Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes [Abstract]

Income Taxes

9. Income Taxes

Significant components of the Company’s deferred income tax assets and liabilities are as follows at December 31:

	2012			2011
Deferred income tax assets:
Net operating loss carryforward	$	46,531		$	634,802
Deferred warranty revenue		1,759,130			1,674,984
Inventory reserve		905,892			1,712,978
Non-qualified and Non-employee stock option expense		3,682,049			2,842,811
Capitalized research and development		8,191,276			9,677,167
Alternative minimum tax carryforward		1,406,045			1,657,287
Research and development tax credit carryforward		2,936,418			5,088,136
Impairment Loss		230,415			902,675
Deferred Legal Settlement		722,793			1,277,323
Reserves, accruals, and other		1,925,307			1,905,311
Total deferred income tax assets		21,805,856			27,373,474
Deferred income tax liabilities:
Depreciation		(662,172	)		(3,133,145	)
Amortization		(141,885	)		(126,659	)
Total deferred income tax liabilities		(804,057	)		(3,259,804	)
Net deferred income tax assets before valuation allowance		21,001,799			24,113,670
Less: Valuation allowance		—			(1,428,572	)
Net deferred income tax assets	$	21,001,799		$	22,685,098

The Company’s net deferred tax assets are presented as follows on the accompanying consolidated balance sheets at December 31:

	2012		2011
Current deferred tax assets, net	$	9,395,987	$	9,968,929
Long-term deferred tax assets, net		11,605,812		12,716,169
Total	$	21,001,799	$	22,685,098

The Company has deferred tax assets of $47,000 related to state NOLs which expire at various dates between 2014 and 2026. The Company has state R&D credit carry forwards for financial reporting purposes of $2.9 million, which expire at various dates between 2018 and 2027. The Company has a minimum tax credit carryover of $1.4 million which does not expire.

The Company recognizes the income tax benefits associated with certain stock compensation deductions only when such deductions produce a reduction to the company’s actual tax liability. Accordingly, in 2012 and 2011, the Company recognized benefits of $4.7 million and $9,800, respectively, for the reduction of federal and state taxes payable, which was recorded as a credit to additional paid-in capital.

Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future. The American Taxpayer Relief Act of 2012 (the “Act”) was signed into law on January 2, 2013. Because a change in tax law is accounted for in the period of enactment, certain provisions of the Act benefitting the Company’s 2012 federal taxes, including the R&D credit, cannot be recognized in the Company’s 2012 financial results and instead will be reflected in the Company’s 2013 financial results. The Company estimates that a benefit of approximately $0.3 million will be accounted for as a discrete item in our tax provision for the first quarter of 2013. In addition, the Company expects the Act’s extension of these provisions through the end of 2013 will favorably affect our estimated annual effective tax rate for 2013 by approximately 1.4 percentage points as compared to 2012.

In preparing the Company’s consolidated financial statements, management has assessed the likelihood that its deferred income tax assets will be realized from future taxable income. In evaluating the ability to recover its deferred income tax assets, management considers all available evidence, positive and negative; including the Company’s operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred income tax assets will not be realized. Management exercises significant judgment in determining the Company’s provisions for income taxes, its deferred income tax assets and liabilities and its future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred income tax assets.

Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of each reporting date management considers new evidence, both positive and negative, that could impact management’s view with regards to future realization of deferred tax assets. As of December 31, 2012, in part because in the current year the Company achieved three years of cumulative pre-tax income in the U.S. federal and Arizona tax jurisdictions, management determined that sufficient positive evidence exists to conclude that it is more likely than not that additional deferred taxes related to Arizona R&D credits of $1.4 million are realizable, and therefore, reversed in full the valuation allowance related to that item.

