6. INCOME TAXES

12 Months Ended

Aug. 31, 2012

Income Tax Disclosure [Abstract]

Note 6. INCOME TAXES

The components of the income tax provision for the years ended August 31, 2012 and 2011 were as follows:

	2012			2011
Current
Federal	$	(872,907	)	$	(623,006	)
State		(177,975	)		(148,171	)
		(1,050,882	)		(771,177	)
Deferred
Federal		114,712			(262,536	)
State		(22,901	)		(21,560	)
		91,811			(284,096	)
Total	$	(1,142,693	)	$	(1,055,273	)

A reconciliation of the expected income tax (benefit) computed using the federal statutory income tax rate to the Company's effective income tax rate is as follows for the years ended August 31, 2012 and 2011:

	2012			2011
Income tax computed at federal statutory tax rate		34.0%			34.0%
State taxes, net of federal benefit		3.3			2.6
Meals & Entertainment		0.1			0.1
Other permanent differences		0.8			(1.0	)
Research and development credit		(8.4	)		(8.2	)
Change in prior year estimated taxes		(0.9	)		0.5
Total		28.9%			28.0%

Significant components of the Company's deferred tax assets and liabilities for income taxes for the years ended August 31, 2012 and 2011 are as follows:

	2012			2011
Deferred tax assets
Accrued payroll and other expenses	$	79,922		$	91,489
Accrued warranty and service costs		–			18,732
Bad debt allowance		–			99,982
Deferred revenue		56,456			60,486
Property and equipment		32,916			60,626
Research and development credit		261,526			289,357
State taxes		66,902			50,378
Total deferred tax assets		497,722			671,050
Less:  Valuation allowance		–			–
		497,722			671,050
Deferred tax liabilities
State Tax Deferred		(30,663	)		(26,710	)
Capitalized computer software development costs		(1,062,204	)		(1,031,869	)
Total deferred tax liabilities		(1,092,867	)		(1,058,579	)
Net deferred tax liabilities	$	(595,145	)	$	(387,529	)

We follow guidance issued by the FASB with regard to its accounting for uncertainty in income taxes recognized in the financial statements. Such guidance prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. Interest and penalties totaled $1,300 and $1,035 for the years ended August 31, 2012 and 2011, respectively. We file income tax returns with the Internal Revenue Service (“IRS”) and the state of California. For jurisdictions in which tax filings are prepared, we are no longer subject to income tax examinations by state tax authorities for years through 2006, and by the IRS for years through 2007. As of August 31, 2012, the Company’s tax returns for tax year ends August 31, 2009 and 2010 are under examination by the California Franchise Tax Board. The potential outcome of these examinations cannot be determined as of August 31, 2012. As of August 31, 2012, our 2007 tax filing was also under examination by the IRS. In October 2012, the IRS completed their examination of our 2007 tax filing, the result of which was a decrease of $36,868 in the amount refundable. Our review of prior year tax positions using the criteria and provisions presented in guidance issued by FASB did not resultin in a material impact on the Company’s financial position or results of operations.