Sonnet BioTherapeutics, 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

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

12.

INCOME TAXES

	2013		2012

Loss from continuing operations before income taxes:
United States	$	4,650,443	$	2,346,516
Foreign		636,651		800,844
	$	5,287,094	$	3,147,360

The income tax provision (benefit) consists of the following:

	2013		2012

Foreign
Current	$	40,935	$	19,205
Deferred		(167,554)		(170,962)
U.S. Federal
Current		-		-
Deferred		(652,624)		(791,395)
State & local
Current		-		-
Deferred		(76,786)		(93,105)
Change in valuation allowance		896,964		1,055,462
Income tax provision	$	40,935	$	19,205

The provision (benefit) for income tax using the statutory U.S. federal tax rate is reconciled to the Company’s effective tax rate as follows:

	2013		2012

Computed "expected" income taxe expense (benefit)	$	(1,797,612)	$	(1,070,100)
State income taxes, net of federal benefit		(211,484)		(93,861)
Foreign rate differential		(79,399)		74,106
Prior year deferred tax adjustment		1,083,075		-
Travel, entertainment and other		537,988		53,660
Deferred taxes from acquisitions		(388,597)		-
Change in valuation allowance		896,964		1,055,400
Income tax expense	$	40,935	$	19,205

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Major components of deferred tax assets and liabilities at December 31, 2013 and 2012 were:

	2013		2012

Net operating loss carryovers	$	4,495,059	$	2,812,636
Capital loss carryforwards		488,500		630,100
Investments		-		(80,400)
Derivative liability		645,500		-
Warrants		184,800		-
Australian equity investment		53,132		-
Deferred occupancy liabilities		378,521		-
Total deferred tax assets		6,245,512		3,362,336

Property and equipment		(278,868)		-
Convertible debt		(645,500)		-
Intangibles		(1,061,844)		-
Total deferred tax liabilities		(1,986,212)		-

Net deferred tax assets		4,259,300		3,362,336
Valuation allowance		(4,259,300)		(3,362,336)
Net deferred tax assets	$	-	$	-

As of December 31, 2013 and 2012, the Company has U.S. federal and state net operating loss carryovers of approximately $10,666,000 and $4,187,000 respectively, which will expire at various dates beginning in 2031 through 2034, if not utilized. As of December 31, 2013 and 2012, the Company has foreign net operating loss carryovers of $1,727,000 ($464,000 for Hungary and $1,263,000 for South Africa) and $1,073,000 ($163,000 for Hungary and $910,000 for South Africa), respectively. These net operating loss carryovers can be carried forward indefinitely as long as the Company is trading. The Company has a capital loss carryforward of $1,286,000 which expires between 2015 and 2017 if not utilized. In accordance with Section 382 of the Internal Revenue code, deductibility of the Company’s U.S. net operating loss carryovers may be subject to an annual limitation in the event of a change of control as defined under the Section 382 regulations.

In assessing the realization of deferred tax assets, Management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. 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, projected future taxable income and tax planning strategies in making this assessment. After consideration of all of the information available, Management believes that significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore established a full valuation allowance. For the year ended December 31, 2013 and December 31, 2012, the change in valuation allowance was approximately $896,964 and $1,055,462.

The Company evaluated the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain positions that the Company has taken or expects to take in its return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between two positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits”. A liability is recognized for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing-authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.

As of December 31, 2013 and December 31, 2012, no liability for unrecognized tax benefits was required to be reported.

Interest costs related to unrecognized tax benefits are required to be calculated, if applicable, and would be classified as “interest expense, net” in the two statements of operations. Penalties would be recognized as a component of “general and administrative expenses”. As of December 31, 2013 and December 31, 2012, no interest or penalties were required to be reported. The Company does not expect any significant changes in its unrecognized tax benefits in the next year.

No provision was made for U.S. or foreign taxes on $250,528 of undistributed earnings of the Company as such earnings are considered to be permanently reinvested. Such earnings have been, and will continue to be, reinvested, but could become subject to additional tax if they were remitted as dividends, loaned to the Company, or if the Company should sell its interests in the foreign entities. It is not practicable to determine the amount of additional tax, if any, that might be payable on the undistributed earnings.

- 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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