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, 2014

NOTE 7 INCOME TAXES

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

	Year Ended December 31,
	2014		2013		2012
Current
Federal	$	-	$	-	$	-
State		-		-		-
		-		-		-
Deferred
Federal		(2,471)		1,216		(618)
State		(74)		(999)		1,377
		(2,545)		217		759
Total	$	(2,545)	$	217	$	759

Income taxes from continuing operations before
valuation allowance	$	(2,545)	$	217	$	759
Change in valuation allowance		2,545		(217)		(759)
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,
	2014		2013		2012

Statutory rate federal	$	(2,662)	$	138	$	(661)
State taxes, net of federal benefit		(51)		17		1,377
Permanent differences and other		168		62		43
Income tax from continuing operation before
valuation allowance		(2,545)		217		759

Change in valuation allowance		2,545		(217)		(759)

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

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

	Year Ended December 31,
	2014		2013		2012
Permanent items:
Meals and Entertainment	$	7	$	7	$	6
Return to provision adjustment		-		-		(46)
Charitable contributions		1		1		4
Share-based compensation expense for stock options granted⁽¹⁾		160		54		79
	$	168	$	62	$	43

(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,
	2014		2013		2012

Net operating loss and capital loss carryforward		14,983	$	13,569	$	14,158
Consulting-royalty costs		39		80		121
Trademark		752		819		-
Investment in Phusion		(483)		(387)		-
Depreciation		(45)		(34)		60
Other		2,508		1,009		983
Valuation allowance		(17,754)		(15,056)		(15,322)
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 2014, 2013 and 2012 was $2.7 million, $266,000 and $271,000, 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 $6.7 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 $38.6 million for federal purposes will expire beginning in Fiscal 2020 through 2033. Additionally, there are net operating loss carry-forwards of $20.1 million for state purposes that will expire beginning in Fiscal 2018 through 2033.

- 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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