INCOME TAXES

The income tax provision (benefit), in thousands, consists of the following for the years ended December 31, 2012, 2011 and 2010:



	2012			2011			2010
Federal
Current	$	(770	)	$	(3,373	)	$	3,556
Deferred	(2,692		)	436			54
IRS audit adjustment	—			622			—
	(3,462		)	(2,315		)	3,610
State
Current	(159		)	(818		)	699
Deferred	(533		)	92			64
	(692		)	(726		)	763
	$	(4,154	)	$	(3,041	)	$	4,373

A reconciliation of income taxes at the statutory rate to the reported provision (benefit), in thousands, is as follows:



	2012			2011			2010
Federal income tax at statutory rate	$	(3,665	)	$	(2,354	)	$	4,225
State and local income taxes, net of federal income tax effect	(457		)	(395		)	599
Permanent differences	9			13			(156		)
Other differences	(41		)	(305		)	(295		)
	$	(4,154	)	$	(3,041	)	$	4,373

Significant components of the Company’s deferred tax liabilities and assets, in thousands, as of December 31, 2012 and 2011 are as follows:



	2012			2011
Deferred tax liabilities
Tax depreciation in excess of book, fixed assets	$	(3,144	)	$	(3,505	)
Tax amortization in excess of book, goodwill	—			(212		)
Gross deferred tax liabilities	(3,144		)	(3,717		)
Deferred tax assets
Book amortization in excess of tax, goodwill	2,776			—
Accrued property taxes	12			12
Allowance for doubtful accounts	43			43
Book amortization in excess of tax, fixed assets	7			29
Inventory capitalization	210			217
Reserve for CWS	—			129
State net operating loss carry forward	599			—
State recycling equipment tax credit carry forward	4,659			4,659
Interest rate swap	100			194
Deferred environmental cleanup	11			11
Other	35			87
Gross deferred tax assets	8,452			5,381
Valuation allowance	(4,162		)	(4,659		)
Net deferred tax assets (liabilities)	$	1,146		$	(2,995	)

The Internal Revenue Service has conducted an examination of the Company’s 2009 income tax return and, per the final report, proposed changes amounting to approximately $735.0 thousand of additional taxes due for which we received an invoice early in 2012. This increase arose from the Company’s use of bonus depreciation rules for certain additions to shredding equipment which were determined to be disqualified for bonus depreciation. This additional income tax was accrued as of December 31, 2011 and netted against the refund received in 2012 due to the net loss in 2011.

This resulting adjustment to 2009 depreciation deductions allowed the Company to file an amended U.S. tax return for 2010, pursuant to which we claimed additional depreciation deductions and resulted in a claim for refund of income taxes paid amounting to approximately $113.0 thousand which was also accrued at December 31, 2011 and received in 2012.

On December 31, 2012, we have deferred recycling equipment state tax credit carry forwards of $4.7 million relating to our shredder purchase which do not expire. This tax credit is limited to 25 percent of our Kentucky state income tax liability. We used the available state tax credits of $25.0 thousand, $12.7 thousand and $165.0 thousand in 2012, 2011, and 2010, respectively.

A deferred tax asset valuation allowance is established if it is “more likely than not” that the related tax benefits will not be realized. In determining the appropriate valuation allowance, we consider the projected realization of tax benefits based on expected levels of future taxable income, available tax planning strategies, reversals of existing taxable temporary differences and taxable income in this state in carry back years. Certain state tax credit carry forwards have been reduced to their net realizable value based upon estimates of future taxable income and utilization of the credit in the foreseeable future. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.

The recorded valuation allowance, in thousands, consisted of the following at December 31, 2012 and 2011:



	Year Ended December 31,
	2012			2011
Valuation allowance, beginning of year	$	4,659		$	4,659
Change in valuation allowance	(497		)	—
Valuation allowance, end of year	$	4,162		$	4,659