Income Taxes

12 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

6. Income Taxes

Income tax benefit (expense) for each of the years ended December 31 consists of the following:

	2011		2010			2009
	(dollars in thousands)
Federal	$	—	$	—		$	9
State		13		(4	)		199
Deferred		1,535		—			—
Total	$	1,548	$	(4	)	$	208

The significant components of deferred income tax benefit from operations before non-controlling interest for each of the years ended December 31 consists of the following:

	2011			2010			2009
	(dollars in thousands)
Deferred tax benefit	$	(402	)	$	675		$	432
Net operating loss carry forward		(6,035	)		740			(1,927	)
Valuation allowance		7,972			(1,415	)		1,495
	$	1,535		$	—		$	—

The Company’s effective income tax rate from operations before non-controlling interest differed from the Federal statutory rate for each of the years ended December 31 as follows:

	2011		2010		2009
Federal statutory tax rate	34	%	34	%	34	%
State taxes, net of federal tax effect	(45	)	6		—
Impact of adjustments to state tax rates	3,099		—		—
Change in valuation allowance	(7,972	)	(42	)	42
Permanent tax difference on derivative valuation	(25	)	—		—
Loss on extinguishment of debt	—		—		(2	)
IRC Section 382 Limitation	3,097		—		(64	)
Expiring net operating loss	3		(3	)	—
Adjustment to opening deferred tax balance	260		5		(3	)
Other, net	1		—		(1	)
Tax Rate	(1,548	)%	0	%	6	%

Pre-tax gain (loss) before non-controlling interests was $100 thousand, $(3.4) million, and $(3.6) million for 2011, 2010, and 2009, respectively.

Deferred Tax Assets:

Deferred tax assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates. Temporary differences, net operating loss carryforwards and tax credit carryforwards that give rise to deferred tax assets and liabilities are summarized as follows as of December 31:

	2011			2010
	(dollars in thousands)
Current deferred tax assets:
Inventory valuation	$	84		$	157
Inventory capitalization		11			13
Vacation pay		57			77
Warranty and other sale obligations		9			14
Other reserves and accruals		111			63
		272			324
Valuation allowance – current		(252	)		(324	)
Net current deferred tax assets	$	20		$	—
Noncurrent deferred tax assets:
Net operating loss	$	17,654		$	23,688
Property, plant and equipment		53			366
Stock options		2,880			2,918
Research and development tax credit		450			450
Alternative minimum tax credit		54			54
		21,091			27,476
Valuation allowance – noncurrent		(19,576	)		(27,476	)
Non-current net deferred tax assets	$	1,515		$	—

As of December 31, 2011, the Company has approximately $450 thousand of research and development tax credit carry forwards, which begin to expire in 2018, and approximately $54 thousand of alternative minimum tax credit carry forwards, which have no expiration date.

Valuation Allowance:

The Company provides for recognition of deferred tax assets if the realization of such assets is more likely than not to occur in accordance with accounting standards that address income taxes. Significant management judgment is required in determining the period in which the reversal of a valuation allowance should occur. The Company has considered all available evidence, both positive and negative, such as historical levels of income and future forecasts of taxable income amongst other items in determining whether a full or partial release of our valuation allowance is required. In addition, the Company’s assessment requires us to schedule future taxable income in accordance with accounting standards that address income taxes to assess the appropriateness of a valuation allowance which further requires the exercise of significant management judgment.

As a result of our analyses in 2011, the Company released a portion of our valuation allowance against our deferred tax assets. The partial release of the valuation allowance caused an incremental tax benefit of $1.5 million to be recognized in the fourth quarter of 2011. The release of a portion of the valuation allowance was based upon a recent cumulative income history for MTI and Subsidiaries exclusive of MTI Micro (MTI Micro files separate federal and state tax returns) causing the Company to evaluate what portion of the Company's deferred tax assets it believes are more likely that not to be realized. The Company has determined that it will generate sufficient levels of pre-tax earnings in the future to realize the net deferred tax assets recorded on the balance sheet at December 31, 2011. The Company has projected such pre-tax earnings utilizing a combination of historical and projected results, taking into consideration existing levels of permanent differences, non-deductible expense and the reversal of significant temporary differences. The Company needs to generate approximately $225 thousand of taxable income in each year over the next twenty years to ensure the realizability of the approximately $1.5 million of deferred tax assets recorded on the balance sheet at December 31, 2011.

The Company believes that the accounting estimate for the valuation of deferred tax assets is a critical accounting estimate because judgment is required in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns. The Company based our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods, the Company may need to adjust the recorded valuation allowance, which could materially impact our financial position and results of operations.

The valuation allowance at December 31, 2011 and 2010 was $19.8 million and $27.8 million, respectively. Activity in the valuation allowance for deferred tax assets is as follows as of December 31:

	2011			2010		2009
	(dollars in thousands)
Valuation allowance, beginning of year	$	27,800		$	26,385	$	27,880
Deductions resulting in income tax benefit		(1,535	)		—		—
Additions charged to other accounts		—			1,415		—
Deduction charged to other accounts		(6,437	)		—		(1,495	)
Valuation allowance, end of year	$	19,828		$	27,800	$	26,385

The remaining valuation allowance at December 31, 2011 of $19.8 million primarily relates to net operating losses and stock based compensation. The Company will continue to evaluate the ability to realize our deferred tax assets and related valuation allowances on a quarterly basis.

