6. INCOME TAXES

12 Months Ended

Aug. 31, 2013

Income Tax Disclosure [Abstract]

Note 6. INCOME TAXES

We utilize FASB ASC 740-10, “Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.

Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.

The components of the income tax provision for FYE 2013 and 2012 were as follows:

	2013		2012
Current
Federal	$	891,153	$	872,907
State		112,042		177,975
		1,003,195		1,050,882
Deferred
Federal		57,805		114,712
State		309,182		(22,901	)
		366,987		91,811
Total	$	1,370,182	$	1,142,693

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 FYE 2013 and 2012:

	2013			2012
Income tax computed at federal statutory tax rate		34.0%			34.0%
State taxes, net of federal benefit		5.2			3.3
Meals & Entertainment		0.1			0.1
Other permanent differences		(0.5	)		0.8
Research and development credit		(11.3	)		(8.4	)
Change in prior year estimated taxes		4.7			(0.9	)
Total		32.2%			28.9%

Significant components of the Company's deferred tax assets and liabilities for income taxes for FYE 2013 and 2012 are as follows:

	2013			2012
Deferred tax assets
Accrued payroll and other expenses	$	82,104		$	79,922
Deferred revenue		38,225			56,456
Deferred rent		29,068			–
Property and equipment		–			32,916
Intellectual property		30,326			–
Research and development credit		–			261,526
State taxes		45,343			66,902
State Tax Deferred		74,458			–
Total deferred tax assets		299,524			497,722
Less:  Valuation allowance		–			–
		299,524			497,722
Deferred tax liabilities
Property and equipment		(23,077	)		–
State Tax Deferred		(30,663	)		–
Capitalized computer software development costs		(1,238,578	)		(1,062,204	)
Total deferred tax liabilities		(1,261,655	)		(1,092,867	)
Net deferred tax liabilities	$	(962,131	)	$	(595,145	)

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 $6,357 and $1,300 for FYE 2013 and 2012, respectively. We file income tax returns with the IRS and the FTB. FTB audited us for FYE2007 and 2008. We received refunds as we claimed; however they continued their audit to include FYE 2009 and 2010, and were reviewing 2007 and 2008 research and development credits since those credits were carried forward to FYE 2009 and 2010. In May 2013, we received a letter from FTB stating that an audit will not be conducted for those years at this time; however it may be subject to future audit for the FYE 2007 through FYE 2010 if they receive new information.

In March 2012, we also received a notice from the IRS that our FYE 2008 is subject to their examination. In October 2012, the IRS completed their examination of our 2007 tax filing. The outcome of this examination was a decrease of $36,868 in the amount refundable. We received a refund of $151,246 in December 2012.

Our review of prior year tax positions using the criteria and provisions presented in guidance issued by FASB did not result in a material impact on the Company’s financial position or results of operations.