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INCOME TAXES | 12 Months Ended
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Dec. 31, 2012
INCOME TAXES |
INCOME TAXES | NOTE 8 - INCOME TAXES Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in income in the period that includes the enactment date. Undistributed earnings of Helpson, the Company’s foreign subsidiary, since its acquisition, amounted to approximately $113.4 million at December 31, 2012. Those earnings, as well as the investment in Helpson of approximately $23.3 million, are considered to be indefinitely reinvested and, accordingly, no U.S. federal or state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. federal and state income taxes (net of an adjustment for foreign tax credits) and withholding taxes payable to the PRC. Determination of the amount of unrecognized deferred U.S. income tax liability is not practical because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credits may be available to reduce a portion of the U.S. tax liability. Liabilities are established for uncertain tax positions expected to be taken in income tax returns when such positions are judged to meet the “more-likely-than-not” threshold based on the technical merits of the positions. Estimated interest and penalties related to uncertain tax penalties are included as a component of other expenses. Through December 31, 2012, the Company has not identified any uncertain tax positions that it had taken. U.S. income tax returns for the years ended December 31, 2009 through December 31, 2012 and the Chinese income tax return for the year ended December 31, 2012 are open for possible examination. On March 16, 2007, the National People’s Congress of China passed the new Enterprise Income Tax Law (EIT Law) and on December 6, 2007, the State Council of China issued the Implementation Regulations for the EIT Law which took effect on January 1, 2008. The EIT Law and Implementation Regulations impose a unified EIT of 25% on all domestic-invested enterprises and Foreign Invested Entities, or FIEs, unless they qualify under certain limited exceptions. The Company is located in a special region, which had a 15% corporate income tax rate before the new EIT Law. The new EIT Law abolished the preferential corporate income tax rate in the special region. The Company has transitioned to the new 25% tax rate over a five year period which began on January 1, 2008. During 2010, the Company applied for and received a favorable tax rate of 15% for fiscal 2011 through 2013 due to its status in the PRC as a high technology enterprise. Under current tax law in the PRC, the Company is and will be subject to the following enterprise income tax rates:
|  | Enterprise Income Tax Rate
Year |
2013 |  | 15%
2014 and after |  | 25%
The provision for income taxes consisted of the following:
|  | Years Ended December 31,
|  | 2012 |  | 2011
Current |  | $ 1,414,171 |  | $ 3,458,568
Deferred |  | (430,250) |  | (16,213)
Total income tax expense |  | $ 983,921 |  | $ 3,442,355
Following is a reconciliation of income taxes calculated at the federal statutory rate to the provision for income taxes:
|  | Years Ended December 31,
|  | 2012 |  | 2011
Tax at statutory rate of 25% |  | $ 1,400,395 |  | $ 5,677,999
Non-deductible stock-based compensation from |  |  |  |
current and prior years |  | 149,644 |  | 261,122
Effect of tax holiday |  | (655,947) |  | (2,330,566)
Other, primarily the effect of US tax rates |  | (70,471) |  | -
Change in valuation allowance |  | 160,300 |  | (166,200)
Income tax expense |  | $ 983,921 |  | $ 3,442,355
The effect of the tax holiday amounted to savings of $655,947 and $2,330,566 for the years ended December 31, 2012 and 2011, which was equivalent to basic and diluted earnings per share of $0.02 and $0.05 per share for the years ended December 31, 2012 and 2011, respectively. The temporary differences which give rise to the deferred income tax assets and liability are as follows:
|  | December 31,
|  | 2012 |  | 2011
Deferred income tax assets: |  |  |  |
Allowance for doubtful trade receivables |  | $ 664,492 |  | $ 530,461
Allowance for doubtful other receivables |  | 7,482 |  | 5,838
Inventory obsolescence reserve |  | 265,498 |  | -
Expenses not deductible in current year |  | 30,200 |  | 29,927
Share based compensation |  | 45,777 |  | 172,911
U.S. net operating loss carry forwards |  | 905,669 |  | 618,236
Total deferred income tax assets |  | 1,919,118 |  | 1,357,373
Valuation allowance |  | (951,447) |  | (791,147)
Net deferred income tax asset |  | $ 967,671 |  | $ 566,226
Deferred income tax liability: |  |  |  |
Intangible assets |  | $ 95,963 |  | $ 128,909
As of December 31, 2012, the Company has net operating losses from continuing operations for United States federal income tax purposes of $2,663,731 which are available to offset future taxable income, if any, and expire, if not used, from 2029 through 2032. In assessing the realizability of deferred tax assets, Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those differences become deductible or tax loss carry forwards are utilized. Management considers projected future taxable income and tax planning strategies in making this assessment. Based upon an assessment of the level of historical taxable income and projections for future taxable income over the periods on which the deferred tax assets are deductible or can be utilized, Management believes it is not likely the Company will realize all of the benefits of the deferred tax assets as of December 31, 2012 and 2011. Therefore, the Company has provided for a valuation allowance against its deferred tax assets of $951,447 and $791,147 as of December 31, 2012 and 2011, respectively. The Company has also incurred various other taxes, comprised primarily of business taxes, value-added taxes, urban construction taxes, education surcharges and others. Any unpaid amounts are reflected on the balance sheets as accrued taxes payable. During 2012 and 2011, the Company received an incentive payment from the tax authority of the Hainan provincial government in the PRC totaling $141,987 and $301,672, respectively, which has been recorded as government subsidy income on the accompanying statements of operations and comprehensive income for the years ended December 31, 2012 and 2011.

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 136, 172 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 43, 44, 45, 46, 47, 48, 49 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 + Details
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