Income Taxes

The components of income tax expense (benefit) for the fiscal years indicated are as follows:



	2013			2012
Current:
Federal	$	(575,000	)	$	—
State	—			—
Foreign	32,000			57,000
	(543,000		)	57,000
Deferred:
Federal	—			—
State	—			—
Foreign	—			—
	—			—
Total	$	(543,000	)	$	57,000

A reconciliation of the U.S statutory tax rate to the Company’s effective tax rate follows:



	2013					2012
	Amount			Percent		Amount			Percent
U.S. statutory tax	$	(178,000	)	(34.0	)%	$	(450,000	)	(34.0	)%
Change in uncertain tax positions	(575,000		)	(109.7	)	—			—
Increase (decrease) in valuation allowance	(257,000		)	(49.0	)	432,000			32.6
Foreign tax rate differences	178,000			33.9		62,000			4.7
Prior year foreign tax adjustment	164,000			31.3		—			—
Permanent differences	88,000			16.8		84,000			6.3
State tax, net of federal benefit	27,000			5.1		(16,000		)	(1.2	)
Other, net	10,000			2.0		(55,000		)	(4.2	)
Effective tax rate	$	(543,000	)	(103.6	)%	$	57,000		4.3	%

The tax effects of temporary differences that give rise to deferred tax assets and liabilities at September 30, 2013 and 2012 are presented below:



	2013			2012
Deferred tax assets:
Inventories	$	900,000		$	868,000
Accrued compensation	459,000			450,000
Warranty accrual	139,000			148,000
Depreciation	75,000			507,000
Allowance for doubtful accounts receivable	335,000			341,000
Unearned revenue	202,000			224,000
U.S. net operating loss carryforwards	2,117,000			2,072,000
Foreign net operating loss carryforwards	986,000			915,000
Tax credits	398,000			366,000
Other	299,000			286,000
Gross deferred tax assets	5,910,000			6,177,000
Deferred tax liabilities:
Other	38,000			48,000
Gross deferred tax liabilities	38,000			48,000
Total deferred tax assets and liabilities	5,872,000			6,129,000
Less valuation allowance	(5,872,000		)	(6,129,000		)
Net deferred tax assets and liabilities	$	—		$	—

Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns for which a tax benefit has been recorded in the income statement. Deferred U.S. income taxes are not provided on approximately $2.6 million of undistributed earnings of foreign subsidiaries as the Company presently intends to reinvest such earnings indefinitely, and any plan to repatriate any of such earnings in the future is not expected to result in a material incremental tax liability to the Company. The Company provides for a valuation allowance against its deferred tax assets due to the uncertainty of future realization. The full valuation allowance is determined to be appropriate due to the Company's operating losses since fiscal year 2010 and the inherent uncertainties of predicting future operating results in periods over which such net tax differences become deductible.

Pretax domestic income (loss) amounted to approximately $651,000 and ($797,000) in fiscal years 2013 and 2012, respectively. Pretax foreign loss amounted to approximately ($1,175,000) and ($526,000) in fiscal years 2013 and 2012, respectively. The Company has U.S. and foreign net operating loss carryforwards (NOL's) of approximately $5.8 million and $3.8 million, respectively, available to offset future taxable income. Such NOL's can be carried forward over periods through September 30, 2033 in the U.S. and indefinitely in foreign jurisdictions.

The Company follows the provisions of ASC 740 as it relates to uncertain tax positions.

Unrecognized tax benefits activity for the years ended September 30, 2013 and 2012 is summarized below:



	2013			2012
Beginning balance	$	502,000		$	478,000
Additions (reductions) based on tax positions related to prior years
	(457,000		)	24,000
Additions (reductions) based on tax positions related to the current year
	—			—
Ending balance	$	45,000		$	502,000

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. At September 30, 2013 and 2012, the combined amount of accrued net interest and penalties related to tax positions taken or to be taken on the Company’s tax returns and recorded as part of the reserves for uncertain tax positions was $0 and $118,000, respectively. The Company files U.S. Federal and State income tax returns and foreign tax returns in the United Kingdom, Germany and Israel. The Company is generally no longer subject to tax examinations for fiscal years prior to 2010 in the U.S. and 2008 in the U.K., Germany and Israel.