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NOTE 13 Income Taxes
 12 Months Ended
Dec. 31, 2011
Notes to Financial Statements  
Income Taxes

NOTE 13 — Income Taxes

 

Deferred tax expense is related to the deferred tax liability on the portion of the Company's goodwill amortized for tax purposes. Due to the indefinite characteristic of this deferred tax liability, it cannot be offset against deferred tax assets. Goodwill impairment charges recorded as of December 31, 2009 on that portion of the Company's goodwill being amortized for tax purposes, resulted in the reversal of accumulated deferred tax expense and the related deferred tax liability, temporarily eliminating the difference between financial and tax reporting at December 31, 2009 and through the first two quarters of 2010. The provision for deferred tax for the periods ended December 31, 2011, 2010, and 2009, consists of the following components:

 

  Years Ended December 31, 
  2011  2010  2009 
Current:            
 Federal $—  $—  $— 
 State  —   —   — 
      Total Current  —   —   — 
Deferred:            
 Federal  31,940   15,515   (214,261)
 State  —   —   — 
      Total Deferred  31,940   15,515   (214,261)
Total provision for deferred tax $31,940  $15,515  $(214,261)

 

 

Reconciliation of the statutory federal income tax rate to the Company's effective tax rate:

 

  Years Ended December 31, 
  2011  2010  2009 
 Federal tax at statutory rate  34.00%   34.00%   34.00% 
 State income tax rate  5.83%   5.83%   5.83% 
 Losses and credits not benefited  (38.49%)  (39.44%)  (17.89%)
 Goodwill impairment  —   —   (19.30%)
 Provision for taxes  1.34%   0.39%   2.64% 

 

 

As of December 31, 2011, we did not recognize deferred tax assets relating to an excess tax benefit for stock-based compensation deduction of $2,155,000. Unrecognized deferred tax benefits will be accounted for as a credit to additional-paid-in-capital when realized through a reduction in income taxes payable. 

 

Deferred income tax reflects the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Significant components of net deferred tax assets are as follows:

 

  Years Ended December 31, 
Deferred tax assets: 2011  2010 
 Net operating loss carryforwards $10,956,000  $11,321,000 
 Credits  635,000   585,000 
 Capitalized research and development costs  562,000   649,000 
 Other acquired intangibles  203,000   222,000 
 Accruals not currently deductible  1,535,000   1,171,000 
    Total deferred tax assets  13,891,000   13,948,000 
 Valuation allowance for deferred tax assets  (13,882,515)  (13,945,515)
    Net deferred tax assets  8,485   2,485 
Deferred tax liability:        
 Acquired intangibles  (56,000)  (18,000)
Net deferred tax liabilities $(47,515) $(15,515)

 

 

The Company has not generated taxable income in any periods in any jurisdiction, foreign or domestic. The Company has maintained a valuation allowance for all its net deferred tax assets, other than certain purchased intangibles.

 

As of December 31, 2011, the Company had net operating loss carryforwards for federal income tax purposes of approximately $29,236,000 which will expire at various dates beginning in 2012 and through 2031, and federal research and development tax credits of approximately $381,000, which will expire at various dates beginning in 2011 and through 2031. As of December 31, 2011, the Company had net operating loss carryforwards for state income tax purposes of approximately $17,418,000, which will expire at various dates in 2012 and through 2031, and state research and development tax credits of approximately $255,000, which can be carried forward indefinitely. During 2011, approximately $2,423,000 of federal net operating loss carryforwards expired unutilized.

 

Utilization of the net operating loss and tax credit carryforwards is subject to annual limitations due to the ownership change limitations provided by the Internal Revenue Code Section 382 and similar state provisions. The annual limitation will result in the expiration of the net operating loss and credit carryforwards before utilization. The deferred tax assets for the year ended December 31, 2011 reflect estimates of Section 382 limitations.

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits (“UTBs”), excluding interest and penalties, is as follows:

  Amount 
Beginning balance at January 1, 2011 $597,000 
Decreases in UTBs taken in prior years  (28,000)
Increases in UTBs taken in current year  10,000 
Amount related to settlements  — 
Amount related to lapsing of statute of limitations  — 
Ending balance at December 31, 2011 $635,000 

 

 Future changes in the unrecognized tax benefit will have no impact on the effective tax rate due to the existence of the valuation allowance. It is the Company's policy to include interest and penalties related to tax positions as a component of income tax expense. No interest was accrued for the period ended December 31, 2011. The Company estimates that the unrecognized tax benefit will not change significantly within the next twelve months.

 

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company is not currently under audit in any of its jurisdictions where income tax returns are filed. The tax years 1996 to 2011 remain open to examination by the major domestic taxing jurisdictions to which the Company is subject, and for the years 2002 to 2009 for the international taxing jurisdictions to which the Company is subject.