12. INCOME TAX

The Company is governed by the Income Tax Law of the PRC concerning privately-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriate tax adjustments. Under the Chinese tax law, the tax treatment of finance and sales-type leases is similar to US GAAP. However, the local tax bureau continues to treat CREG sales-type leases as operating leases. Accordingly, the Company recorded deferred income taxes.

The Company’s subsidiaries generate all of their net income from their PRC operations. Shanghai TCH’s effective income tax rates for 2012 and 2011 are 25% and 24%, respectively. Xi’an TCH’s effective income tax rate for 2012 and 2011 is 15% as a result of its high tech enterprise status that was approved by the taxing authority. The 2012 rate is expiring in August 2012. Xingtai Huaxin’s effective income tax rate for 2012 and 2011 is 25%. Huahong and Erdos TCH’s effective income tax rate for 2012 and 2011 is 25%. Pingshan Shengda’s effective income tax rate for 2012 and 2011 is 25%. Shanghai TCH, Xi’an TCH, Xingtai Huaxin, Huahong, Pingshan Shengda and Erdos TCH file separate income tax returns. If Xi’an TCH had not been granted high tech enterprise status, income tax expense for the six and three months ended June 30, 2012, would have been increased by $418,196 and $225,417, and earnings per share would have been reduced by $0.01 and $0.005, respectively.

There is no income tax for companies domiciled in the Cayman Islands. Accordingly, the Company’s consolidated financial statements do not present any income tax provisions related to Cayman Islands tax jurisdiction where Sifang Holding is domiciled.

The parent company, China Recycling Energy Corporation, is taxed in the U.S. and, as of June 30, 2012, had net operating loss (“NOL”) carry forwards for income taxes of $9.60 million, which may be available to reduce future years’ taxable income as NOLs can be carried forward up to 20 years from the year the loss is incurred. Our management believes the realization of benefits from these losses may be uncertain due to the Company’s limited operating history and continuing losses. Accordingly, a 100% deferred tax asset valuation allowance was provided.

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the six and three months ended June 30, 2012 and 2011, respectively:

	Six Months						Three Months
	2012			2011			2012			2011
U.S. statutory rates		34.0	%		34.0	%		34.0	%		34.0	%
Tax rate difference – current provision		(11.8	)%		(9.4	)%		(15.5	)%		(8.5	)%
Effective tax holiday		(9.4	)%		(6.2	)%		(12.5	)%		(7.2	)%
Non tax-deductible expense		0.3	%		8.8	%		11.0	%		13.8	%
Other		-	%		(0.3	)%		-	%		0.2	%
Valuation allowance on US NOL		8.1	%		(7.3	)%		8.1	%		(15.4	)%
Tax per financial statements		21.2	%		19.6	%		25.1	%		16.9	%

Non-tax deductible expenses represented permanent non-tax deductible interest expense resulting from an amortization of a beneficial conversion feature for a convertible note and changes in fair value of conversion feature liability.

The provision for income taxes expenses for the six and three months ended June 30, 2012 and 2011 consisted of the following:

	Six Months				Three Months
	2012		2011		2012		2011
Income tax expense - current	$	375,010	$	1,572,051	$	176,787	$	809,195
Income tax expense (benefit) - deferred		567,071		607,580		277,902		(25,494	)
Total income tax expenses	$	942,081	$	2,179,631	$	454,689	$	783,701