11. Income Taxes

Our provision for income tax expense (benefit) is comprised of the following:


	For the Years Ended December 31,
(in thousands)	2011			2010		2009
Current:
Federal	$	129		$	113	$	308
State		116			71		156
International		236			224		—

		481			408		464

Deferred:
Federal		(10,384	)		1,434		(2,308	)
State		(748	)		170		(244	)
International		(6	)		354		—

		(11,138	)		1,958		(2,552	)

	$	(10,657	)	$	2,366	$	(2,088	)

Variations from the federal statutory rate are as follows:


(in thousands)	2011			2010			2009
Expected federal income tax expense (benefit) at statutory rate of 34%	$	(12,215	)	$	2,528		$	(871	)
Effect of permanent goodwill impairment and worthless stock differences		7,668			(114	)		(967	)
Effect of permanent subsidiary's acquisition-related costs		461			—			—
Effect of permanent enhanced charitable donation differences		(25	)		(260	)		—
Effect of permanent other differences		131			49			177
Effect of change in financial statement carrying value of investment		(5,534	)		—			—
Effect of changes in tax positions		—			—			(259	)
State income tax expense (benefit), net of federal benefit		(871	)		238			(139	)
Federal tax credits		(164	)		(16	)		—
Other		(55	)		(42	)		(29	)
Effect of differences between U.S. taxation and foreign taxation		(53	)		(17	)		—

Income tax expense (benefit)	$	(10,657	)	$	2,366		$	(2,088	)

Deferred income taxes reflect net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the net accumulated deferred income tax assets as of December 31, 2011 and 2010 are as follows:


	December 31,
(in thousands)	2011			2010
Deferred tax assets (liabilities):
Current:
Provision for doubtful accounts	$	306		$	368
Inventory-related expense		724			893
Accrued liabilities		3,530			4,175
Charitable carryforward		187			251
Net operating loss carryforward		2,229			3,232
Dividend from affiliate		—			(37	)
Prepaid and deferred catalog costs		(266	)		(204	)
Other		(24	)		(53	)

Total current deferred tax assets	$	6,686		$	8,625

Non-current:
Depreciation and amortization	$	(1,032	)	$	(420	)
Section 181 qualified production expense		(4,414	)		(3,639	)
Net operating loss carryforward (a)		15,975			11,619
Charitable carryforward		1,464			1,356
Gain from change in financial statement carrying value of investment, net		(4,849	)		(11,941	)
Gain from foreign business acquisition		(347	)		(354	)
Impairment of intangibles		6,032			6,800
Tax credits		899			735
Other		(3	)		78

Total non-current deferred tax assets (a)		13,725			4,234
Valuation allowance		(1,089	)		(1,089	)

Total non-current deferred tax assets, net of valuation allowance (a)		12,636			3,145

Total net deferred tax assets (a)	$	19,322		$	11,770

(a)

During the fourth quarter of 2011, it was determined that we made two errors with regards to our subsidiary's, Real Goods Solar, 2008 income taxes. For tax purposes, we over estimated the amount of Real Goods Solar's intangibles recognizable with regards to an asset purchase and impaired certain intangibles too soon. To correct these qualitatively and quantitatively immaterial to 2008 errors, we restated our net deferred tax assets (with corresponding adjustments to our equity – see Note 9. Equity), reducing the non-current net operating loss carryforward, total non-current deferred tax assets, total non-current deferred tax assets, net of valuation allowance, and total net deferred tax assets at December 31, 2010 by $364 thousand each.

The sources of income (loss) before income taxes and noncontrolling interests are as follows:


(in thousands)	2011			2010		2009
Domestic	$	(34,918	)	$	6,094	$	(2,563	)
International		(1,009	)		1,341		258

	$	(35,927	)	$	7,435	$	(2,305	)

On December 31, 2011, we adjusted the financial statement carrying value of our equity method investment in Real Goods Solar to its estimated fair value due to deconsolidation. Accordingly, we also adjusted the related deferred tax liability for the temporary difference in basis for this investment, thereby recognizing an income tax benefit of $7.1 million and a credit to additional paid-in capital of $0.6 million. See Note 3. Equity Method Investment and Receivable From Investee.

Certain of our subsidiaries, namely those for which we own less than 80% of their shares and voting rights and/or are foreign entities, file tax returns separately from Gaiam's consolidated tax group. At December 31, 2011, we had made a provision for U.S. federal and state income taxes on approximately $1.0 million of undistributed foreign earnings, which are not expected to remain outside of the U.S. indefinitely. Deferred tax liabilities have been established for future taxes on distribution of foreign earnings in the form of dividends or otherwise, in order to derive, for financial statement purposes, the U.S. income taxes (net of tax on foreign tax credits), state income taxes, and withholding taxes payable to the various foreign countries.

At December 31, 2011, we had $1.7 million in tax effected state net operating loss carryforwards. These operating loss carryforwards, if unused, will begin to expire in 2018. Additionally, we had $16.5 million in tax effected federal net operating loss carryforwards. These operating loss carryforwards, if unused, begin to expire in 2018. The Internal Revenue Code contains provisions that limit the net operating loss available for use in any given year upon the occurrence of certain events, including significant changes in ownership interest. A change in ownership of a company of greater than 50% within a three-year period results in an annual limitation on the utilization of net operating loss carryforwards from tax periods prior to the ownership changes. Certain of our net operating loss carryforwards as of December 31, 2011 are subject to annual limitations due to changes in ownership.

We have alternative minimum tax credit carryforwards that have no expiration dates, of approximately $480,000 that are available to offset future regular tax liabilities. We also have general business tax credit carryforwards and foreign tax credit carryforwards for federal income tax purposes at December 31, 2011 of approximately $254,000 and $164,000 that are available to reduce future federal income taxes, if any, and begin to expire in 2018.

Periodically we perform assessments of the realization of our net deferred tax assets considering all available evidence, both positive and negative. As a result of these assessments, we concluded that no changes to our existing valuation allowances were necessary. We expect our net deferred tax assets, less the valuation allowances, at December 31, 2011 to be fully recoverable through the reversal of taxable temporary differences and normal business activities in future years.

We realized $13,000 and $165,000 in tax write-offs recorded to additional paid-in capital as a result of the exercise of stock options for the years ended December 31, 2011 and 2010, respectively. Also, we charged $0.9 million to additional paid-in capital during the year ended December 31, 2011 as a result of adjustments to a deferred tax liability caused by temporary changes in the financial statement carrying value of our investment in Real Goods Solar.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. We measure the tax benefits recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to our subjective assumptions and judgments which can materially affect amounts recognized in our consolidated balance sheets and consolidated statements of operations. The result of our assessment of our uncertain tax positions did not have a material impact on our consolidated financial statements. Our federal and state tax returns for all years after 2006 are subject to future examination by tax authorities for all our tax jurisdictions. We recognize interest and penalties related to income tax matters in interest and other income (expense) and corporate, general and administration expenses, respectively.