NOTE 4 INCOME TAXES

The income tax expense for the years ended December 31, 2013 and 2012 consists of the following:

	2013			2012

Current taxes—Federal	$	72,000		$	384,000
Current taxes—State		(21,000	)		(15,000	)
Current taxes—Foreign		20,000			25,000
Deferred taxes—Federal		194,000			(109,000	)
Deferred taxes—State		35,000			13,000


Income tax expense	$	300,000		$	298,000

The statutory rate reconciliation for the years ended December 31, 2013 and 2012 is as follows:

	2013			2012

Statutory federal tax provision	$	370,000		$	315,000
State income taxes		45,000			28,000
Effect of foreign operations		(3,000	)		(11,000	)
Income tax credits		(167,000	)		(14,000	)
Permanent differences		55,000			24,000
Other		—			(44,000	)


Income tax expense	$	300,000		$	298,000

Income from operations before income taxes was derived from the following sources:

	2013		2012

Domestic	$	1,074,572	$	770,440
Foreign		12,804		156,998


Total	$	1,087,376	$	927,438

Deferred tax assets (liabilities) at December 31, 2013 and 2012, consist of the following:

	2013			2012

Allowance for uncollectable accounts	$	51,000		$	57,000
Inventories reserve		404,000			537,000
Accrued vacation		386,000			353,000
Non-compete amortization		281,000			335,000
Stock-based compensation and equity appreciation rights		100,000			68,000
State Tax NOL carry forwards		117,000			139,000
Other		144,000			175,000


Deferred tax assets		1,483,000			1,664,000


Prepaid expenses		(246,000	)		(192,000	)
Property and equipment		(836,000	)		(842,000	)


Deferred tax liabilities		(1,082,000	)		(1,034,000	)


Net deferred tax assets	$	401,000		$	630,000

The net deferred taxes summarized above have been classified on the accompanying consolidated balance sheets as follows:


Net current deferred tax assets	$	683,000		$	857,000
Net non-current deferred tax liabilities		(282,000	)		(227,000	)


Net deferred tax assets	$	401,000		$	630,000

We have determined that it is more likely than not that our deferred tax assets will be realized, principally through anticipated taxable income in future tax years. As a result, we have determined that establishing a valuation allowance on our deferred tax assets is not necessary.

The tax effects from an uncertain tax position can be recognized in our consolidated financial statements, only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The following table sets forth changes in our total gross unrecognized tax benefit liabilities, excluding accrued interest, for the years ended December 31, 2013 and 2012:


Balance as of December 31, 2011	$	118,000
Tax positions related to current year:
Additions		22,000
Reductions		0


Balance as of December 31, 2012		140,000
Tax positions related to current year:
Additions		53,000
Reductions		0


Balance as of December 31, 2013	$	193,000

The $193,000 of unrecognized tax benefits as of December 31, 2013 includes amounts which, if ultimately recognized, will reduce our annual effective tax rate. It is included in Other Long-Term Liabilities on the accompanying consolidated balance sheets.

Our policy is to accrue interest related to potential underpayment of income taxes within the provision for income taxes. The liability for accrued interest as of December 31, 2013 and 2012 was not significant. Interest is computed on the difference between our uncertain tax benefit positions and the amount deducted or expected to be deducted in our tax returns.

We are subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply.

With few exceptions, we are no longer subject to U.S. federal, state or local income tax examinations by tax authorities for the years before 2009.