Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes [Abstract]

Income Taxes

Note 8 – Income Taxes

We provide for income taxes under the liability method in accordance with the FASB’s guidance on accounting for income taxes.  Under this guidance, we only recognize a deferred tax asset for the future benefit of our tax losses, temporary differences and tax credit carry forwards to the extent that it is more likely than not that these assets will be realized. We consider available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance.

For the nine months ended September 30, 2011 and 2010, our effective tax rate was 30% and 2%, respectively.  In 2011, our effective tax rate consisted of U.S. federal and state income taxes.  Our 2011 effective tax rate is less than the statutory rate primarily due to the realization of previously reserved net operating loss carryforwards and tax credits.  In 2010, our effective tax rate consisted mainly of state income taxes as the company generated operating losses in the year.

In 2011, we generated operating income that is partially offset with previously reserved net operating loss carryforwards, resulting in a $4.0 million U.S. federal and state tax expense for the nine month period ended September 30, 2011. The company does not have any remaining federal net operating loss carryforwards, but continues to have other net deferred tax assets.

In evaluating our ability to recover our U.S. and foreign deferred tax assets, we considered all available positive and negative evidence, giving greater weight to the recent losses, the absence of taxable income in the carry back periods and the uncertainty regarding our ability to project financial results in future periods. Consistent with prior periods, we believe that it is more likely than not that the associated deferred tax assets will not be realized and continue to maintain a full valuation allowance.

We establish reserves for uncertain tax positions based on our assessment of exposures associated with tax deductions, permanent tax differences and tax credits. The tax reserves are analyzed periodically and adjustments are made as events occur to warrant adjustment to the reserves. At September 30, 2011, we have $2.9 million of unrecognized tax benefits, all of which would affect our effective tax rate, if recognized.

We recognize interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2011, we had approximately $170,000 of accrued interest and penalties related to uncertain tax positions.

The tax years 2007-2010 remain open to examination by the major taxing jurisdictions to which we are subject. We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.