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 September 30, 2014 was 10%, compared with 29% for the three months ended September 30, 2013. The decrease in the effective tax rate in the third quarter of 2014 was the result of a favorable return to provision true-up discrete item primarily related to additional research and development credits that were determined when filing the return. Our effective tax rate for the nine months ended September 30, 2014 was 10% compared with 23% for the nine months ended September 30, 2013. The decrease in the effective tax rate is primarily due to the favorable return to provision true-up and the audit settlement with Minnesota Department of Revenue which included the acceptance of our research and development credits of $100,000 which were previously reserved for as an uncertain position.

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

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2014			2013			2014			2013
Statutory federal tax provision	$	129,000		$	105,000		$	259,000		$	245,000
State income taxes	14,000			16,000			33,000			39,000
Income tax credits	(19,000		)	(48,000		)	(33,000		)	(151,000		)
Change in uncertain tax positions	1,000			11,000			(99,000		)	33,000
Return to provision true-up	(84,000		)	—			(84,000		)	—
Other	(3,000		)	3,000			(3,000		)	(2,000		)
Income tax expense (benefit)	$	38,000		$	87,000		$	73,000		$	164,000

At September 30, 2014, we had $44,000 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.