12. Income Taxes

The Company uses the liability method of accounting for income taxes as set forth in ASC 740 (formerly Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”)). Under the liability method, deferred taxes are determined based on differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. As of January 31, 2012, the Company had federal and California tax net operating loss carryforwards of approximately $1,981,000 and $2,060,000, respectively. The federal and California net operating loss carryforwards will expire at various dates from 2028 through 2031.

The Company’s effective tax rate is different from the federal statutory rate of 34% due primarily to operating losses that receive no tax benefit as a result of a valuation allowance recorded for such losses.

Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company’s net operating loss and credit carryforwards may be limited if a cumulative change in ownership of more than 50% occurs within any three-year period since the last ownership change. The Company may have had a change in control under these Sections. However, the Company does not anticipate performing a complete analysis of the limitation on the annual use of the net operating loss and tax credit carryforwards until the time that it projects it will be able to utilize these tax attributes.

Significant components of the Company’s deferred tax assets as of January 31, 2012 and January 31, 2011 are shown below. A valuation allowance of $933,420 and $232,700 as of January 31, 2012 and 2011, respectively, has been established against the Company’s deferred tax assets as realization of such assets is uncertain.

Deferred tax assets consist of the following:

	January 31,		January 31,
	2012		2011
NOL carry forward	849,591		212,800
Stock Option - exercisabe	81,775		10,800
Contribution carryforward	6,970		-
Warrant liability	51,408		-
State income taxes	1,247		-
Accrual to cash	(76,500	)	-
State income taxes, deferred	(71,035	)	-
Impairment loss	89,964		-
Other, net	-		9,100
Net Deferred Tax Assets	933,420		232,700
Valuation Allowance	(933,420	)	(232,700	)
	-		-

The provision for income taxes for the year ended January 31, 2012 differs from the amount computed by applying the federal income tax rate as follows:

Tax computed at the statutory rate (34%)	0.34	%
Stock options	(0.01	)%
Accrual to cash	0.01	%
Warrant liability	(0.05	)%
Impairment Loss	(0.08	)%
Non-cash stock compensation	(0.06	)%
Change in valuation	(0.15	)%
	-	%

As of January 31, 2012, the Company does not have any unrecognized tax benefits related to various federal and state income tax matters. The Company will recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.

The Company is subject to U.S. federal income tax as well as income tax of multiple state tax jurisdictions. The Company and its subsidiaries’ state income tax returns are open to audit under the statute of limitations for the years ended January 31, 2009 through 2012. The Company does not anticipate any material amount of unrecognized tax benefits within the next 12 months.