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Income Taxes
 12 Months Ended
Dec. 31, 2011
Income Taxes [Abstract]  
Income Taxes
2. INCOME TAXES

Income tax expense for the years ended December 31, 2011 and 2010 consists of the following:

 

                 
    2011     2010  

Current:

                

Federal

   $ 162,000     $ 428,000  

State

     3,000       (3,000 ) 
   

 

 

    

 

 

  
      165,000       425,000  

Deferred

     180,000       15,000  
   

 

 

    

 

 

  
    $ 345,000     $ 440,000  
   

 

 

    

 

 

  

The expected provision for income taxes, computed by applying the U.S. federal income tax rate of 35% in 2011 and 2010 to income before taxes, is reconciled to income tax expense as follows:

 

                 
    2011     2010  

Expected provision for federal income taxes

   $ 365,100     $ 544,000  

State income taxes, net of federal benefit

     2,200       (2,100 ) 

Reversal of uncertain tax positions

     —         (27,000 ) 

Domestic manufacturers deduction

     (18,600 )      (50,100 ) 

Non-deductible meals, entertainment, and life insurance

     20,700       20,400  

Research and development credit

     (15,900 )      (16,600 ) 

Other

     (8,500 )      (28,600 ) 
   

 

 

    

 

 

  
    $ 345,000     $ 440,000  
   

 

 

    

 

 

  

Net deferred tax liabilities consist of the following as of December 31, 2011 and 2010:

 

                 
    2011     2010  

Deferred tax assets:

                

Accrued vacation

   $ 23,000     $ 21,000  

Inventories

     107,000       113,000  

Allowance for doubtful accounts

     8,000       12,000  

Allowance for sales returns

     10,000       11,000  

Capital loss carryforward

     323,000       323,000  

Less valuation allowance

     (323,000 )      (323,000 ) 
   

 

 

    

 

 

  
      148,000       157,000  

Deferred tax liabilities:

                

Property and equipment and other assets

     (305,000 )      (160,000 ) 

Prepaid expenses

     (5,000 )      —    

Intangible assets

     (32,000 )      (11,000 ) 
   

 

 

    

 

 

  

Net deferred tax liabilities

   $ (194,000 )    $ (14,000 ) 
   

 

 

    

 

 

  

The deferred tax amounts described above have been included in the accompanying balance sheet as of December 31, 2011 and 2010 as follows:

 

                 
    2011     2010  

Current assets

   $ 144,000     $ 157,000  

Noncurrent liabilities

     (338,000 )      (171,000 ) 
   

 

 

    

 

 

  
    $ (194,000 )    $ (14,000 ) 
   

 

 

    

 

 

  

At December 31, 2011 and 2010, the Company established a valuation allowance against its deferred tax asset related to the Company’s $919,000 loss on its investment in non-marketable equity securities since it is more likely that the deferred tax asset will not be realized. The deferred tax asset and valuation allowance at December 31, 2011 and December 31, 2010 was $323,000. As of December 31, 2011 the remaining deferred tax asset related to the capital loss can be carried back one year and carried forward three years and must be offset by a capital gain.

 

It has been the Company’s policy to recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2011 and 2010, there was no liability for unrecognized tax benefits.

The Company is subject to taxation in the United States and various states. The material jurisdictions that are subject to examination by tax authorities primarily include Minnesota and the United States, for tax years 2008, 2009, 2010 and 2011.