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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.