14. Income Taxes

Income Tax Expense

The components of the Company’s income before income taxes and our provision for (benefit from) income taxes consist of the following:

	Year ended December 31,
	2011			2010			2009
Income (loss) before income taxes
Domestic	$	15,962,992		$	11,944,795		$	5,512,259
Foreign		(2,177,978	)		(4,601,729	)		-
	$	13,785,014		$	7,343,066		$	5,512,259

	Year ended December 31,
	2011			2010			2009
Provision for (benefit from) income taxes:
Current provision:
Federal	$	3,327,626		$	1,063,841		$	(2,908	)
State		155,855			(6,920	)		(18,237	)
Foreign		90,626			-			-
		3,574,107			1,056,921			(21,145	)
Deferred provision:
Federal		1,907,408			2,828,029			2,010,097
State		570,869			479,529			(164,260	)
Foreign		(734,050	)		(1,337,408	)		-
		1,744,227			1,970,150			1,845,837
Total expense	$	5,318,334		$	3,027,071		$	1,824,692

Deferred Tax Assets and Liabilities

Significant components of the Company’s deferred tax assets and liabilities consist of the following:

	December 31,
	2011		2010
Deferred tax assets:
Deferred revenue	$	2,072,931	$	3,078,098
Stock-based compensation expense		1,496,910		1,347,412
Tax credit carry forward		695,914		1,072,993
Net operating loss carryforward, foreign		1,839,924		2,063,037
Accrued expenses and other		825,884		565,503
Inventory reserve		417,726		170,240
Deferred tax asset	$	7,349,289	$	8,297,283

	December 31,
	2011			2010
Deferred tax liabilities:
Intangibles related to Srl acquisition	$	(7,594,729	)	$	(8,279,637	)
Depreciation		(5,210,775	)		(3,851,614	)
Deferred tax liability	$	(12,805,504	)	$	(12,131,251	)

Tax Rate

The reconciliation between the U.S. federal statutory rate and our effective rate is summarized as follows:

	Year ended December 31,
	2011			2010			2009
Statutory federal income tax rate		34.0	%		34.0	%		34.0	%
State tax expense, net of federal benefit		5.7	%		7.8	%		6.2	%
Permanent items, including nondeductible expenses		0.9	%		2.2	%		6.9	%
State investment tax credit		(0.2	)%		(0.8	)%		(5.6	)%
Federal and state research and development credits		(0.4	)%		(2.5	)%		(8.4	)%
Foreign rate differential		0.9	%		2.6	%		0.0	%
Domestic production deduction		(2.3	)%		(2.1	)%		0.0	%
Tax expense		38.6	%		41.2	%		33.1	%

As of December 31, 2011, the Company had net operating losses (“NOL”) for federal income tax purposes in Italy of $6,690,632 with no expiration date. For Massachusetts state income tax purposes, the Company also had an investment tax credit carry-forward of $1,054,105 expiring through 2020.

In connection with the preparation of the financial statements, the Company performed an analysis to ascertain if it was more likely than not that it would be able to utilize, in future periods, the net deferred tax assets associated with its NOL carry-forward and its investment tax credit carry-forward. We have concluded that the positive evidence outweighs the negative evidence and, thus, that those deferred tax assets not otherwise subject to a valuation allowance are realizable on a “more likely than not” basis. As such, we have not recorded a valuation allowance at December 31, 2011, and 2010, respectively.

Accounting for Uncertainty in Income Taxes

A reconciliation of the beginning and ending amount of our unrecognized tax benefits is summarized as follows:

	Year ended December 31,
	2011			2010			2009
Unrecognized tax benefit, beginning of year	$	37,428		$	40,900		$	40,900
Tax positions related to current year		38,329			-			-
Tax positions related to prior years		(19,587	)		37,427			-
Settlements		-			(3,089	)		-
Statute expirations		-			(37,810	)		-
Unrecognized tax benefit, end of year	$	56,170		$	37,428		$	40,900

In the normal course of business, Anika and its subsidiaries may be periodically examined by various taxing authorities. We file income tax returns in the U.S. federal jurisdiction, in certain U.S. states, and in Italy. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate. The 2008 through 2011 tax years remain subject to examination by the IRS and other taxing authorities for U.S. federal and state tax purposes. The 2009 through 2011 tax years remain subject to examination by the appropriate governmental authorities for Italy.

We do not anticipate experiencing any significant increases or decreases in our unrecognized tax benefits within the twelve months following December 31, 2011.

We incurred expenses related to stock-based compensation in 2011, 2010 and 2009 of $1,190,697, $1,102,617, and $958,025, respectively. Accounting for the tax effects of stock-based awards requires that we establish a deferred tax asset as the compensation is recognized for financial reporting prior to recognizing the tax deductions. The tax benefit recognized in the consolidated statement of operations related to stock-based compensation totaled $219,626, $244,746, and $230,812 in 2011, 2010 and 2009, respectively.

Upon the settlement of the stock-based awards (i.e., exercise, vesting, forfeiture or cancellation), the actual tax deduction is compared with the cumulative financial reporting compensation cost and any excess tax deduction is considered a windfall tax benefit, and is tracked in a "windfall tax benefit pool" to offset any future tax deduction shortfalls and will be recorded as increases to additional paid-in capital in the period when the tax deduction reduces income taxes payable. We follow the with-and-without approach for the direct effects of windfall/shortfall items and to determine the timing of the recognition of any related benefits. We recorded a net windfall of approximately $274,000 in 2011 and a net shortfall of approximately $21,000 and $83,000 in 2010 and 2009, respectively.