Annual report pursuant to Section 13 and 15(d)

TAX EXPENSE

v3.22.1
TAX EXPENSE
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
TAX EXPENSE TAX EXPENSE
The provision for income taxes consisted of the following for the years ended December 31, 2021 and 2020.
Year Ended December 31,
Current: 2021 2020
Federal 108  — 
State 860  — 
Foreign —  — 
Total current tax expense 968  — 
Year Ended December 31,
Deferred: 2021 2020
Federal 1,112  — 
State (277) — 
Foreign — 
Total deferred tax expense 835  — 
Total Tax Provision 1,803  — 

The components of deferred income tax assets and (liabilities) are as follows:
Year Ended December 31,
2021 2020
Deferred income tax assets:
Options expense $ —  $ 2,871 
Depreciation —  194 
Allowance for Doubtful Accounts —  291 
Accrued Expenses 58  — 
Net operating Losses 5,010  19,676 
Total 5,068  23,032 
Deferred income tax liabilities:
Fixed Assets and Intangibles (11,094) — 
Leases (96) — 
Unrealized gain on investments —  (8,658)
Total (11,190) 14,374 
Valuation allowance —  (14,374)
Net deferred tax assets (liabilities) $ (6,122) $ — 
The net deferred tax liability as of December 31, 2021 is associated with the Company's continuing operations.
The reconciliation between the Company’s effective tax rate and the statutory tax rate is as follows:
Year Ended December 31,
2021 2020
Expected Income Tax  Benefit at Statutory Tax Rate, Net $ (6,385) $ (6,151)
Changes in income taxes resulting from:
State taxes (net of federal tax benefits) 9,937  (2,045)
Decrease in valuation allowance (14,375) (3,727)
Foreign tax rate differential —  — 
Gain/loss on distinguishment of debt 1,255  — 
Non-deductible 280E 5,421  2,683 
Goodwill impairment 1,296  5,572 
Debt discount 239  — 
Passthrough and managed 308  713 
RTP adjustments and other 4,107  613 
Reported income tax expense (benefit) $ 1,803  $ — 
For the years ended December 31, 2021 and 2020, the Company had subsidiaries that produced and sold cannabis or cannabis pure concentrates, subjecting the Company to the limits of Internal Revenue Code (“IRC”) Section 280E. Pursuant to IRC Section 280E, the Company is allowed only to deduct expenses directly related to sales of product. The State of California does not conform to IRC Section 280E and, accordingly the Company is allowed to deduct all operating expenses on its California income tax returns. As the Company files consolidated federal income tax returns, the taxable income generated from its subsidiaries subject to IRC Section 280E has been offset by losses generated by operations not subject to IRC Section 280E.
As of December 31, 2021, the Company had federal net operating loss carryforwards of approximately $16.30 million, which do not expire, but are limited in utilization against 80% of taxable income. As of December 31, 2021, the Company had state net operating loss carryforwards of approximately $17.9 million, which begin to expire in 2038. These tax attributes are subject to an annual limitation from equity shifts, which constitute a change of ownership as defined under IRC Section 382, which will limit their utilization. Management completed an analysis of our owner shifts and believe we underwent ownership changes as defined by Section 382 on May 7, 2018 and July 1,2021. Net operating loss carryforwards have been reduced to reflect the maximum amount available subject to these limitations.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. As of December 31, 2021, we have determined that a valuation allowance is no longer required due to our net deferred tax liability position. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased.
The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. All tax years are subject to examination.
Under ASC 740-10, Income Taxes, we periodically review the uncertainties and judgments related to the application of complex income tax regulations to determine income tax liabilities in several jurisdictions. We use a “more likely than not” criterion for recognizing an asset for unrecognized income tax benefits or a liability for uncertain tax positions. We have determined we have unrecognized assets related to uncertain tax positions for IRC Section 280E as of December 31, 2021. We do not anticipate any significant changes in such uncertainties and judgments during the next twelve months. We settled prior year positions with adjustments to previously filed income tax returns. As of December 31, 2021, we had approximately $8.6 million of unrecognized tax benefits, all of which would affect the effective tax rate if recognized. Of the $8.6 million in unrecognized tax benefits, all of it relates to prior years through our acquisition of UMBRLA.