INCOME TAXES

6 Months Ended

Jul. 02, 2011

INCOME TAXES

INCOME TAXES

12.INCOME TAXES

The Company accounts for income taxes in accordance with “Income Taxes”, Topic 740 of the FASB ASC. This guidance requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities, using applicable tax rates for the years in which the differences are expected to reverse. At January 1, 2011, the Company maintained $9.3 million of net deferred tax assets, of which approximately $5.7 million related to federal tax operating loss carry-forwards and $1.7 million related to state tax net operating loss carry-forwards. In addition, during the 26-week period ended July 2, 2011, the Company recorded an income tax provision of $885,000 primarily related to the net income generated, which reduced the net deferred tax assets previously recorded by the Company. The Company established a federal valuation allowance of $5.1 million at January 1, 2011. For state income tax purposes, the Company had a valuation allowance in the amount of $650,000 at January 1, 2011, primarily to reserve for the possible non-utilization of state NOL carry-forwards, which may not be realized in future periods before the NOLs expire. These amounts remained unchanged as of July 2, 2011.

At July 2, 2011, the current portion of deferred tax assets and liabilities of $269,000 is included in prepaid expenses and other current assets, while the non-current portion of deferred tax assets and liabilities of $7.8 million is included in other assets on the Company’s accompanying condensed consolidated balance sheets. These amounts are net of the valuation allowance discussed above.

When tax contingencies become probable, a liability for the contingent amount is estimated based upon the Company’s best estimation of the potential exposures associated with the timing and amount of deductions, as well as various tax filing positions. As of January 1, 2011, the Company had recorded a $271,000 reserve, net of federal benefit for potential tax contingencies. During the 13 week period ended July 2, 2011, the Company recorded a reversal of the state income tax reserve of $277,000, net of federal benefit, based on the completion of a state income tax audit of the Company’s state income tax returns.  As of July 3, 2010, the Company reported a reserve balance of $301,000, net of federal benefit.