| Income Taxes | Note
4 - Income Taxes During
the years ended December 31, 2021 and 2020, we incurred financial net operating losses before income tax benefit of $ 11,958,145
and $ 15,414,807 ,
respectively, and federal taxable losses of $ 5,740,342
and $ 2,648,248 ,
respectively. For the years ended December 31, 2021 and 2020, we did not record any income tax benefits from the following:
● $ 3,172,746 1,345,002 807,256 370,111
● $ 1,580,984 383,571 415,312 105,549
● $ 572,713 8,743,517 75,073 2,405,997
● $ 788,495 288,339 216,974 . We have recorded
the benefit of our 2021 and 2020 net operating losses in our consolidated financial statements to the extent possible as
a reduction in the deferred tax liability created by the future financial statement amortization of the intangible asset from the acquired
CoNCERT license and Know-How. The benefit associated with the net operating loss carry forward will more-likely-than-not go unrealized
unless future operations are successful except for their offset against the deferred tax liability created by the acquired CoNCERT license
and Know-How, which will decrease over time leading to an increase to the valuation allowance. A
deferred tax liability was recorded on March 19, 2018 when Processa received CoNCERT’s license and Know-How in exchange for Processa
stock that had been issued in an Internal Revenue Code Section 351 Transaction. The Section 351 Transaction treats the acquisition of
the license and Know-How for stock as a tax-free exchange. As a result, under ASC 740-10-25-51 Income Taxes 3,037,147
for the acquired temporary difference between
intangible assets for the financial reporting basis of $ 11,038,929
and the tax basis of $ 1,782 .
The deferred tax liability has been reduced for the effect of non-deductibility of the amortization of the intangible asset to $ 2,145,620
at December 31, 2021 and offset by deferred
tax assets resulting from net operating tax losses. For
the years ended December 31, 2021 and 2020, we recorded a federal income tax benefit of $ 530,611 1,001,019 ,
respectively, as a result of offsetting our deferred tax liability (related to the CoNCERT asset) by the deferred tax assets resulting
from our net operating loss and the amortization of the intangible asset related
to CoNCERT. Our
provision (benefit) for income taxes for the years ended December 31, 2021 and 2020 was as follows: Schedule of Provision for Income Taxes
2021 2020
Year Ended December 31,
2021 2020
Current:
Federal $ - $ -
State - -
Total deferred tax benefit - -
Deferred:
Federal (2,853,937 ) (3,068,218 )
State (624,844 ) (907,504 )
Total deferred tax benefit (3,478,781 ) (3,975,722 )
Valuation allowance 2,948,170 2,974,703
Net deferred tax benefit (530,611 ) (1,001,019 )
Total tax provision (benefit) $ (530,611 ) $ (1,001,019 ) A
reconciliation of our effective income tax rate and statutory income tax rate for the years ended December 31, 2021 and 2020 is as follows: Schedule of Effective Income Tax Rate Reconciliation
2021 2020
Year Ended December 31,
2021 2020
Federal statutory income tax rate 21.00 % 21.00 %
State tax rate, net 1.05 % 1.54 %
Permanent differences (0.18 )% (2.03 )%
Federal orphan drug tax credit 3.04 % 0.94 %
Deferred tax asset valuation allowance (20.48 )% (14.96 )%
Effective income tax rate 4.43 % 6.49 % At
December 31, 2021 and 2020, we had available federal and state net operating loss carryforwards of approximately $ 12.5
million and $ 6.7
million, respectively. The federal net operating
loss generated in 2021 and 2020 of $ 5.7
million and $ 2.6
million, respectively, will carry forward indefinitely.
Net operating losses generated prior to 2018 will expire 2037 .
