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Note 14 - Income Taxes

12 Months Ended

Dec. 31, 2013

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,
	2013			2012			2011
Income (loss) before income taxes
Domestic	$	33,060,976		$	26,170,313		$	15,962,992
Foreign		(581,445	)		(6,642,892	)		(2,177,978	)
	$	32,479,531		$	19,527,421		$	13,785,014

	Year ended December 31,
	2013			2012			2011
Provision for (benefit from) income taxes:
Current provision:
Federal	$	8,024,303		$	7,594,287		$	3,327,626
State		1,580,963			885,958			155,855
Foreign		94,136			(188,650	)		90,626
		9,699,402			8,291,595			3,574,107
Deferred provision:
Federal		2,374,850			776,486			1,907,408
State		114,546			602,447			570,869
Foreign		(283,788	)		(1,900,567	)		(734,050	)
		2,205,608			(521,634	)		1,744,227
Total provision	$	11,905,010		$	7,769,961		$	5,318,334

Deferred Tax Assets and Liabilities

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

	December 31,
	2013		2012
Deferred tax assets:
Deferred revenue	$	852,207	$	1,988,509
Stock-based compensation expense		1,358,554		1,584,583
Tax credit carry forward		19,967		194,364
Net operating loss carryforward, foreign		2,578,640		2,520,746
Accrued expenses and other		649,402		954,559
Inventory reserve		283,996		405,302
Deferred tax asset	$	5,742,766	$	7,648,063

	December 31,
	2013			2012
Deferred tax liabilities:
Acquisition-related Intangibles	$	(6,056,162	)	$	(6,482,404	)
Depreciation		(6,964,428	)		(6,131,473	)
Deferred tax liability	$	(13,020,590	)	$	(12,613,877	)

Tax Rate

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

	Year ended December 31,
	2013			2012			2011
Statutory federal income tax rate		35.0	%		35.0	%		34.0	%
State tax expense, net of federal benefit		4.8	%		6.4	%		5.7	%
Permanent items, including nondeductible expenses		(0.2	%)		0.9	%		0.9	%
State investment tax credit		(0.1	%)		(0.2	%)		(0.2	%)
Federal, state and foreign research and development credits		(0.5	%)		(1.2	%)		(0.4	%)
Foreign rate differential		0.1	%		2.5	%		0.9	%
Domestic production deduction		(2.4	%)		(3.6	%)		(2.3	%)
Effective income tax rate		36.7	%		39.8	%		38.6	%

As of December 31, 2013, the Company had NOL’s for federal income tax purposes in Italy of $9,353,750 with no expiration date.

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. We have concluded that the positive evidence outweighs the negative evidence and, thus, that the 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, 2013, and 2012, 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,
	2013			2012			2011
Unrecognized tax benefit, beginning of year	$	56,170		$	56,170		$	37,428
Tax positions related to current year		-			-			38,329
Tax positions related to prior years		-			38,329			(19,587	)
Statute expirations		(56,170	)		(38,329	)		-
Unrecognized tax benefit, end of year	$	-		$	56,170		$	56,170

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 2010 through 2013 tax years remain subject to examination by the IRS and other taxing authorities for U.S. federal and state tax purposes. The 2009 through 2013 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, 2013.

We incurred expenses related to stock-based compensation in 2013, 2012 and 2011 of $1,268,070, $1,151,199, and $1,190,697, respectively. Accounting for the tax effects of certain stock-based awards requires that we establish a deferred tax asset as the compensation expense is recognized for financial reporting prior to recognizing the related tax deduction upon exercise of the awards. The tax benefit recognized in the consolidated statement of operations related to stock-based compensation totaled $1,984,280, $285,068, and $219,626 in 2013, 2012 and 2011, respectively.

Upon the settlement of certain stock-based awards (i.e., exercise, vesting, forfeiture or cancellation), the actual tax deduction is compared with cumulative financial reporting compensation cost and any excess tax deduction related to these awards is considered a windfall tax benefit. Such benefits are 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 $856,830, $452,471 and $274,190 in 2013, 2012 and 2011, respectively.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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