Note 15 - Income Taxes

12 Months Ended

Aug. 31, 2013

15. INCOME TAXES

The provision for income taxes for the fiscal years ended August 31, 2013 and 2012 consists of the following:

	Fiscal Year Ended August 31,
	2013		2012
Current:
Federal	$	—	$	—
State		8,000		25,000
Foreign		731,000		1,015,000
		739,000		1,040,000
Deferred:
Federal		118,000		44,000
State		7,000		(43,000	)
Foreign		—		—
		125,000		1,000
	$	864,000	$	1,041,000

Reconciliations of the expected federal income tax at the statutory rate with the provisions for income taxes for the fiscal years ended August 31, 2013 and 2012 are as follows:

	Fiscal Year Ended August 31,
	2013			2012
Tax computed at statutory rates	$	1,910,000		$	1,570,000
State income tax, net of federal benefit		15,000			(17,000	)
Tax effect on equity in (income) loss of international joint ventures		(1,781,000	)		(1,616,000	)
Tax effect on dividends received from joint ventures		1,732,000			1,363,000
Tax effect of foreign operations		807,000			556,000
Foreign tax credit		(2,524,000	)		(1,729,000	)
Research and development credit		(364,000	)		(330,000	)
Valuation allowance		1,635,000			1,177,000
Tax-exempt income		(230,000	)		—
Non-controlling interest in partnership income		(425,000	)		—
Other		89,000			67,000
	$	864,000		$	1,041,000

The Company has not provided U.S. income taxes or foreign withholding taxes with respect to its portion of the cumulative undistributed earnings of foreign joint ventures that are essentially permanent in duration. The Company’s portion of the cumulative undistributed earnings of foreign joint ventures that are essentially permanent in duration were $22,281,510 and $18,185,000 at August 31, 2013 and 2012, respectively. If some or all of the undistributed earnings of the joint ventures are remitted to the Company in the future, income taxes, if any, after the application of foreign tax credits will be provided at that time. To the extent undistributed earnings of the Company’s joint ventures are distributed in the future, it is not expected to result in any material additional income tax liability after the application of foreign tax credits.

The tax effect of the temporary differences and tax carryforwards comprising the net deferred taxes shown on the consolidated balance sheets at August 31, 2013 and 2012 are as follows:

	August 31,
	2013			2012
Current:
Accrued bonus	$	277,300		$	404,100
Allowance for doubtful accounts		7,200			7,200
Inventory costs		24,600			11,900
Prepaid expenses and other		(31,200	)		(27,300	)
Other accrued expenses		85,500			96,200
Deferred joint venture expenses		104,100			104,000
Total current	$	467,500		$	596,100

Noncurrent:
Property and equipment	$	(165,100	)	$	(159,500	)
Goodwill		35,200			43,100
Other intangible assets		914,000			949,200
Nonqualified stock options		248,500			196,100
Foreign tax credit carryforward		4,253,900			3,438,300

Research and development credit		1,823,200			1,485,800
New hire retention credit		10,600			10,700
		7,120,300			5,963,700
Valuation allowance		(6,086,100	)		(4,933,100	)
Total noncurrent	$	1,034,200		$	1,030,600

At August 31, 2013, the Company had foreign tax credit carryforwards of approximately $4,253,900, of which approximately $285,800 will expire if not utilized by August 31, 2014. In addition, the Company had federal and state tax credit carryforwards of $1,832,200 at August 31, 2013 which begins to expire in fiscal 2019. These federal and state tax credit carryforwards consist primarily of federal and Minnesota research and development credit carryforwards.

The Company has recorded a valuation allowance of $4,253,900 with respect to the foreign tax credit carryforwards. In addition, the Company has recorded a valuation allowance of $1,832,200 with respect to federal and state tax credit carryforwards.

The Company records a tax valuation allowance to reduce deferred tax assets to the amount expected to be realized when it is more likely than not that some portion or all of its deferred tax assets will not be realized. The Company determined based on all available evidence, including historical data and projections of future results, that it is more likely than not that all of its deferred tax assets, except for its foreign tax credit carryforward and Minnesota research and development credit carryforwards, will be fully realized. The Company determined that its deferred tax asset related to foreign tax credit carryforwards will not be realized due to insufficient federal taxable income within the carryforward period and the fact that for ordering purposes the foreign tax credit carryforwards are not allowed to be used until after any current year foreign tax credits are utilized. In addition, based on historical data and future projections, the Company determined that it is more likely than not that its deferred tax asset related to federal and Minnesota research and development credit carryforwards will not be realized due to insufficient federal and Minnesota taxable income within the carryforward period after considering the foreign tax credit usage.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:

	Fiscal Year Ended August 31,
	2013		2012
Gross unrecognized tax benefits – beginning balance	$	131,000	$	131,000
Gross increases - prior period tax positions		19,000		—
Gross increases – current period tax positions		20,000		—
Gross unrecognized tax benefits – ending balance	$	170,000	$	131,000

The entire amount of unrecognized tax benefits would affect the effective tax rate. It is not expected that the amount of unrecognized tax benefits will change significantly in the next 12 months.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the Company’s income tax provision. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet. The liability for the payment of interest and penalties was $0 at both August 31, 2013 and August 31, 2012.

The Company is subject to taxation in the United States and various states and foreign jurisdictions. With few exceptions, as of August 31, 2013, the Company is no longer subject to federal, state, local, or foreign examinations by tax authorities for years prior to August 31, 2010.

- 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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