of December 31, 2023 and 2022)
 $ 1,031,648  $ 11,928,152 

A valuation allowance of $10.9 million and $0 was recorded against the deferred tax asset balance of The Joint Corp., without its VIEs, as of December 31, 2023 and 2022, respectively. As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets in each reporting jurisdiction. A significant piece of objective evidence evaluated was the cumulative loss incurred in each jurisdiction over the three-year period ended December 31, 2023. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth, in evaluating the need for a valuation allowance. As a result, management has determined that it is more likely than not that The Joint Corp. will not realize its deferred tax assets as of December 31, 2023, and has recorded a valuation allowance after consideration of any recorded deferred tax liabilities

The Joint Corp, without the VIE, has federal gross net operating loss carryforwards of $13.4 million and $21.6 million as of December 31, 2023 and 2022, respectively. Federal tax effected of these net operating losses were $2.8 million and $4.5 million as of December 31, 2023 and 2022, respectively. $8.3 million of the federal net operating loss is subject to a 20-year carryforward, with a portion beginning to expire in 2036. $5.1 million of the federal net operating loss has an indefinite carryforward period.

The Joint Corp., without its consolidated VIEs, 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 VIE's have net operating loss carryforwards of $0.2 million and $0.5 million as of December 31, 2023 and 2022, respectively. No federal net operating loss is subject to a 20 year carryforward. $0.2 million of the federal net operating loss has an indefinite carryforward period.

The VIE's 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.
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,
  2023 2022
  Amount Percent Amount Percent
Expected federal tax expense $ 344,139  21.0  % $ 145,982  21.0  %
Meals and entertainment 31,057  1.9  % —  —  %
State tax provision (benefit), net of federal benefit 163,657  10.0  % 41,660  6.0  %
Other permanent differences
 12,651  0.8  % 15,458  2.2  %
Change in VA 10,849,714  662.1  % —  —  %
Stock compensation
 (2,030) (0.1) % (91,454) (13.2) %
Change in tax rate
 147,911  9.0  % (64,756) (9.3) %
Return to provision (153,254) (9.4) % —  —  %
Other adjustments
 (2,892) (0.2) % 21,558  3.1  %
Expense $ 11,390,953  695.1  % $ 68,448  9.8  %

Changes in the Company’s income tax expense relate primarily to states taxes, change in valuation allowance, changes in tax rates, return-to-provision adjustments, as well as changes in pre-tax income during the year ended December 31, 2023, as compared to the year ended December 31, 2022. For the years ended December 31, 2023 and December 31, 2022, effective tax rates were 695.1% and 9.8%, respectively. The difference between the statutory federal income tax rate and the Company’s effective tax rate was primarily due to the valuation allowance, and state taxes.
For the years ended December 31, 2023 and December 31, 2022, the Company had gross uncertain tax positions attributable to the VIEs of $1.2 million and $1.3 million, respectively.
December 31,
2023 2022
Beginning balances
 $ 1,314,351  $ 1,314,351 
Increases related to tax positions taken during a prior year —  — 
Decreases related to tax positions taken during a prior year —  — 
Increases related to tax positions taken during a current year —  — 
Decreases related to settlements with taxing authorities —  — 
Decreases related to expiration of the statute of limitations (138,585) — 
Ending balances
 $ 1,175,766  $ 1,314,351 
At December 31, 2023 and December 31, 2022, there were $19,433 and $19,433, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate.
Interest and penalties associated with tax positions are recorded in the period assessed as general and administrative expenses. Accrued interest and penalties was $142,213 and $143,584 for the years ended December 31, 2023 and December 31, 2022 and recorded as other liabilities.
With exceptions due to the generation and utilization of net operating losses or credits, as of December 31, 2023, the Company is no longer subject to federal and state examinations by taxing authorities for tax years before 2020 and 2019, respectively.