Net operating losses:

At December 31, 2011, the Company has unused Federal net operating loss carry forwards of approximately $66.9 million.

As a result of the conversion of the Bridge Notes in December of 2009 (see Note 17 for further discussion of the transaction), MTI no longer maintained an 80% or greater ownership in MTI Micro. Thus, MTI Micro is no longer included in Mechanical Technology, Incorporated and Subsidiaries' consolidated federal and combined New York State tax returns, effective December 9, 2009. Pursuant to the Internal Revenue Service's consolidated tax return regulations (IRS Regulation Section 1.1502-36), upon MTI Micro leaving the Mechanical Technology, Incorporated and Subsidiaries’ consolidated group, MTI has elected to reduce a portion of its stock tax basis in MTI Micro by "reattributing" a portion of MTI Micro's net operating loss carryforwards to MTI, for an amount equivalent to its built in loss in MTI's investment in MTI Micro's stock. As the result of MTI making this election with its December 31, 2009 tax return, MTI reattributed approximately $45.2 million of MTI Micro's net operating losses (reducing its tax basis in MTI Micro's stock by the same amount), leaving MTI Micro with approximately $13 million of separate company net operating loss carry forwards at the time of conversion of the Bridge Notes.

As of December 31, 2011, it is estimated that MTI has net operating loss carryforwards of approximately $50.4 million and MTI Micro has net operating loss carryforwards of approximately $16.5 million. Of the Company’s carry forwards, $1.3 million represents windfall tax benefits from stock option transactions, the tax effect of which are not included in the Company’s net deferred tax assets.

In addition, a formal Section 382 study was performed for both the Company and MTI Micro. The Company's and/or its subsidiaries’ ability to utilize their net operating loss carryforwards may be significantly limited by Section 382 of the IRC of 1986, as amended, if the Company or any of its subsidiaries undergoes an “ownership change” as a result of changes in the ownership of the Company's or its subsidiaries’ outstanding stock pursuant to the exercise of the warrants or otherwise. A corporation generally undergoes an “ownership change” when the ownership of its stock, by value, changes by more than 50 percentage points over any three-year testing period. In the event of an ownership change, IRC Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change net operating loss carryforwards and certain recognized built-in losses. As of December 31, 2011, the Company does not appear to have had an ownership change for IRC Section 382 purposes. However, as a result of MTI Micro’s issuance of stock between 2009 and 2011, MTI Micro has had an ownership change for IRC Section 382 purposes which places limitations on the utilization of MTI Micro’s separate company net operating loss carryforwards. MTI Micro’s net operating losses have been reduced by $14.6 million. This net operating loss limited by IRC Section 382 is not reflected in the Company’s deferred tax asset as of December 31, 2011.

The balance of the Company’s net operating losses carried forward from 2010 of $67.2 million was reduced by $8 thousand in expired net operating losses. The remaining Federal net operating loss carry forwards, if unused, will continue to expire beginning in 2020 for the Company, and 2022 for MTI Micro.

Unrecognized tax benefits:

A reconciliation of the beginning and ending amount of unrecognized tax benefits in accordance with accounting standards that address income taxes for 2011, 2010 and 2009 is as follows:

	2011		2010		2009
			(dollars in thousands)
Balance as of January 1,	$	1,186	$	1,836	$	2,049
Deductions for settlements		—		650		213
Balance as of December 31,	$	1,186	$	1,186	$	1,836

In future periods, if $1.2 million of these unrecognized benefits become supportable, the Company may not recognize a change in its effective tax rate as long as it remains in a partial valuation allowance position. Additionally the Company does not have uncertain tax positions that it expects will increase or decrease within twelve months of this reporting date. In accordance with the Company’s accounting policy, it recognizes interest and penalties related to uncertain tax positions as a component of tax expense. This policy did not change as a result of the adoption of accounting guidance for uncertain tax positions. The Company did not recognize any interest or penalties in 2011 and 2010. For both December 31, 2011 and 2010, the Company had $0 of accrued interest and penalties related to uncertain tax positions.

The Company files income tax returns, including returns for its subsidiaries, with federal and state jurisdictions. The Company is no longer subject to IRS or NYS examinations for its federal and state returns for any periods prior to 2008, although carryforward attributes that were generated prior to 2008 may still be adjusted upon examination by the IRS if they either have been or will be used in a future period. On February 2, 2009, New York State Department of Taxation and Finance notified the Company that it was no longer going to pursue the issue associated with potentially not permitting the Company to file combined tax returns for the period 2002 through 2004. At December 31, 2008 the Company had recorded a $213 thousand long-term liability for this issue. In the settlement of this issue, the Company paid New York State approximately $19 thousand and recognized the benefit of the reversal of this liability of $194 thousand in the first quarter of 2009.