NOTE 6 - Income Taxes

The Provision (benefit) for income taxes is comprised of the following (in thousands):

	For the Years Ended June 30,
	2012		2011
Current income taxes:
Federal	$	11	$	(35	)
State		57		39
Foreign		--		3
		68		7

Deferred income tax provision (benefit)		199		(321	)
Provision (benefit) for income taxes	$	267	$	(314	)

A reconciliation of the U.S. Federal statutory income tax rate to our actual effective tax rate on earnings before income taxes is as follows (dollars in thousands):

	For the Years Ended June 30,
	2012						2011
	Amount			% of Pre-tax Income			Amount			% of Pre-tax Income
Tax at Federal statutory rate	$	868			34.0	%	$	274			34.0	%
Increases (decreases) in taxes resulting from:
Meals and entertainment		56			2.2	%		51			6.3	%
State income taxes, net of Federal income tax benefit		39			1.5	%		26			3.2	%
Foreign source income and taxes		(515	)		(20.2	)%		102			12.7	%
Stock based compensation expense		3			0.1	%		16			2.0	%
Tax reserve reversal		(61	)		(2.4	)%		(77	)		(9.5	)%
R&D Credit refund		(81	)		(3.2	)%		(708	)		(87.8	)%
Other, net		(42	)		(1.6	)%		2			0.2	%

Effective tax rate	$	267			10.4	%	$	(314	)		(38.9	)%

Deferred tax assets and deferred tax liabilities at June 30, 2012 and 2011 are as follows (in thousands):

	Current Deferred Tax Assets (Liabilities)				Long-term Deferred Tax Assets (Liabilities)
	2012		2011		2012			2011
Accounts receivable	$	23	$	19	$	--		$	--
Inventories		399		288		405			380
Accrued Liabilities		228		221		--			35
Stock based compensation expense		--		--		137			137
Goodwill		--		--		1,875			2,077
R&D credit		--		--		225			163
Property, plant and equipment		--		--		(624	)		(625	)
Other deferred tax liabilities		--		--		(256	)		(84	)
		650		528		1,762			2,083
Valuation allowance		--		--		--			--

Net deferred taxes	$	650	$	528	$	1,762		$	2,083

The Company has identified its U.S. Federal income tax return and its State return in New York as its major tax jurisdictions. The fiscal 2008 and forward years are still open for examination.

During the year ended June 30, 2011, the Company completed a research and development credit study. The study included the years June 30, 2007 through June 30, 2011 to determine the amount of R&D credits to which the Company is entitled. The Company filed amended tax returns for these years to establish the credits and generated an income tax benefit of $885,401. Due to the nature of the credits, the Company established a reserve under ASC 740-10 of $165,000.

During the year ending June 30, 2012 the Company decreased its reserve for uncertain income tax positions by $39,000. As of June 30, 2012 the Company has a long-term accrued income tax liability of $126,000. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense and accrued income taxes. As of June 30, 2012, the Company had accrued interest totaling $0 and $126,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	Tax			Interest		Total
Balance of gross unrecognized tax benefits as of July 1, 2011	$	165		$	--	$	165
Reductions to unrecognized tax benefits resulting from changes in reserve percentages		(39	)		--		(39	)

Balance of gross unrecognized tax benefits as of June 30, 2012	$	126		$	--	$	126

Napco US plans to permanently reinvest a substantial portion of its foreign earnings and as such has not provided US corporate taxes on the permanently reinvested earnings. As of June 30, 2012, the Company had no undistributed earnings of foreign subsidiaries.