Note 3 – Income Taxes

We provide for income taxes under the liability method in accordance with the FASB's guidance on accounting for income taxes. (Loss) income before income taxes consists of the following:

Year ended December 31,	2012			2011			2010

Domestic	$	(4,980,364	)	$	15,805,107		$	(7,706,018	)
Foreign		(706,265	)		(4,270,715	)		(766,343	)
Total	$	(5,686,629	)	$	11,534,392		$	(8,472,361	)

The provision for income taxes in the accompanying consolidated statements of operations consists of the following:

Year ended December 31,	2012			2011		2010

Federal:
Current	$	350,039		$	3,588,798	$	210,090
Deferred		-			-		-
		350,039			3,588,798		210,090

State:
Current		143,370			515,745		92,505
Deferred		-			-		-
		143,370			515,745		92,505

Foreign:
Current		(8,879	)		1,420		-
Deferred		-			-		-
		(8,879	)		1,420		-

Total	$	484,530		$	4,105,963	$	302,595

A reconciliation of the federal statutory rate to our effective tax rate is as follows:

Year ended December 31,	2012			2011			2010

Income tax (benefit) provision at federal statutory rate		(34.0	%)		34.0	%		(34.0	%)
Increase (decrease) in tax resulting from:
State income taxes, net of federal benefit		(1.5	)		3.1			(2.2	)
Federal research credit		-			(3.0	)		(1.1	)
Foreign rate differential		(0.3	)		0.4			(0.3	)
Change in foreign valuation allowance		4.5			12.2			3.4
Change in U.S. valuation allowance		28.9			(13.3	)		32.1
ASC 740-10 reserves		5.5			1.9			(0.3	)
Permanent items		3.5			0.3			5.3
U.S federal and state provision to return adjustment		1.9			-			0.7
Provision for income taxes		8.5	%		35.6	%		3.6	%

The components of the net deferred tax asset recognized in the accompanying consolidated balance sheets are as follows:

At December 31,	2012			2011

Deferred Tax Assets
Net operating loss carry forwards	$	2,349,107		$	1,962,882
Nondeductible reserves		3,339,700			1,880,276
Nondeductible accruals		1,479,545			1,527,390
Tax credits		495,486			499,099
Deferred revenue		273,608			-
Stock-based compensation		1,865,675			2,100,606
Gross Deferred Tax Assets	$	9,803,121		$	7,970,253
Valuation allowance		(9,551,668	)		(7,636,353	)
Net Deferred Tax Assets	$	251,453		$	333,900


Deferred Tax Liabilities
Fixed assets	$	(251,453	)	$	(333,900	)
Net Deferred Tax Liabilities	$	(251,453	)	$	(333,900	)

Net Deferred Tax Assets	$	-		$	-

Our 2012 tax expense of $0.5 million is comprised of $0.2 million of state non-income taxes and $0.3 million in increases in uncertain tax positions.

Under the FASB's 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 continue to believe that it is more likely than not that our foreign deferred tax assets will not be realized. Therefore, we have established and maintained a full valuation allowance in 2012 and 2011 on our foreign deferred tax assets.

In 2012 and 2011, we have continued to record a valuation allowance against our U.S. deferred tax assets. In 2012, we generated U.S. federal and state tax losses. In 2011, as a result of the resolution of the patent infringement lawsuits against Syneron, Inc., Syneron Medical Ltd., and Candela Corporation, we generated U.S. federal and state taxable income in the U.S. that was partially offset by U.S. federal and state net operating loss carry forwards. In evaluating the ability to recover our U.S. 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 $18.4 million related to excess tax deductions from the exercise of employee stock options. Recognition of these assets would occur upon the utilization of these deferred tax assets to reduce current taxes payable and would result in a credit to additional paid-in capital within stockholders' equity. For 2012, 2011, and 2010, the impact to paid-in capital resulting from the utilization of these assets was $0.2 million, $3.2 million, and $0.2 million, respectively.

At December 31, 2012, we had available, subject to review and possible adjustment by the Internal Revenue Service, U.S. federal net operating loss and tax credit carry forwards of approximately $38.7 million and $4.5 million, respectively, to be used to offset future taxable income. We also have U.S. state net operating loss and tax credit carry forwards of approximately $13.0 million and $2.0 million, respectively, to be used to offset future taxable income. These U.S. federal and state net operating loss and tax credit carry forwards are primarily attributable to the excess tax deductions from the exercise of employees' stock options and will expire through 2032. We also have $6.0 million of foreign net operating loss carry forwards.

At December 31, 2012, we have $3.3 million of unrecognized tax benefits, including related accrued interest, all of which would affect our effective tax rate if recognized. A reconciliation of our total gross unrecognized tax benefits for the years ended December 31, 2012, 2011, and 2010 is below.

At December 31,	2012			2011			2010

Balance at beginning of year	$	2,902,543		$	2,762,432		$	3,032,220
Tax positions related to current year:
Increase related to positions taken in current year		69,959			173,800			146,811
Increases related to positions taken during prior year		258,112			94,069			-
Decrease related to positions take during prior year		-			-			(98,923	)
Decrease related to settlements		(8,471	)		-			(12,415	)
Decrease resulting from statute expiration		(175,355	)		(127,758	)		(305,261	)
Balance at end of year	$	3,046,788		$	2,902,543		$	2,762,432

We establish reserves for uncertain tax positions based on management's assessment of exposure 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 reserve.

We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2012 and 2011, we had approximately $229,000 and $180,000 of accrued interest and penalties related to uncertain tax positions, respectively.

The tax years 2006-2012 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.