We are evaluating our qualified research expenditures for the federal orphan drug credit and the federal and state credit for increasing
research activities to offset potential future tax liabilities. The federal research and development tax credits have a 20 -year
carryforward period. We have not recognized any deferred tax assets related to research and development tax credits as of December 31,
2021 or 2020. All federal and state net operating loss and credit carryforwards listed above are reflected after the reduction
for amounts effectively eliminated under Section 382. We
do not recognize other deferred income tax assets at this time because the realization of the assets is not more-likely-than-not that
they will be realized. As of December 31, 2021 and 2020, we had deferred tax assets including start-up expenditures, stock-based compensation,
purchased in-process research and development expenditures and other deductible expenses for both federal and state income tax purposes
of $ 31,427,925
and $ 20,361,140 ,
respectively. The benefit associated with the amortization of the deferred start-up expenditures, purchased in-process research and development
expenditures and other deductible expenses, including a portion of the net operating loss carry forwards, will more-likely-than-not
go unrealized unless future operations are successful. Since the success of future operations is indeterminable, the potential benefits
resulting from these deferred tax assets have not been recorded in our consolidated financial statements. We
recorded a valuation allowance during the years ended December 31, 2021 and 2020 equal to the full recorded amount of our net deferred
tax assets related to deferred start-up costs, federal orphan drug tax credit and other temporary differences since it is more-likely-than-not
that such benefits will not be realized. The valuation allowance is reviewed quarterly and is maintained until sufficient positive evidence
exists to support its reversal. The
significant components of our deferred tax assets and liabilities for Federal and state income taxes consisted of the following: Schedule of Deferred Tax Assets and Liabilities
2021 2020
December 31,
2021 2020
Deferred tax assets:
Non-current:
Net operating loss carry forward – Federal $ 2,615,518 $ 1,410,046
Net operating loss carry forward – State 760,897 437,618
Stock compensation expense 593,365 178,053
Depreciation 13,200 12,958
Purchased in-process R&D 2,481,070 2,405,997
Federal orphan drug credits 791,151 427,343
Start-up expenditures and amortization 1,978,418 1,171,162
Total non-current deferred tax assets 9,233,619 6,043,177
Valuation allowance for deferred tax assets (7,087,999 ) (4,139,829 )
Total deferred tax assets 2,145,620 1,903,348
Deferred Tax Liabilities:
Non-current:
Intangible asset (2,145,620 ) (2,433,959 )
Total non-current deferred tax liabilities (2,145,620 ) (2,433,959 )
Total deferred tax asset (liability) $ - $ (530,611 ) The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future
taxable income and tax planning strategies in making this assessment. Based on management’s analysis, a reserve has been established
against the deferred tax assets related to deferred start-up expenditures and certain other deductible expenses. The change in the valuation
allowance in 2021 and 2020 was $ 2,948,170 2,974,703 ,
respectively. Our
total deferred tax asset as of December 31, 2021 and 2020 primarily includes $ 7,428,810
and $ 4,256,064
($ 1,978,418
and $ 1,171,162
tax effected, respectively) of general and administrative
expenses treated as deferred start-up expenditures for tax purposes, respectively, $ 12,454,846
and $ 6,714,504
($ 3,376,415 and $ 1,847,664
tax effected, respectively) of tax losses,
respectively, resulting in tax loss carryforwards; $ 2,228,039 647,055 593,365 178,053 9,316,230
and
$ 8,743,517 of purchased in-process research
and development ($ 2,481,070
and
$ 2,405,997
tax effected, respectively); and $ 791,151
and $ 427,343
of federal orphan drug tax credits, respectively.
We have had no revenues and recognized cumulative loses since inception. Due to the uncertainty regarding future profitability and
recognition of taxable income to utilize the amortization of deferred start-up expenditures, purchased in-process research and development,
federal orphan drug tax credits and the tax loss carryforwards, except for their offset against the deferred tax liability created by
our acquisition of the CoNCERT license, a valuation allowance against the deferred tax assets has been recognized for the years ended
December 31, 2021 and 2020. We
recognize potential liabilities for uncertain tax positions using a two-step process. The first step is to evaluate the tax position
for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be
sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit
as the largest amount that is more than 50% likely of being realized upon settlement. We have not recorded any uncertain tax positions. We
file U.S. Federal income and California and Maryland state tax returns. There are currently no income tax examinations underway for these
jurisdictions. However, tax years from and including 2017 remain open for examination by federal and state income tax authorities. |
