INCOME TAXES

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Note 6. INCOME TAXES

The Company accounts for income taxes in accordance with ASC Topic 740. Under the provisions of ASC Topic 740, a deferred tax liability or asset (net of a valuation allowance) is provided in the financial statements by applying the provisions of applicable laws to measure the deferred tax consequences of temporary differences that will result in net taxable or deductible amounts in future years as a result of events recognized in the financial statements in the current or preceding years.

Income tax provision consisted of the following:

	2011		2010
Current:	$		$
Federal		—		—
State		—		—
		—		—
Deferred:
Federal		—		—
State		—		—
		—		—
Income Tax Provision	$	—	$	—

Reconciliation of effective tax rate:

	2011			2010
Federal taxes at statutory rate		34.00	%		34.00	%
State taxes, net of federal benefit		2.97	%		2.96	%
Permanent items		(1.01	)%		(1.14	)%
Generation of general business credits		(0.32	)%		(0.02	)%
Valuation allowance		(35.64	)%		(35.79	)%
Effective income tax rate		—			—

Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:

	2011			2010
Deferred tax assets:
Net operating losses	$	8,606,404		$	7,316,466
Stock based compensation and other		1,348,590			1,232,094
Gross deferred tax assets		9,954,994			8,548,560
Deferred tax liabilities:
Gross deferred tax liabilities		—			—
Net deferred tax assets before valuation allowance		9,954,994			8,548,560
Valuation Allowance		(9,954,994	)		(8,548,560	)
Deferred Tax Assets (Liabilities), Net	$	—		$	—

As December 31, 2011, approximately $23 million of federal and $22.7 million of state net operating loss carryforwards were available to offset future taxable income through the year 2031. 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 realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during all periods in which those temporary differences become realizable. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the history of the Company and projections for future taxable income over the periods in which the deferred tax assets are realizable, management believes it is not more likely than not that the Company will realize the benefits of these deductible differences and therefore a full valuation allowance against the deferred tax assets has been established.

The Tax Reform Act of 1986 contains provisions that limit the utilization of net operating loss and tax credit carryforwards if there has been a change of ownership as described in Section 382 of the Internal Revenue Code. Such an analysis has not been performed by the Company to determine the impact of these provisions on the Company’s net operating losses, though management believes the impact would be minimal, if any. A limitation under these provisions would reduce the amount of losses available to offset future taxable income of the Company.

Tax positions must initially be recognized in the financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. The Company has not identified any significant uncertain tax positions that require recognition in our financial statements.

Based on management’s assessment of ASC Topic 740, it was concluded that the adoption of ASC Topic 740, as of January 1, 2007, had no significant impact on the Company’s results of operations or financial position, and required no adjustments to the opening balance sheet accounts. The year-end analysis supports the same conclusion, and the Company does not have an accrual for uncertain tax positions as of December 31, 2011. There have been no income tax related interest or penalties assessed or recorded and if interest and penalties were to be assessed, the Company would charge interest and penalties to income tax expense. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting date. The Company files income tax returns in the U.S. and various state jurisdictions and there are open statutes of limitations for taxing authorities to audit the Company’s tax returns from 2006 through the current period.