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Income Taxes
 12 Months Ended
Dec. 31, 2012
Income Tax Disclosure [Abstract]  
Income Tax Disclosure [Text Block]

8.  Income Taxes

 

The Company accounts for income taxes under FASB ASC 740 “Accounting for Income Taxes.”  Deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities in the Company’s financial statements and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that all or some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

Federal and state income tax returns of the Company for the years ended December 31, 2011, 2010 and 2009 are subject to review by the taxing authorities.

 

The Company has evaluated and concluded that there are no uncertain tax positions requiring recognition in the Company’s financial statements for the year ended December 31, 2012.  The tax expense for the years ended December 31, 2012 and 2011 is $1,482 and $800, respectively.

 

Income tax provision consisted of the following for 2012:

 

    Federal     California     2012  
                   
Current provision   $ -     $ 1,482     $ 1,482  
                         
Deferred provision:                        
Deferred tax – beg of year     -       -       -  
Deferred tax – end of year     -       -       -  
Change in deferred     -       -       -  
Subtotal     -       -       -  
                         
Total Provision   $ -     $ 1,482     $ 1,482  

 

Income tax provision consisted of the following for 2011:

 

    Federal     California     2011  
                   
Current provision   $ -     $ 800     $ 800  
                         
Deferred provision:                        
Deferred tax – beg of year     -       -       -  
Deferred tax – end of year     -       -       -  
Change in deferred     -       -       -  
Subtotal     -       -       -  
                         
Total Provision   $ -     $ 800     $ 800  

 

 

As of December 31, 2012, and December 31, 2011 the Company had deferred tax assets primarily consisting of its net operating loss carryforward.  However, because of the cumulative losses in several consecutive years, the Company has recorded a full valuation allowance such that its net deferred tax asset is zero.

 

Deferred tax assets consist of the following components:

 

    2012     2011  
Current            
Current state taxes   $ -     $ -  
Accrued and other related costs     50,000       39,000  
Total current     50,000       39,000  
                 
Non-current                
Net operating loss carryforward     13,899,000       14,509,000  
Research and development credit     1,821,000       1,820,000  
Total non-current     15,720,000       16,329,000  
                 
Total deferred tax asset     15,770,000       16,368,000  
                 
Less valuation allowance     (15,770,000 )     (16,368,000 )
                 
Net deferred tax asset   $ -     $ -  

 

The Company must make judgments as to whether the deferred tax assets will be recovered from future taxable income. To the extent that the Company believes that recovery is not likely, it must establish a valuation allowance.  A valuation allowance has been established for deferred tax assets which the Company does not believe meet the “more likely than not” criteria.  The Company’s judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies or other factors.  If the Company’s assumptions and consequently its estimates change in the future, the valuation allowances it has  established may be increased or decreased, resulting in a respective increase or decrease in income tax expense.

 

At December 31, 2012 the Company had net operating loss carryforwards of approximately $41,082,000 and $4,449,000 for federal income and California tax purposes, respectively.  Such carryforwards may be used to reduce taxable income, if any, in future years through their expiration in 2013 to 2032 subject to limitations of Sec 382 of the Internal Revenue Code for federal income, and 2016 to 2021 for California tax purposes.  The Company believes an ownership change may have occurred, as defined by Sections 382 and 383 of the Internal Revenue Code (IRC), which could result in the forfeiture of a significant portion of its net operating loss and credit carryforwards. The Company is not using any tax attributes in the current year, but will analyze whether a change occurred and the related impact on its gross deferred tax assets, if needed. As the Company's analysis is not complete, the impact to its gross deferred tax assets is uncertain.

 

In addition, the Company has research and development credits aggregating approximately $854,000 for federal income tax purposes and approximately $968,000 for California tax purposes at December 31, 2012, which are net of potentially ineligible Research and Development credits.  Such credits may be used to reduce federal income taxes payable if any, in future years through their expiration in 2024; such credits have no expiration in California.

 

For 2012 and 2011, the provision for income taxes on the statements of operations differs from the amount computed by applying the statutory Federal income tax rate to income before the provision for income taxes, as follows:

 

    2012     2011  
             
Federal expense expected at statutory rate   $ 193,746     $ (89,063 )
State income taxes, net of Federal benefit     33,247       (15,283 )
Other     504       528  
Change in valuation allowance     (226,017 )     104,618  
                 
Effective Income Tax   $ 1,482     $ 800  

 

The Company follows guidance issued by the FASB with regard to its accounting for uncertainty in income taxes recognized in the financial statements. Such guidance prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities.  The Company’s policy is to include interest and penalties in general and administrative expenses.  There were no interest and penalties recorded for the years ended December 31, 2012 and 2011.  The Company’s review of prior year tax positions using the criteria and provisions presented in guidance issued by the FASB did not result in a material impact on the Company’s financial position or results of operations.