NOTE 4. INCOME TAXES

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction. Our effective tax rate for the three months ended June 30, 2014 was (6%), compared with 34% for the three months ended June 30, 2013. The tax benefit in the second quarter of 2014 was the result of a favorable audit settlement with the Minnesota Department of Revenue which included the acceptance of the Company’s research and development credits of $100,000 which were previously reserved for as an uncertain position. The effective tax rate for the year ended December 31, 2014 is expected to be 30% compared to 28% for the year ended December 31, 2013.

The differences between federal income taxes computed at the federal statutory rate and reported income taxes for the three and six months ended June 30, 2014 and 2013 are as follows:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2014			2013			2014			2013
Statutory federal tax provision	$	79,000		$	97,000		$	130,000		$	140,000
State income taxes	12,000			13,000			19,000			23,000
Income tax credits	(6,000		)	(17,000		)	(14,000		)	(103,000		)
Change in uncertain tax positions	(100,000		)	8,000			(100,000		)	22,000
Other	—			(3,000		)	—			(5,000		)
Income tax expense (benefit)	$	(15,000	)	$	98,000		$	35,000		$	77,000

At June 30, 2014, we had $41,000 of net uncertain tax benefit positions remaining in other long-term liabilities related to research and development credits that would reduce our effective income tax rate if recognized.