Note 10. Income Taxes

12 Months Ended

Sep. 30, 2011

Income Tax Disclosure [Text Block]

10. Income Taxes

Telular’s has provided for income taxes based on U.S tax laws and rates. Deferred tax assets and liabilities are determined based on the difference between GAAP financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. For the fiscal years 2011, 2010 and 2009, income tax expense (benefit) consisted of the following:

	For the Year Ended September 30,
	2011		2010			2009
Current:
Federal	$	170	$	106		$	48
State		128		33			17
Current income tax provision		298		139			65
Deferred:
Federal		1,219		(32,607	)		-
State		775		(1,898	)		-
Deferred income tax provision (benefit)		1,994		(34,505	)		-
	$	2,292	$	(34,366	)	$	65

In fiscal 2009, Telular did not record a deferred tax provision because a full valuation allowance has been provided against the net deferred tax assets. In fiscal 2010, Telular determined that it was more likely than not that it would be able to recognize, in the future, the benefits of certain deferred tax assets.  Therefore, the valuation allowances associated with these deferred tax assets was reversed and a deferred tax benefit was recorded.  The deferred tax provision for fiscal 2011 represents the utilization of deferred tax assets, primarily net operating loss carryforwards (“NOLs”). The valuation allowance associated with these deferred tax assets was reversed to reflect the utilization of the net deferred tax assets and the expiration of certain NOLs.

The provision for income taxes differs from the amount obtained by applying the statutory tax rate as follows for the years ended September 30:

	2011			2010			2009
Provision for income taxes at statutory rate		34.0	%		34.0	%		34.0	%
Increases (decreases) in taxes resulting from:
Valuation allowance		-0.4	%		-949.2	%		-32.0	%
State taxes net of federal benefit		1.3	%		0.6	%		0.6	%
Other		0.7	%		-0.6	%		1.0	%
		35.6	%		-915.2	%		3.6	%

At September 30, 2011, Telular had net operating loss carryforwards (“NOLs”) of approximately $85,790 for income tax purposes that will expire in varying amounts from 2012 through 2028.
 

Telular accounts for uncertainties in income taxes pursuant to ASC 740 (formerly FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109), (“FIN 48”). The guidance prescribes a comprehensive model for the financial statement recognition, measurement, classification and disclosure of uncertain tax positions.  In the first step of the two-step process prescribed in the interpretation, Telular evaluates the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any.  In the second step, Telular measures the tax benefit at the percentage that is cumulatively greater than 50% likely of being realized upon ultimate settlement with the relevant tax authority. Accordingly, Telular has determined that there is a less than 50% likelihood that its research and development (R&D) tax credits would be sustained upon audit as Telular has not completed gathering the necessary documentation required by the taxing authority to substantiate the credit.  In fiscal year 2009 Telular had a full valuation allowance against the net deferred tax assets. In fiscal 2010, Telular has eliminated this deferred tax assetbecause Telular does not plan on taking these credits on future tax returns. This has no impact on Telular’s effective tax rate.

In fiscal 2011, Telular had no reportable uncertain tax positions under FIN 48.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	For the Year Ended September 30,
	2011		2010			2009
Balance at beginning of year	$	-	$	2,486		$	2,834
Reductions:
For expiring credits		-		-			(348	)
For eliminated credits		-		(2,486	)		-
Balance at end of year	$	-	$	-		$	2,486

Telular does not include interest and penalties related to income taxes, including unrecognized tax benefits, within the provision for income taxes.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of Telular’s deferred tax assets are as follows:

	September 30,
	2011			2010
Deferred tax assets:
Reserve for inventory obsolescence	$	231		$	154
Allowance for doubtful accounts		13			5
Fixed assets		5			-
Intangible assets		43			53
Non-cash compensation		1,698			1,448
Alternative minimum tax credits		324			155
Accrued liabilities		427			176
Net operating loss carryfowards		35,810			43,972
Other		1			104
Total deferred tax assets		38,552			46,067
Deferred tax liabilities:
Intangible assets		(282	)		(389	)
Fixed assets		(29	)		(45	)
Production certification costs		(118	)		(95	)
Total deferred tax liabilities		(429	)		(529	)
Net deferred tax asset		38,123			45,538
Less valuation allowance		5,612			11,033
Net deferred tax assets	$	32,511		$	34,505

In fiscal 2010, Telular, as a result of three years of cumulative book tax income, analyzed the need for a full valuation allowance against its net deferred tax assets.  This analysis considered all available positive and negative evidence including Telular’s past operating results, the existence of cumulative losses and Telular’s forecast of future taxable income. In estimating future taxable income, Telular developed assumptions including the amount of future federal and state pre-tax operating income, the reversal of temporary differences, the utilization of net operating loss carryforwards to offset taxable income and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates Telular is using to manage the underlying business. In fiscal 2010, the valuation allowance decreased by $37,014, primarily due to the valuation allowance reversal and the expiration of unused NOLs. In fiscal 2011, the valuation allowance decreased by $5,421 primarily due to expiring NOLs.  The remaining valuation is for state NOLs that Telular anticipates will expire unutilized in future periods.

In connection with accounting for stock-based compensation, Telular elected to follow the tax ordering laws to determine the sequence in which deduction, net operating loss carryforwards and tax credits are utilized.

Telular files income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. As of September 30, 2011, Telular is no longer subject to U.S. federal examination by taxing authorities for years prior to 2008. Income tax returns for fiscal years 2008, 2009 , 2010 and 2011 are still open for examination.  However, utilization of net operating loss carryforwards that were generated in years prior to 2008 may result in a prior tax year being open for IRS examination.

Telular has concluded Illinois, New York and Texas state audits for years 2004 through 2006.  Tax years 2007 through 2011 remain open to examination by multiple state taxing jurisdictions.

Telular also files sales and use tax returns in various states. Telular has concluded Illinois and California for the period October 1, 2007 through September 30, 2010 and New York sales and use tax audits for March 1, 2007 through February 28, 2010. Tax years 2007 through 2011 remain open to examination by multiple state taxing jurisdictions.

Based on Internal Revenue Code Section 382, changes in the ownership of Telular may limit the utilization of net operating loss carryforwards of Telular. Any limitation to the utilization of NOLs may result in the unused NOLs expiring and may require that Telular record an additional valuation allowance against its deferred tax assets.