(9) Income Taxes

Income before income taxes was as follows:

	2012			2011		2010

Income (loss) before income taxes:
Domestic	$	3,931,365		$	6,405,112	$	5,060,452
Foreign		(551,243	)		1,798,868		1,402,918

Total	$	3,380,122		$	8,203,980	$	6,463,370

The provision (benefit) for income taxes consists of the following:

	2012			2011			2010

Current tax expense:
Federal	$	1,420,599		$	1,934,352		$	1,549,506
State		13,437			173,360			175,814
Foreign		354,314			552,292			443,908

Total current expense		1,788,350			2,660,004			2,169,228

Deferred tax expense (benefit):
Federal		(72,727	)		97,588			(223,484	)
State		(3,542	)		4,580			(1,124	)
Foreign		(333,933	)		(9,110	)		366

Total deferred expense (benefit)		(410,202	)		93,058			(224,242	)

Provision for income taxes	$	1,378,148		$	2,753,062		$	1,944,986

The effective income tax rate varies from the federal statutory tax rate for the following reasons:

	Percentage of pretax income for years ended December 31,

	2012			2011			2010
Tax at statutory federal income tax rate		34.0	%		34.0	%		34.0	%
Increases (reductions) in taxes resulting from:
State income taxes, net of federal benefit		1.2			1.5			1.8
Change in valuation allowance		—			0.6			—
Domestic manufacturing deduction		(3.8	)		(2.1	)		(2.5	)
Capitalized acquisition costs		3.6			—			—
Effect of foreign operations		5.9			(0.7	)		(0.5	)
Foreign dividend income		(1.5	)		—			(2.9	)
Tax-exempt interest		(0.4	)		(0.2	)		(0.2	)
Changes in unrecognized tax benefits		(0.3	)		0.3			0.6
Stock option compensation		2.5			0.3			0.7
Research credit		—			(1.0	)		(1.1	)
Other		(0.4	)		0.9			0.2

Effective income tax rate		40.8	%		33.6	%		30.1	%

The effect of foreign operations was unusually high in 2012 due primarily to the impact of losses which were benefitted at rates lower than the U.S. statutory rate.

The tax effect of significant temporary differences representing deferred tax assets and liabilities at December 31, 2012 and 2011 were as follows:

	2012			2011

Deferred tax assets:
Allowance for doubtful accounts	$	34,580		$	40,155
Inventory items		371,089			159,547
Reserves and accruals		502,141			542,095
Compensation expense—stock options		177,717			128,045
Foreign tax credit carryover		329,314			279,366
Intangibles		29,734			33,371
Other		319,137			205,769

Subtotal		1,763,712			1,388,348
Less: Valuation allowance		(76,504	)		(50,504	)

Total deferred tax assets		1,687,208			1,337,844

Deferred tax liabilities:
Fixed assets		(506,478	)		(468,887	)
Intangibles		(2,808,675	)		—

Total deferred tax liabilities		(3,315,153	)		(468,887	)

Net deferred tax liability	$	(1,627,945	)	$	868,957

As of December 31, 2012, the Company has determined that establishing a valuation allowance against the deferred tax assets is required since it is more likely than not that the tax benefits of $76,504 from the carry-forward of foreign tax credits and certain foreign net operating losses which will not be realized through generating future foreign source income. However, the Company believes it is more likely than not that the remainder of its deferred tax assets at December 31, 2012 will be realized primarily through generation of future taxable income. During 2011, a capital loss carryforward for which a full valuation allowance was carried, expired. Accordingly, both the deferred tax asset and the related valuation allowance were removed.

In each of March 2012 and January 2011, the Company's German subsidiary repatriated to the Company 2.5 million euros (approximately $3.3 million) in the form of dividend distributions. As of December 31, 2012, there was approximately $2,200,000 of accumulated undistributed earnings remaining at the subsidiary. No deferred tax liability has been provided on the remaining foreign earnings. If they were remitted to the Company, applicable U.S. Federal and foreign withholding taxes would be offset by available foreign tax credits.

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

	2012			2011

Balance at January 1	$	244,000		$	217,000
Additions based on tax positions related to the current year		5,000			77,000
Additions based on tax positions related to the prior year		—			—
Reductions due to closing of statute of limitations		(14,000	)		(9,000	)
Reductions based on tax positions related to the prior year		(2,000	)		(41,000	)

Balance at December 31	$	233,000		$	244,000

Included in the balance of total unrecognized tax benefits at December 31, 2012 are potential benefits of $174,000 that if recognized would affect the effective tax rate on income before income taxes. The difference between this amount and the corresponding amount of gross unrecognized tax benefits related primarily to the deferred federal benefit for state income tax related amounts.

The Company does not anticipate that the total amount of unrecognized tax benefits will change significantly in the next twelve months.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Total accrued interest and penalties amounted to $33,000 and $34,000 on a gross basis at December 31, 2012 and 2011, respectively, and are excluded from the reconciliation of unrecognized tax benefits presented above.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, several state jurisdictions, China, France, Germany, Denmark, Italy, Luxembourg, Spain and the Netherlands. With limited exceptions, the Company is no longer subject to income tax examinations by taxing authorities for taxable years before 2009. In July 2011, the Internal Revenue Service completed its examination of our 2009 Federal income tax return. The audit was completed without having a material impact on our provision for income taxes. In early 2013, the State of Minnesota completed its examination of the four years 2008 through 2011 which resulted in an immaterial adjustment.