7. Income Taxes

The unaudited provision for income taxes for the three and six months ended January 31, 2013 and 2012 is composed of the following (in thousands):


	Three months ended January 31				Six months ended January 31
	2013		2012		2013		2012
Current:
Federal	$	(22)	$	-	$	(21)	$	-
State		(15)		4		(36)		(22)
Change in valuation allowance		941		21		941		21
Deferred, net		(69)		(86)		(174)		(228)
Income tax benefit (expense)	$	835	$	(61)	$	709	$	(229)

The provision for income taxes is based on taxes payable under currently enacted tax laws and an analysis of temporary differences between the book and tax bases of the Company’s assets and liabilities, including various accruals, allowances, depreciation and amortization, and does not represent current taxes due. The tax effect of these temporary differences and the estimated benefit from tax net operating losses are reported as deferred tax assets and liabilities in the balance sheet. The provision includes permanent differences for a true up related to incentive stock option expense and losses related to the Netherlands operation. We have unused net operating loss carry forwards for federal income tax purposes, and as a result, we generally only incur alternative minimum taxes at the federal level.

As of January 31, 2013, after deducting year to date taxable income, the Company had accumulated net operating loss carryforwards for federal and state tax purposes of approximately $9,129,000 and $5,520,000, respectively, which expire as follows:


Year ended July 31, *	Federal		State
2013 Ɨ	$	1,293	$	1,701
2014		-		482
2015		-		3,258
2019		843		4
2020		6,043		-
2024		4		-
2025		-		75
2030		946		-
	$	9,129	$	5,520

* Years not shown have no amounts that expire.

Ɨ Reduced for current year to date taxable income.

An assessment is performed semi-annually of the likelihood that our net deferred tax assets will be realized from future taxable income. To the extent management believes it is more likely than not that some portion, or all, of the deferred tax asset will not be realized, a valuation allowance is established. This assessment is based on all available evidence, both positive and negative, in evaluating the likelihood of realizability. Issues considered in the assessment include future reversals of existing taxable temporary differences, estimates of future taxable income (exclusive of reversing temporary differences and carryforwards) and prudent tax planning strategies available in future periods. Because the ultimate realizability of deferred tax assets is highly subject to the outcome of future events, the amount established as a valuation allowance is considered to be a significant estimate that is subject to change in the near term. To the extent a valuation allowance is established or there is a change in the allowance during a period, the change is reflected with a corresponding increase or decrease in the tax provision in the Consolidated Statements of Income. We will continue to evaluate the realizability of our deferred tax assets on a semi-annual basis.

The Company recorded a benefit related to a net change in estimate on our valuation allowance of approximately $941,000, or $0.11 per basic and diluted share, and $21,000, or $0.00 per basic and diluted share, during the three months ended January 31, 2013 and 2012, respectively, as a result of our semi-annual evaluation of the likelihood that our net deferred tax assets will be realized from future taxable income. The gain recognized in fiscal 2013 was primarily due to the estimated increase in future taxable income related to the growth in our business and operational synergies as a result of the two acquisitions in fiscal 2013.