Income Taxes

12 Months Ended

Sep. 30, 2012

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

8. Income Taxes

The Company’s income tax provision consists of the following:

	Years ended September 30,
	2012		2011
Current tax  expense:
State income taxes	$	40,000	$	40,000
Foreign income taxes		110,204		157,309
Total current tax  expense		150,204		197,309
Deferred tax expense
Federal		283,779		3,579
State		33,399		421
Total deferred tax  expense		317,178		4,000
Total tax  provision	$	467,382	$	201,309

Components of deferred taxes are as follows:

	Years ended   September 30,
	2012			2011
Net operating loss domestic	$	367,959		$	505,522
Net operating loss foreign		475,693			475,693
Sales returns and allowances		314,428			360,345
Inventory obsolescence reserve		355,627			424,215
Allowance for bad debts		133,807			161,034
Vacation accrual		24,588			24,588
Warranty reserve		9,158			9,158
263 A inventory capitalization		139,880			148,301
Depreciation		39,928			48,870
Goodwill		53,296			73,816
AMT credit		177,704			177,704
R&D credit		311,275			391,356
Subtotal		2,403,343			2,800,602
Valuation allowance		(803,583	)		(883,664	)
Net deferred tax assets	$	1,599,760		$	1,916,938

The Company’s net deferred tax asset is primarily attributable to our Hauppauge Computer Works Inc. domestic operations and consists primarily of timing differences. In evaluating the future realization of the Company’s deferred tax asset and the corresponding valuation allowance as of September 30, 2012, the Company took into consideration:

· before inventory disposals, write offs of accounts receivable and utilization of net operating loss carry-forwards, our domestic operations had taxable income in four of the last five fiscal years;

· over the last five fiscal years our domestic operations had $3,871,521 in inventory disposals, account receivable write offs and net operating loss carry-forward utilization, which at a 38% blended tax rate provided a $1,471,178 reduction in taxes payable;

· a three year forecast that included the impact of new products as well as an expense reduction plan that the Company put into effect which supports the deferred tax asset utilization of our current net operating losses and a portion of our current timing differences over the next three years;

· our history of utilization of prior domestic net operating losses.

After evaluating the circumstances listed above, it was the Company’s opinion that its net deferred tax asset of $1,599,760 is realizable as of September 30, 2012.

As of September 30, 2012, the Company had $968,314 in unrestricted domestic net operating losses expiring between 2023 and 2026. As of September 30, 2012, the Company had tax credit carry forwards for research and development expenses totaling $311,275 (which expire between 2013 and 2014) which have a full valuation allowance recorded against them. In addition, there are foreign net operating losses which have a full valuation allowance recorded against them.

No provision has been made for income taxes on substantially all of the undistributed earnings of the Company’s foreign subsidiaries of approximately $1,429,000 at September 30, 2012 as the Company intends to indefinitely reinvest such earnings.

The difference between the actual income tax provision (benefit) and the tax provision computed by applying the Federal statutory income tax rate of 34% to the loss before income tax is attributable to the following:

	Years ended September 30,
	2012			2011
Income tax benefit at federal statutory rate	$	(705,863	)	$	(1,920,239	)
Change in estimate of prior year income taxes		22,820			3,619
Permanent differences-life insurance		1,700			1,700
Permanent differences-compensation expense		43,687			136,636
Permanent differences-other		1,700			1,700
State income taxes,   net of federal benefit		26,400			40,421
Foreign  earnings taxed at rates other than the federal statutory rate		1,073,189			1,936,780
Other		3,749			692
Tax provision	$	467,382		$	201,309

The Company’s Luxembourg corporation functions as the entity which services the Company’s European customers. The Company has separate domestic and foreign tax entities, with the Luxembourg entity paying a royalty fee to the Company’s domestic operation for use of the Hauppauge name.

Including royalty fees received from the Company’s Luxembourg subsidiary, the Company’s domestic operation generated pretax income of $756,241 and $327,577 for the years ended September 30, 2012 and 2011, respectively. The Company’s international operations had pretax loss including royalty fees of $2,848,072 and $5,975,340 for the years ended September 30, 2012 and 2011, respectively. Due to unused tax loss carry forwards, the Company has three years worth of open tax years.