Note 7 - Income Taxes

12 Months Ended

Jun. 30, 2012

Income Tax Disclosure [Text Block]

Note 7 – Income Taxes

The provision for (benefit from) income taxes is comprised of the following:

	Year Ended June 30,
	2012		2011			2010
	(In thousands)
Current:
Federal	$	—	$	(2	)	$	—
State		16		(3	)		—
		16		(5	)		—
Deferred:
Federal		—		—			—
State		—		—			—
		—		—			—
	$	16	$	(5	)	$	—

The following is a reconciliation of the statutory federal income tax rate to Qualstar’s effective income tax rate:

	Year Ended June 30,
	2012			2011			2010
Statutory federal income tax benefit		(34.0	)%		(34.0	)%		(34.0	)%
State income taxes, net of federal income tax benefit		(3.6	)		(3.8	)		(1.4	)
Research and development credits		(1.8	)		(13.8	)		(3.0	)
Valuation allowance		39.3			59.4			27.0
Other		0.5			(8.6	)		11.4
		0.4	%		0.8	%		0.0	%

The tax effect of temporary differences resulted in deferred income tax assets (liabilities) as follows:

	June 30,
	2012			2011			2010
Deferred tax assets:	(In thousands)
Net operating loss carry forwards	$	5,059		$	4,119		$	3,861
Capital loss and other credit carry forwards		178			21			20
Research and development credit carry forwards		1,244			1,148			994
Allowance for bad debts and returns		19			78			53
Inventory reserves		650			168			224
Capitalized inventory costs		17			16			24
Marketable securities		—			—			(24	)
Other accruals		500			514			507
Total gross deferred tax assets		7,667			6,064			5,659
Less valuation allowance on deferred tax assets		(7,654	)		(6,034	)		(5,620	)
Net deferred tax assets		13			30			39
Deferred tax liabilities:
Marketable securities		(3	)		(15	)		—
Depreciation and other		(10	)		(15	)		(39	)
Total deferred tax liabilities		(13	)		(30	)		(39	)
Net deferred taxes	$	—		$	—		$	—

The Company records a valuation allowance against its net deferred income tax assets in accordance with ASC 740 “Income Taxes” when in management’s judgment, it is more likely than not that the deferred income tax assets will not be realized in the foreseeable future. For the fiscal years ended June 30, 2012, 2011, and 2010, the Company placed a valuation allowance on net deferred tax assets. The Company has net operating loss carry-forwards for federal income tax purposes of approximately $13.3 million as of June 30, 2012, $10.7 million as of June 30, 2011 and $10.1 million as of June 30, 2010.  The Company has net operating loss carry-forwards for state income tax purposes of approximately $10.0 million as of June 30, 2012, $8.4 million as of June 30, 2011 and $8.1 million as of June 30, 2010. The Company had research and development and other credits for tax purposes of $1.8 million as of June 30, 2012, $1.7 million as of June 30, 2011 and $1.5 million at June 30, 2010. If not utilized, the federal net operating loss and other tax credit carry-forwards will expire beginning in 2025. If not utilized, the state net operating loss carry-forward will expire beginning in 2013.  The state research and development credit has no limit on the carry-forward period.

In accordance with ASC 740, the Company recognized an increase of approximately $36,000 in liability for uncertain tax positions that were accounted for as a reduction to the July 1, 2007 balance of retained earnings. The following table summarizes the activity related to the Company’s uncertain tax positions (in thousands):

	June 30,
	2012			2011			2010
Balance at July 1	$	21		$	25		$	34
Increases related to tax positions taken in prior year		4			9			1
Decreases due to lapse of statute of limitations		(1	)		(10	)		(8	)
Related interest and penalties, net of federal tax benefit		2			(3	)		(2	)
Balance at June 30	$	26		$	21		$	25

While the Company expects that the amount of its uncertain tax positions will change in the next twelve months, the Company does not expect this change to have a significant impact on its results of operations or financial position.  In addition, future changes in the unrecognized tax benefit will have no impact on the Company’s effective tax rate due to the existence of the valuation allowance.

The Company’s policy is to include interest and penalties on uncertain tax positions in income tax expense, but is not significant at June 30, 2012.   The Company files its tax returns by the laws of the jurisdictions in which it operates.  The Company’s federal tax returns after 2008 and California tax returns after 2007 are still subject to examination.  Various state jurisdictions tax years remain open to examination as well, though the Company believes any additional assessment will be immaterial to its financial statements.