Note 9: Income Taxes

The significant components of deferred tax assets as of December 31, 2013 and 2012 are shown below. A valuation allowance has been established to offset the deferred tax assets, as realization of such assets is uncertain.

	December 31,
	2013		2012

Excess of financial accounting over tax depreciation	$	54,000	$	51,954
State income tax benefits		2,166,000		1,985,066
Net operating loss carryforward		12,181,000		11,488,759
Allowance for obsolete inventory		-		12,469
Allowance for bad debts, returns and discounts		-		31,316
Warranty expense		12,000		11,949
Derivative liability expense		878,000		1,068,323
Research and development credit carryforwards		538,000		591,601
Patent amortization		(603,000)		(668,661)
Vacation accrual		3,000		19,976
Other		(356,200)		(28,060)
Valuation reserve		(14,872,800)		(14,564,692)
Net deferred tax asset	$	-	$	-

The following reconciles the tax provision with the expected provision obtained by applying statutory rates to pretax income:

	December 31,
	2013		2012

Federal income tax benefit computed at the Federal statutory rate	$	(1,055,900)	$	(3,091,483)
State income tax expense benefit net of Federal benefit		(273,700)		(530,499)
Federal net operating loss carry-forward		564,000		1,031,555
Tax valuation allowance		308,100		1,779,872
Permanent differences		56,000		715,563
Other		401,500		94,992
Income tax benefit	$	-	$	-

The components of federal income tax benefit from continuing operations consisted of the following for the year ended:

	December 31,
	2013		2012

Current income tax expense (benefit):
Federal	$	-	$	-
State		-		-

Net current tax expense (benefit)	$	-	$	-

Deferred tax expense (benefit) resulted from:
Difference between financial and tax depreciation	$	6,000	$	(26,612)
State income tax benefits		(21,100)		(72,227)
Net operating (loss) income		(564,000)		(492,547)
Research and development credits		(21,000)		24,328
Allowance for obsolete inventory		(13,000)		-
Amortization of patents		66,000		(300,296)
Derivative liability recognition		191,000		(783,315)
Vacation accrual		17,000		(2,911)
Warranty expense		-		(11,949)
Allowance for bad debts, returns and discounts		31,000		(8,943)
Other		-		(105,400)
Valuation reserve		308,100		1,779,872

Net deferred tax benefit	$	-	$	-

	$	-	$	-

At December 31, 2013, the Company had federal net operating loss carry-forwards of approximately $35,827,000 that expire from 2013 through 2033. During 2013, the Company had federal net operating losses of approximately $1,624,000 expire. In addition, the Company had research and development tax credits of approximately $475,000 that expire from 2017 through 2033. As a result of previous stock transactions, the Company's ability to utilize its net operating loss carry-forwards to offset future taxable income and utilize future research and development tax credits is subject to certain limitations under Section 382 and Section 383 of the Internal Revenue Code due to changes in equity ownership of the Company.

The Company has a history of operating losses and, as of yet, has not had any taxable income. The Company has calculated a deferred tax asset for its tax credits but offsets the tax asset with a valuation allowance. As a result, the Company has not realized or recorded any tax benefit related to its tax credits.