10. Income Taxes

Open tax years related to federal and state income tax filings are for the years ended June 30, 2010, 2011, 2012 and 2013. The Company files state tax returns in New York and Texas,. The Company's foreign subsidiaries, Misonix Ltd. and Misonix Urology Services Limited (formerly, UKHIFU Limited) filed tax returns in the United Kingdom. In general, open years related to the United Kingdom for filing are June 30, 2011, 2012, and 2013. As of June 30, 2013 and 2012, the Company has no material unrecognized tax benefits and no accrued interest and penalties.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:

	June 30,
	2013		2012
Deferred tax liabilities:
Depreciation and amortization	$	(299,896)	$	(237,291)
Total deferred tax liabilities		(299,896)		(237,291)

Deferred tax assets:
Bad debt reserves		56,842		36,535
Accruals and allowances		13,504		13,506
Inventory valuation		611,272		286,527
License fee and other income		59,602		55,653
Stock-based compensation		225,793		225,823
Deferred gain - HIFU and Labcaire		203,946		211,263
Tax credits		534,163		475,386
Net operating loss carry forwards		5,235,264		4,745,221
Other		22,512		5,993
Total deferred tax assets		6,962,898		6,055,907
Valuation allowance		6,663,002		(5,818,616)
Net deferred tax asset	$	-	$	-

Recorded as:
Current deferred tax asset	$	-	$	-
Non-current deferred tax liability, net		-		-
	$	-	$	-

As of June 30, 2013, the valuation allowance was determined by estimating the recoverability of the deferred tax assets. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. In making this assessment, the ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and tax planning strategies. Based on these considerations, management concluded that it is more likely than not that its deferred tax assets will not be fully realized. The increase in the valuation allowance is primarily due to the net loss from continuing operations.

As of June 30, 2013, the Company had approximately $13,500,000 of U.S. federal net operating loss carryforwards which expire in tax years between 2026 and 2033. Of the net operating loss carryforwards, approximately $3,900,000 is subject to the separate return loss rules under the Internal Revenue Code of 1986, as amended (the “Code”). The Company has approximately $456,000 of research and development tax credit carryforwards which expire in the tax years between 2026 and 2033. In addition, the Company has approximately $78,000 of alternative minimum tax credit which has an indefinite carryforward period.

Significant components of the income tax expense (benefit) attributable to continuing operations are as follows:

	Year ended June 30,
	2013		2012
Current:
Federal	$	(79,667)	$	(181,016)
State		4,471		(13,766)
Total current		(75,196)		(194,782)

Deferred:
Federal		-		-
State		-		-
Total deferred		-		-
	$	(75,196)	$	(194,782)

The reconciliation of income tax expense (benefit) computed at the Federal statutory tax rates to income tax expense (benefit) are as follows:

	Year ended June 30,
	2013		2012
Tax at federal statutory rates	$	(993,461)	$	(273,206)
State income taxes, net of federal benefit		2,951		(9,086)
Research credit		(58,777)		(50,722)
Stock-based compensation		166,080		116,541
Rate change		-		24,093
Valuation allowance		782,808		(21,306)
Travel and entertainment		24,860		22,099
Other		343		(3,195)
	$	(75,196)	$	(194,782)