Income Taxes

12 Months Ended

Dec. 31, 2013

Income Taxes [Abstract]

INCOME TAXES

NOTE 10 – INCOME TAXES

The Company accounts for income taxes pursuant to the accounting standards that require the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. Additionally, the accounting standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets, including those related to the U.S. net operating loss carry forwards and to the temporary differences related to the deduction of impairment losses in PRC for income tax purposes as compared to financial statement purposes, are dependent upon future taxable income during the periods in which those temporary differences become deductible or are utilized.

Net deferred tax asset related to the U.S. net operating loss carry forward has been fully offset by a valuation allowance. The Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended. Under the Income Tax Laws of PRC, Chinese companies are generally subject to an income tax at an effective rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. The Company’s VIEs (Dyeing and Electric) and the Company’s subsidiary, Fulland Wind Energy, are subject to these statutory rates. The Company’s wholly-owned subsidiary, Fulland Limited was incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, this entity is not subject to income taxes.

Cleantech Solutions International, Inc. was incorporated in the United States and has incurred an aggregate net operating loss of approximately $5,426,000 for income tax purposes through December 31, 2013, subject to the Internal Revenue Code Section 382, which places a limitation on the amount of taxable income that can be offset by net operating losses after a change in ownership. The net operating loss carries forward for United States income taxes, and may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2033. Management believes that the realization of the benefits from these losses appears not more than likely due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. Management will review this valuation allowance periodically and make adjustments as necessary.

The Company has cumulative undistributed earnings from its foreign subsidiaries of approximately $60 million and $51 million as of December 31, 2013 and 2012, respectively, which is included in the consolidated retained earnings and will continue to be indefinitely reinvested in the Company’s PRC operations. Accordingly, no provision has been made for any deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.

The table below summarizes the differences between the U.S. statutory federal rate and the Company’s effective tax rate for the years ended December 31, 2013 and 2012:

	2013			2012
U.S. statutory rates		34.0	%		34.0	%
U.S. effective rate in excess of China tax rate		(9.6	)%		(10.4	)%
Other		0.0	%		1.4	%
U.S. valuation allowance		2.4	%		3.8	%
Total provision for income taxes		26.8	%		28.8	%

For the years ended December 31, 2013 and 2012, income tax expense related to our operations in the PRC and amounted to $2,999,795 and $1,701,602, respectively.

The tax effects of temporary differences under the Income Tax Law of the PRC that give rise to significant portions of deferred tax assets and liabilities as of December 31, 2013 and 2012 are as follows:

	December 31, 2013			December 31, 2012
Deferred tax assets:
Net U.S. operating loss carry forward	$	1,844,921		$	1,571,055
Loss on impairment of equipment		1,222,216			551,890
Allowance for doubtful accounts and inventory reserve		253,173			-
Total gross deferred tax assets		3,320,310			2,122,945
Less: valuation allowance		(1,844,921	)		(1,571,055	)
Net deferred tax assets	$	1,475,389		$	551,890

The valuation allowance at December 31, 2013 and 2012 were $1,844,921 and $1,571,055, respectively, related to the U.S. net operating loss carry forward. During 2013, the valuation allowance was increased by approximately $274,000 from the prior year.

In assessing the ability to realize the deferred tax asset from the loss on impairment of equipment held for lease in PRC and allowance for doubtful accounts and inventory reserve, management considers whether it is more likely than not that some portion or the entire deferred tax asset will be realized. The Company concluded that the temporary difference on the impairment loss of equipment held for lease in PRC and allowance for doubtful accounts and inventory reserve will be deductible or utilized on the future PRC taxable income and a deferred tax asset of $1,475,389 and $551,890 has been set up at December 31, 2013 and 2012, respectively.