Income Taxes

3 Months Ended

Mar. 31, 2012

Income Taxes

Income Taxes

Note 9 – 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 three months ended March 31, 2012 and 2011, our effective tax rate was 3% and 2%, respectively.  In both periods, our effective tax rate consisted primarily of minimum state income taxes as the company generated operating losses during the period.

The Company does not have any remaining federal net operating loss carryforwards to offset against tax expense, but continues to have other net deferred tax assets.  In 2012 and 2011, we have maintained a valuation allowance against our U.S. deferred tax assets. In evaluating the ability to recover these deferred tax assets, we considered all 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.  We do not believe it is more likely than not that the net deferred tax assets will be realized.

In addition to the tax assets described above, we have deferred tax assets totaling approximately $18.5 million, related to excess tax deductions from the exercise of employee stock options. Recognition of these assets would occur upon utilization of these deferred tax assets to reduce taxes payable and would result in a credit to additional paid-in capital within stockholders’ equity. For the three months ended March 31, 2012 and 2011, the impact to paid-in capital resulting from the exercise and expiration of employee stock options was a charge of $10,000 and a credit of $15,000, respectively.

At March 31, 2012, we had available, subject to review and possible adjustment by the Internal Revenue Service, federal net operating loss and tax credit carry forwards generated by excess tax deductions from the exercise of employee stock options of approximately $39.1 million and $3.9 million, respectively, to be used to offset future taxable income. We also have state net operating loss and tax credit carryforwards of approximately $7.1 million and $2.0 million, respectively, to be used to offset future taxable income.  These net operating loss carry forwards and tax credits are primarily attributable to the excess tax deductions from the exercise of employees’ stock options and will expire through 2031. We also have $6.4 million of foreign net operating loss carry forwards.

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 March 31, 2012, we have $3.1 million of unrecognized tax benefits, including related accrued interest.

We recognize interest and penalties related to uncertain tax positions in income tax expense. As of both March 31, 2002 and March 31, 2011, we had approximately $0.2 million of accrued interest and penalties related to uncertain tax positions.

The tax years 2008-2011 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.