Note 12

Income Taxes:

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which the related temporary difference becomes deductible. The benefit of tax positions taken or expected to be taken in the Company's income tax returns are recognized in the consolidated financial statements if such positions are more likely than not of being sustained.

For the years ended December 31, 2013, 2012, and 2011, the following table summarizes the components of income before income taxes and the provision for income taxes:

	Year Ended December 31,
	2013			2012			2011
Income (loss) before income tax:
U.S.	$	7,698		$	3,152		$	( 16,309	)
Israel		14,279			20,414			13,980
Other Foreign		768			3,365			-
Income before income taxes	$	22,745		$	26,931		$	( 2,329	)


Income tax expense (benefit):
United States - Federal tax:
Current	$	( 1,253	)	$	2,752		$	246
Deferred		1,795			(1,572	)		(5,495	)

United States - State tax:
Current		180			315			-
Deferred:		850			(2,074	)		(243	)

Israel:
Current		2,781			4,034			3,487
Deferred		(237	)		(50	)		(17	)

Other foreign:
Current		54			1371			-
Deferred:		200			(338	)		-

Income tax expense (benefit)	$	4,370		$	4,438		$	(2,022	)

For the years ended December 31, 2013, 2012 and 2011, the following table reconciles the federal statutory income tax rate to the effective income tax rate:

	Year Ended December 31,
	2013			2012			2011
Federal Tax rate		35	%		35	%		35	%

Federal tax expense (benefit) at 35%	$	7,961		$	9,426		$	( 815	)
State and local income tax		958			286			(320	)
Foreign rate differential		(2,656	)		(4,213	)		(3,654	)
Increase in taxes from permanent differences in stock-based compensation		433			637			2,674
US taxation of foreign earnings – Subpart F		367			403			-
Increase (decrease) in uncertain tax positions		269			(2,325	)		-
Return to provision and other adjustments		(1,964	)		-			-
Impact of tax rate change on deferred taxes		(942	)		-			-
Foreign tax credits		(341	)		-			-
Change in valuation allowance		116			-			-
Other		169			224			93

Income tax expense (benefit)	$	4,370		$	4,438		$	( 2,022	)

As of December 31, 2013, the Company had approximately $48 million of Federal net operating loss carryforwards in the United States. Approximately $18.4 million of the loss carryforward has been recognized in the deferred tax account without a valuation allowance. Such recognized carryforward has sufficient expected income and sufficient Section 382 limitation to be used in future years. The balance of the loss carryforward has been placed under a valuation allowance.

After conversion to U.S. dollars, Photo Therapeutics Limited had approximately $11 million of net operating loss carryforwards. Additionally, an NOL of $0.3 million was recorded by the Company’s Brazilian subsidiary.

As of December 31, 2013, the Company’s gross deferred tax asset pertaining to State net operating loss carryforwards approximated $1.971 million and expire generally through 2017 to 2033, depending on the particular State’s rules. A large portion of the State loss carryforwards have been placed under a valuation allowance, approximating $1.548 million.

In addition, the Company has approximately $0.1 million of AMT credits. The Company is currently expected to utilize foreign tax credits on a current basis. None of the Federal research tax credit carryforwards from Pre-merged PhotoMedex are deemed utilizable due to the constraints of Section 382.

The balance of the deferred tax asset at December 31, 2013 has a valuation allowance of $11,910, which offsets the gross valuation of Federal and State NOL carryforwards.

The following table summarizes the components of deferred income tax assets and liabilities:

	December 31,
	2013			2012

Loss carryforwards	$	21,092		$	20,122
AMT credits		112			1,495
Foreign tax credits		-			446
Accrued employment expenses		1,256			718
Amortization and write-offs		8,883			10,557
Capitalized R&D costs		2,933			3,670
Deferred revenues		84			301
Depreciation		4,360			5,537
Doubtful accounts		3,499			2,121
Inventory reserves		822			-
Other accruals and reserves		228			617
Return allowances		5,660			4,118
Translation adjustments		61			-
Gross deferred tax asset		48,990			49,702

Less: valuation allowance		(11,910	)		(10,075	)

Net deferred tax asset	$	37,080		$	39,627

Among current assets	$	13,041		$	19,441
Among other non-current assets		24,039			20,186

PhotoMedex files corporate income tax returns in the United States, both in the Federal jurisdiction and in various State jurisdictions. The Company is subject to Federal income tax examination for calendar years 2010 through 2013 and is also generally subject to various State income tax examinations for calendar years 2005 through 2013. Photo Therapeutics Limited files in the United Kingdom. Radiancy (Israel) Limited files in Israel. The Israeli subsidiary is subject to tax examination for calendar years 2010 through 2013.

The Israeli subsidiary is entitled to reduced tax rates regarding income that is subject to tax pursuant to the "approved enterprise" until end of year 2012 and "preferred enterprise" from year 2013. Other income is subject to the regular corporate income tax rate.

Change in Israel rates. Effective for tax periods beginning 1 January 2014, the standard corporate income tax rate was increased from 25% to 26.5% and preferred income tax rate (for preferred enterprise located in an area which is not development zone A) was increased to 16%.

Income derived from the approved enterprise was tax-exempt for the first two years. In the succeeding five to eight years (depending on the classification of the Company as a foreign-invested company) the income was taxed at a reduced rate. In the event of cash dividends from income which was tax-exempt as above, the Israeli subsidiary would have to pay 15% tax in respect of the amount distributed. The Israeli subsidiary intends to reinvest the amount of such tax-exempt income and not to distribute it as dividends.

The entitlement to the above benefits is contingent upon fulfillment of the conditions stipulated by the law, the regulations published thereunder (and the letters of approval for the specific investments in the approved enterprise) in the preferred enterprise. Management of the Israeli subsidiary believes that as of December 31, 2013 the subsidiary was in compliance with the above-mentioned conditions.

Change in U.K. rates. In addition, effective for tax periods beginning on April 1, 2013, the United Kingdom tax rate was reduced from 24% to 23%. Further enacted decreases in the tax rate to 21% and 20% will take effect on April 1, 2014 and 2015 respectively. These changes in rate will affect the tax provision with regard to the tax attributes of Photo Therapeutics Limited, the United Kingdom subsidiary.

Unrecognized Tax Benefits. The Company is subject to income taxation in the U.S., Israel, the U.K., and Brazil. Unrecognized tax benefits reflect the difference between positions taken or expected to be taken on income tax returns and the amounts recognized in the financial statements. Resolution of the related tax positions through negotiations with the relevant tax authorities or through litigation could take years to complete. It is difficult predict the timing of resolution for tax positions since such timing is not entirely within the control of the Company. It is reasonably possible that the total amount of unrecognized tax benefits could both increase and decrease in the next 12 months, with no material impact on earnings.

The Company and its subsidiaries file income tax returns in the United States, Israel and the United Kingdom.

In 2012, Management conducted an analysis of the facts and law surrounding the then existing income tax uncertainties, and found that such liability as may have arisen was of a much lesser magnitude and is able to be extinguished by loss carryforwards and carrybacks,

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


Balance at January 1, 2011	$	2,700
Additions / Settlements during 2011		-
Balance December 31, 2011		2,700
Additions/ Settlements due 2012		(2,325	)
Balance at December 31, 2012		375
Additions / Settlements due 2013		269
Balance at December 31, 2013	$	644