INCOME TAXES

12 Months Ended

Dec. 31, 2012

Income Taxes [Abstract]

INCOME TAXES

7.           INCOME TAXES

Details of the income tax benefit (provision) for the years ended December 31, 2012 and 2011 are as follows (in 000’s):

	2012			2011
Current tax expense	$	-		$	-
Deferred tax expense (benefit)		1,519			(536	)
Change in valuation allowance		(1,519	)		536
Income tax benefit (provision)	$	-		$	-

Deferred income taxes reflect the net effect of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  The significant components of the Company’s deferred tax assets and liabilities as of December 31, 2012 and 2011 are as follows (in 000’s):

	2012			2011
Deferred tax assets:
Net operating loss carryforwards and credits	$	18,955		$	18,985
Allowance for doubtful accounts		49			35
Accruals		687			647
Goodwill		2,339			3,045
Other		295			241
Gross deferred tax assets		22,325			22,953
Less valuation allowance		(20,319	)		(21,839	)
Gross deferred tax assets net of valuation allowance		2,006			1,114
Deferred tax liabilities:
Depreciation		(2,006	)		(1,114	)
Gross deferred tax liabilities		(2,006	)		(1,114	)
Net deferred taxes	$	-		$	-

Innotrac utilizes the liability method of accounting for income taxes in accordance with ASC topic No. 740 – Income Taxes.  Under the liability method, deferred taxes are determined based on the difference between the financial and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.  A valuation allowance is recorded against deferred tax assets if the Company considers it is more likely than not that deferred tax assets will not be realized.  Innotrac’s gross deferred tax asset as of December 31, 2012 is approximately $22.3 million. This deferred tax asset was generated primarily by net operating loss carryforwards created by net losses in prior years and the goodwill impairment charge of $25.2 million recorded in 2009.  Innotrac has a net operating loss carryforwards of $52.1 million at December 31, 2012 that expire between 2021 and 2032.

Innotrac’s ability to generate taxable income from future operations is dependent upon general economic conditions, collection of existing outstanding accounts receivable, competitive pressures on sales and margins and other factors beyond management’s control.  These factors, combined with losses in recent years, create uncertainty about the ultimate realization of the gross deferred tax asset in future years.  Therefore, a valuation allowance of approximately $20.3 million and $21.8 million has been recorded as of December 31, 2012 and 2011, respectively. Income taxes associated with future earnings may be offset by a reduction in the valuation allowance.  For the year ended December 31, 2012, the income tax provision of $1.5 million was offset by a corresponding decrease in the deferred tax asset valuation allowance.  When and if the Company can return to consistent profitability and management determines that it is more likely than not that the Company will be able to utilize the deferred tax assets prior to their expiration, the valuation allowance may be reduced or eliminated.

ASC topic No. 740 requires that the Company determine whether it is more likely than not that a tax position will be sustained upon audit, based on the technical merits of the position.  A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements.  The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.  The tax years that are open for audit are 2001-2007, and 2009-2012.  There are no unrecognized tax benefits and no related ASC topic No. 740 tax liabilities at December 31, 2012 and 2011.

The Company generally recognizes interest and/or penalties related to income tax matters in general and administrative expenses.  As of December 31, 2012 and 2011, we have no accrued interest or penalties related to uncertain tax positions.

The difference between the provision for income taxes (benefit) and the amount computed by applying the U.S. federal income tax rate for the years ended December 31, 2012 and 2011 is as follows:

	2012			2011
Statutory federal income tax (benefit) expense	$	1,181		$	(531	)
Expired state tax credits		31			-
State income taxes, net of federal effect		66			(42	)
Permanent book-tax differences		48			28
Rate adjustment for change in state rate		61			-
State NOL true-up		136			-
Other		(4	)		9
Valuation allowance for deferred tax assets		(1,519	)		536
Income tax provision (benefit)	$	-		$	-