Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes

Income Taxes

6) Income Taxes

        Some items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles, leading to timing differences between the Company's actual tax liability and the amount accrued for this liability based on book income. These temporary differences comprise the "deferred" portion of the Company's tax expense or benefit, which is accumulated on the Company's books as a deferred tax asset or deferred tax liability until such time as they reverse.

        Realization of the Company's deferred tax assets is primarily dependent upon the Company generating sufficient taxable income to obtain benefit from the reversal of net deductible temporary differences and utilization of tax credit carryforwards and the net operating loss carryforwards for Federal and California state income tax purposes. The amount of deferred tax assets considered realizable is subject to adjustment in future periods based on estimates of future taxable income. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is "more likely than not" that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management's evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax planning strategies, and assessments of current and future economic and business conditions.

        The Company had net deferred tax assets of $27,361,000, net of a $3,700,000 partial valuation allowance, as of December 31, 2010. In analyzing the deferred tax assets as of September 30, 2011, based on the factors above, the Company estimated it was more likely than not that the Company will realize approximately $21,134,000 of the benefits of the deductible differences, and therefore, a $700,000 partial valuation allowance for deferred tax assets was recorded as of September 30, 2011. The income tax benefit of $2,529,000 for the third quarter of 2011, and $1,068,000 for the nine months ended September 30, 2011, are net of the $3,000,000 reduction in the partial valuation allowance from $3,700,000 as of December 31, 2010 to $700,000 as of September 30, 2011.