ProPhase Labs, Inc. 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, 2013

NOTE 9 INCOME TAXES

The components of the provision (benefit) for income taxes, in the consolidated statement of operations are as follows (in thousands):

	Year Ended December 31,
	2013		2012		2011

Current
Federal	$	-	$	-	$	-
State		-		-		-
		-		-		-
Deferred
Federal		1,216		(618)		(877)
State		(999)		1,377		(21)
		217		759		(898)
Total	$	217	$	759	$	(898)

Income taxes from continuing operations before valuation allowance	$	217	$	759	$	(898)
Change in valuation allowance		(217)		(759)		898
Income tax (benefit)		-		-		-
Total	$	-	$	-	$	-

A reconciliation of the statutory federal income tax expense (benefit) to the effective tax is as follows (in thousands):

	Year Ended December 31,
	2013		2012		2011

Statutory rate - federal	$	138	$	(661)	$	(925)
State taxes, net of federal benefit		17		1,377		(21)
Permanent differences and other		62		43		48
Income tax from continuing operation before valuation allowance		217		759		(898)

Change in valuation allowance		(217)		(759)		898

Income tax (benefit)		-		-		-
Total	$	-	$	-	$	-

The components of permanent and other differences are as follows (in thousands):

	Year Ended December 31,
	2013		2012		2011

Permanent items:
Meals and Entertainment	$	7	$	6	$	2
Return to provision adjustment		-		(46)		-
Charitable contributions		1		4		-
Share-based compensation expense for stock options granted ⁽¹⁾		54		79		46
	$	62	$	43	$	48

(1)

This item relates to share-based compensation expense for financial reporting purposes not deducted for tax purposes until such options are exercised.

The tax effects of the primary “temporary differences” between values recorded for assets and liabilities for financial reporting purposes and values utilized for measurement in accordance with tax laws giving rise to our deferred tax assets are as follows (in thousands):

	Year Ended December 31,
	2013		2012		2011

Net operating loss and capital loss carryforward	$	13,569	$	14,158	$	13,170
Consulting-royalty costs		80		121		1,431
Trademark		819		-		-
Investment in Phusion		(387)		-		-
Depreciation		(34)		60		235
Other		1,009		983		757
Valuation allowance		(15,056)		(15,322)		(15,593)
Total	$	-	$	-	$	-

A valuation allowance for all of our net deferred tax assets has been provided as we are unable to determine, at this time, that the generation of future taxable income against which the net operating loss (“NOL”) carryforwards could be used can be predicted to be more likely than not. The net change in the valuation allowance for Fiscal 2013, 2012 and 2011 was $266,000, $271,000 and ($898,000), respectively. Certain exercises of options and warrants, and restricted stock issued for services that became unrestricted resulted in reductions to taxes currently payable and a corresponding increase to additional-paid-in-capital for prior years. In addition, certain tax benefits for option and warrant exercises totaling $6.5 million are deferred and will be credited to additional-paid-in-capital when the NOL’s attributable to these exercises are utilized. As a result, these NOL’s will not be available to offset income tax expense. The net operating loss carry-forwards currently approximate $34.7 million for federal purposes will expire beginning in Fiscal 2020 through 2032. Additionally, there are net operating loss carry-forwards of $20.4 million for state purposes that will expire beginning in Fiscal 2018 through 2032.

- Definition

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.

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