INCOME TAXES (Notes)

12 Months Ended

Jun. 30, 2012

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The Company utilizes the liability method of accounting for income taxes.  The liability method measures the expected income tax impact of future taxable income and deductions implicit in the consolidated balance sheets.  The income tax provision (benefit) in 2012 and 2011 consisted of the following:

Year Ended June 30,	2012			2011
Current:
Federal	$	953,682		$	867,051
State	(194,875		)	(193,058		)
Deferred	341,284			1,269,627
Total income tax provision	$	1,100,091		$	1,943,620

The 2012 and 2011 tax results in an effective rate different than the federal statutory rate because of the following:

Year Ended June 30,	2012			2011
Federal income tax expense (benefit) at statutory rate	$	1,373,772		$	2,147,763
State income tax expense, net of federal income tax benefit	80,810			244,860
Decrease in valuation allowance	(471,254		)	(1,018,838		)
Research and development credits	(34,835		)	(13,585		)
Stock-based compensation	32,442			353,099
Unrecognized tax benefits	—			50,000
Other	119,156			180,321
Total income tax provision	$	1,100,091		$	1,943,620

Temporary differences which give rise to deferred income tax assets and liabilities at June 30 include:

	2012			2011
Deferred Income Tax Assets:
Deferred compensation	$	812,639		$	731,978
Stock-based compensation	362,585			364,071
Accrued expenses and reserves	1,249,817			1,318,002
Package design and trademarks	46,997			62,790
Unauthorized transactions	458,284			1,480,000
Federal and state net operating loss carryforwards	1,500,198			590,473
AMT and research and development credit carryforwards	153,045			72,901
Valuation allowance	(200,486		)	(671,740		)
Total deferred income tax asset	4,383,079			3,948,475
Deferred Income Tax Liabilities:
Equipment and leasehold improvements	(466,250		)	(311,962		)
Capitalized research and development costs	(1,592,415		)	(972,465		)
Other	(3,711		)	(2,061		)
Net deferred income tax asset	$	2,320,703		$	2,661,987

Deferred income tax assets as presented on the consolidated balance sheets:

	2012		2011
Current deferred income tax assets	$	963,303	$	1,028,796
Noncurrent deferred income tax assets	1,357,400		1,633,191
Net deferred income tax assets	$	2,320,703	$	2,661,987

Deferred income tax balances reflect the effects of temporary differences between the tax bases of assets and liabilities and their carrying amounts.  These differences are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered.  The recognition of these deferred tax balances will be realized through normal recurring operations and, as such, the Company has recorded the full value of such expected benefits. The Company has federal net operating loss carryforwards of $3,537,198 which expire in the fiscal years ended 2030 through 2032. There are net operating loss carryforwards in the state of Wisconsin totaling $7,944,240 which expire in fiscal year 2025.

Accounting Standards Codification (“ASC”) Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return.  There were no significant matters determined to be unrecognized tax benefits taken or expected to be taken in a tax return that have been recorded on the Company’s consolidated financial statements for the year ended June 30, 2012.  As part of the unauthorized transactions, the Company has accrued interest of $150,624 and $498,806 at June 30, 2012 and 2011, respectively.

	2012			2011
Accrued interest at beginning of year	$	498,806		$	660,989
Interest charges to expense	44,015			325,370
Interest charges paid	(140,712		)	—
Interest charges reversed	(251,485		)	(487,553		)
Accrued interest at end of year	$	150,624		$	498,806

Additionally, ASC Topic 740 provides guidance on the recognition of interest and penalties related to income taxes.  There were no penalties related to income taxes that have been accrued or recognized as of and for the years ended June 30, 2012 and 2011.  The Company records interest related to unrecognized tax benefits in interest expense.  For the year ended June 30, 2012, the Company decreased the interest it had accrued related to its tax reporting of the unauthorized transactions. The Company reversed the accrued interest related to the tax return that was filed for the year ended June 30, 2007 because of the statute of limitations for this return. During the year ended June 30, 2012, the Company accrued interest related to the tax reporting of the unauthorized transactions for years ending after June 30, 2007.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	2012		2011
Unrecognized tax benefits at beginning of year	$	599,938	$	300,000
Gross increases — tax positions in prior years	546,113		299,938
Unrecognized tax benefits at end of year	$	1,146,051	$	599,938

The Company files income tax returns in the United States federal jurisdiction and in a state jurisdiction.  The Company’s federal tax returns through tax year June 30, 2006 are settled and the income tax returns for tax years beginning July 1, 2006 are open.  For states in which Koss files state income tax returns, the statue of limitations is generally open for tax years ended June 30, 2008 and forward. 

The following are the changes in the valuation allowance:

Year Ended  June 30,	Balance, Beginning of Year			Increase in Valuation Allowance	Release of Valuation Allowance	Balance, End of Year
2012	$	(671,740	)	—	471,254	$	(200,486	)
2011	$	(1,690,578	)	—	1,018,838	$	(671,740	)