Note 9 - Income Taxes

9 Months Ended

Sep. 30, 2011

Income Tax Disclosure [Text Block]

9. Income Taxes

The Company adopted FASB ASC 740, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109” as of January 1, 2007. FASB ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax position taken or expected to be taken on a tax return. Additionally, FASB ASC 740 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. No adjustments were required upon adoption of FASB ASC 740. The Company has provided a full valuation allowance against its deferred tax assets.

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the fiscal years 2007 through 2010. The Company’s state tax returns are open to audit under the statute of limitations for the fiscal years 2006 through 2010.  The Company’s 2010 tax returns, formerly on extension, were filed in September 2011.  The increase in federal and state income taxes in 2011 was primarily due to higher 2010 and higher projected 2011 profits, and the California NOL utilization suspension.

The provision for income taxes differs from the amount that would result from applying the federal statutory rate for the quarters ended September 30, 2011 and 2010 as follows:  

	September 30,  2011			September 30,  2010
Statutory regular federal income benefit rate		34.0	%		34.0	%
State income taxes, net of federal benefit		12.4	%		5.1	%
Change in valuation allowance		(23.9	%)		(39.1	%)
Total		22.5	%		-	%

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 temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more unlikely than not that the Company will realize all of the benefits of these deductible differences, and has choosen to provide a 100% valuation allowance against its deferred tax asset.

Significant components of the Company’s deferred tax assets and liabilities for federal incomes taxes at September 30, 2011 and 2010 consisted of the following:

		2011		2010
Deferred tax assets
Net operating loss carryforward	$	3,813,862		$	4,329,593
Stock option expense		1,170,487			1,115,338
Allowance for doubtful accounts		47,124			52,693
Allowance for product returns		31,702			10,282
Accrued compensation		165,882			97,218
Inventory reserve		109,242			80,968
Other		637			6,915
Valuation allowance		(4,954,618	)		(5,298,022	)
Total deferred tax assets		384,318			394,985
Total deferred tax liabilities		(384,318	)		(394,985	)
Net deferred tax assets/liabilities	$	-		$	-

As of September 30, 2011, the Company had unused federal and state contribution carryovers of $1,487 that expire in 2011 through 2015.

As of September 30, 2011, the Company had unused federal and states net operating loss carryforwards available to offset future taxable income of approximately $8,871,000 and $9,557,000, respectively, that expire between 2015 and 2024.