Significant components of the provision (benefit) for income taxes are as follows for the years ended December 31:

	2012			2011			2010
Current:
Federal	$	384,123		$	133,220		$	270,437
State		172,739			59,428			71,494
Total current		556,862			192,648			341,931
Deferred:
Federal		7,778,464			(3,252,769	)		(939,803	)
State		(1,382,203	)		770,687			(148,574	)
Total deferred		6,396,261			(2,482,082	)		(1,088,377	)
Tax provision (benefit) recorded as an increase (decrease)in liability for unrecorded tax benefits		920,497			(299,441	)		17,061
Provision (benefit) for income taxes	$	7,873,620		$	(2,588,875	)	$	(729,385	)

The Company is subject to federal, state and foreign taxes; however, no separate calculation of the foreign provision for deferred tax assets was calculated for the periods presented due to the minimal amount of book income in the Company’s foreign subsidiary and the comparability of the foreign tax rate to the tax rate in the United States. A reconciliation of the Company’s effective income tax rate to the Federal statutory rate for the years ended December 31, 2012, 2011 and 2010 is as follows:

	2012			2011			2010
Federal income tax at the statutory rate	$	7,913,977		$	(3,370,059	)	$	(1,789,837	)
State income taxes, net of federal benefit		968,902			(357,226	)		(103,651	)
Permanent differences (i)		330,216			680,742			870,757
Research and development		(327,256	)		(229,694	)		(163,883	)
Return to provision adjustment (ii)		(270,134	)		(458,172	)		265,028
Change in liability for unrecognized tax benefits		920,497			(299,441	)		17,061
Change in valuation allowance		(1,428,572	)		1,428,572			—
Other		(234,010	)		16,403			175,140
Provision (benefit) for income taxes	$	7,873,620		$	(2,588,875	)	$	(729,385	)
Effective tax rate		34.8	%		26.9	%		14.3	%

(i) Permanent differences include certain expenses that are not deductible for tax purposes including lobbying fees and stock-based compensation expense related to incentive stock options (“ISOs”).

(ii) The 2010 return to provision adjustment was driven by lower than estimated 2009 R&D credits, which reduced the net tax benefit and therefore, the effective tax rate. The 2011 return to provision adjustment was driven by higher than estimated 2010 R&D tax credits, which increased the net tax benefit and therefore, the effective tax rate. The 2012 return to provision adjustment was driven by higher than estimated 2011 R&D tax credits which increased the net tax benefit and therefore, reduced the effective tax rate.

The Company has completed research and development tax credit studies which identified approximately $7.4 million in tax credits for federal, Arizona and California income tax purposes related to the 2003 through 2012 tax years, net of the federal benefit on the Arizona and California R&D tax credits. Management has made the determination that it is more likely than not that the full benefit of the R&D tax credit will not be sustained on examination and recorded a liability for unrecognized tax benefits of $2.8 million as of December 31, 2012. In addition, management accrued approximately $106,000 for estimated uncertain tax positions related to certain state income tax liabilities. As of December 31, 2012, management does not expect the amount of the unrecognized tax benefit liability to increase or decrease significantly within the next 12 months. Should the unrecognized tax benefit of $2.9 million be recognized, the Company’s effective tax rate would be favorably impacted.

The following presents a roll forward of our liability for unrecognized tax benefits as of December 31:

	2012		2011			2010
Balance, beginning of period	$	1,982,399	$	2,281,840		$	2,264,779
Increase in previous year tax positions		659,341		—			—
Increase in current year tax positions		151,041		83,298			58,830
Increase (decrease) related to adjustment of previous estimates of activity		110,115		(382,739	)		(41,769	)
Balance, end of period	$	2,902,896	$	1,982,399		$	2,281,840

Federal income tax returns for 2004 through 2011 remain open to examination by the United States Internal Revenue Service (the “IRS”), while state and local income tax returns for 2003 through 2011 also remain open to examination. The foreign tax returns for 2009 through 2011 also remain open to examination. The Company has not been notified by any major state tax jurisdiction that it will be subject to examination.