Note 10. Income Taxes

The provision (benefit) for income taxes attributable to income from operations includes the following (in thousands):

	For the Years Ended December 31,
	2012		2011			2010
Current provision
Federal	$	4,362	$	3,426		$	2,588
State		829		621			605
Total current		5,191		4,047			3,193

Deferred provision (benefit)
Federal		1,881		(718	)		1,473
State		158		(91	)		42
Total deferred		2,039		(809	)		1,515
Total provision	$	7,230	$	3,238		$	4,708

The provision for income taxes related to operations varies from the amount determined by applying the federal income tax statutory rate to the income or loss before income taxes, exclusive of net income attributable to non-controlling interest. The reconciliation of these differences is as follows:

	For the Years Ended December 31,
	2012			2011			2010
Computed expected income tax provision		35.0	%		35.0	%		35.0	%
State income taxes, net of federal income tax benefit		3.6			3.5			5.6
Change in valuation allowance for deferred tax assets		(1.3	)		(1.4	)		(0.1	)
Other permanent differences		(0.1	)		1.0			2.2
Dividend and accretion on preferred stock		10.7			34.1			19.1
FIN 48 liability		0.6			(1.6	)		----
R&D credit		----			(1.8	)		----
Other		0.8			0.2			(1.1	)
		49.3	%		69.0	%		60.7	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 are as follows (in thousands):

	December 31,
	2012			2011
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts	$	123		$	144
Allowance for inventory obsolescence and amortization		628			785
Accrued liabilities not currently deductible		2,071			2,475
Accrued compensation		686			562
Amortization and depreciation		2,149			1,682
Telos ID basis difference		81			57
Net operating loss carryforwards - state		446			623
Total gross deferred tax assets		6,184			6,328
Less valuation allowance		(2,084	)		(2,281	)
Total deferred tax assets, net of valuation allowance		4,100			4,047
Deferred tax liabilities:
Unbilled accounts receivable, deferred for tax purposes		(1,373	)		(1,374	)
Section 481(a) adjustment - inventory		(221	)		(440	)
Goodwill basis adjustment and amortization		(2,505	)		(193	)

Total deferred tax liabilities		(4,099	)		(2,007	)

Net deferred tax assets	$	1		$	2,040

The components of the valuation allowance are as follows (in thousands):

	Balance Beginning of Period		Additions		Deductions		Balance End of Period

December 31, 2012	$	2,281	$	----	$	197	$	2,084
December 31, 2011	$	2,348	$	----	$	67	$	2,281
December 31, 2010	$	2,388	$	----	$	40	$	2,348

At December 31, 2012, for federal income tax purposes all available net operating loss carryforwards and alternative minimum tax credits have been fully utilized.

We adopted the provisions of ASC 740 as of January 1, 2007 and determined that there were approximately $534,000 and $400,000 of unrecognized tax benefits required to be recorded in other current liabilities as of December 31, 2012 or 2011, respectively. We believe that the total amounts of unrecognized tax benefits will not significantly increase or decrease within the next 12 months. The period for which tax years are open, 2009 to 2012, has not been extended beyond the applicable statute of limitations.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	2012		2011			2010
Unrecognized tax benefits, beginning of period	$	400	$	501		$	316
Gross increases—tax positions in prior period		34		20			83
Gross increases—tax positions in current period		100		90			139
Settlements		----		(211	)		(37	)
Unrecognized tax benefits, end of period	$	534	$	400		$	501