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Note 8 - Income Taxes

9 Months Ended

Sep. 30, 2013

NOTE 8 – INCOME TAXES

The Company accounts for income taxes in accordance with FASB ASC Topic 740, "Accounting for Income Taxes" which requires the Company to provide a net deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting and any available operating loss or tax credit carry forwards. The amount of and ultimate realization of the benefits from the deferred tax assets for income tax purposes is dependent, in part, upon the tax laws in effect, the Company’s future earnings, and other future events, the effects of which cannot be determined.

The temporary differences, tax credits and carry forwards gave rise to the following deferred tax asset (liabilities) at September 30, 2013 and December 31, 2012:

	2013			2012
Vacation accrual	$	4,093		$	4,093
Allowance for doubtful Accounts		243,314			243,314
Reserve for obsolete inventory		32,844			19,925
Net current tax assets	$	280,251		$	267,332

Business tax credit carryover		25,379			25,379
Net operating loss carryover		1,906,914			856,517
Excess of book over tax depreciation		(810,526	)		(805,949	)
Long term tax asset	$	1,121,767		$	75,947

In accordance with prevailing accounting guidance, the Company is required to recognize and disclose any income tax uncertainties. The guidance provides a two-step approach to recognizing and measuring tax benefits and liabilities when realization of the tax position is uncertain. The first step is to determine whether the tax position meets the more-likely-than-not condition for recognition and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%.

The amount of and ultimate realization of the benefits from the deferred tax assets for income tax purposes is dependent, in part, upon the tax laws in effect, the Company’s future earnings, and other future events, the effects of which can be difficult to determine and can only be estimated. Management estimates that it is more likely than not that the Company will generate adequate net profits to use the deferred tax assets; management has estimated that all of the deferred tax will be realized and consequently, a valuation allowance was not recorded.

As of September 30, 2013, the Company had net operating loss carryovers of approximately $3,685,000 for U.S. federal tax purposes expiring through 2033, approximately $980,000 for Danish tax purposes which do not expire, $110,000 for German tax purposes which do not expire and $60,000 for Singapore tax purposes which do not expire.

A reconciliation of income tax expense at the federal statutory rate to income tax expense at the Company’s effective rate was as follows at September 30, 2013 and 2012:

	2013			2012
Computed tax at expected statutory rate	$	(1,335,240	)	$	(346,516	)
State and local income taxes, net of federal benefits		(15,743	)		(5,349	)
Non-deductible expenses		205,498			3,768
Non-US income taxed at different rates		100,735			3,203
Other items		(557	)		(16,492	)
Income tax expense (benefit)	$	(1,045,307	)	$	(361,386	)

The components of income tax expense (benefit) from continuing operations for the years ended September 30, 2013 and 2012 consisted of the following:

	2013			2012
Current income tax expense:
Danish	$	-		$	152,458
Federal		-			(145,020	)
State		-			(45,547	)
Current tax expense	$	-		$	(38,109	)

Deferred tax expense (benefit) arising from:
Excess of tax over financial accounting depreciation	$	-		$	71,129


Net operating loss carryover		(1,032,389	)		(310,138	)
Allowance for doubtful accounts		-			(88,820	)
Reserve for obsolete inventory		(12,918	)		4,552
Deferred tax expense	$	(1,045,307	)	$	(323,277	)
Income tax expense (benefit)	$	(1,045,307	)	$	(361,386	)

Deferred income tax expense/(benefit) results primarily from the reversal of temporary timing differences between tax and financial statement income and net operating losses that can be used to offset taxable income in future years.

The Company files Danish, U.S. federal and Minnesota state income tax returns and LiqTech International AS are generally no longer subject to tax examinations for years prior to 2007 for their Danish tax returns. LiqTech NA is generally no longer subject to tax examinations for years prior to 2008 for U.S. federal and U.S. states tax returns.

- 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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