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Income Tax
9 Months Ended
Sep. 30, 2013
Income Tax Disclosure [Abstract]  
Income Tax

6. Income Tax

The Company calculates its interim tax provision in accordance with the provisions of ASC 740-270 “Income Taxes – Interim Reporting.” For each interim period the Company estimates its annual effective income tax rate and applies the estimated rate to its year-to-date income or loss before income taxes. The Company also computes the tax provision or benefit related to items separately reported, such as discontinued operations, and recognizes the items net of their related tax effect in the interim periods in which they occur. The Company also recognizes the effect of changes in enacted tax laws or rates in the interim periods in which the changes occur.

For the nine months ended September 30, 2013 and September 30, 2012, the estimated income tax rate from continuing operations was 27% and 31%, respectively. The decrease in the effective tax rate was primarily due to the recording of a research and development tax benefit of $906,000 in 2013, of which $431,000 was related to the retroactive reinstatement of the federal research and development tax credits from the enactment of the American Tax Relief Act of 2012. These credits were not available to the Company in 2012.

During the three months ended September 30, 2013, the Company recorded additional benefits from federal and state research and development tax credits of $245,000 and $67,000 respectively. During the nine months ended September 30, 2013, the Company recorded additional benefits from federal and state research and development tax credits of $741,000 and $165,000 respectively. The Company did not record additional benefits from federal and state research and development tax credits during the three and nine months ended September 30, 2012.

As of September 30, 2013, the Company’s gross research and development tax credit carryforwards totaled approximately $1,120,000. Of these credits, approximately $453,000 can be carried forward for 15 years and will expire between 2015 and 2028, and approximately $667,000 of state credits can be carried forward indefinitely.

 

The Company has recorded gross unrecognized tax benefits, excluding interest and penalties, as of September 30, 2013 and December 31, 2012 of $819,000 and $595,000, respectively. Tax benefits are recorded pursuant to the provisions of ASC 740 “Income Taxes.” If such unrecognized tax benefits are ultimately recorded in any period, the Company’s effective tax rate would be reduced accordingly for such period.

The Company has been examined by the Internal Revenue Service (the “IRS”) through the calendar year 2010. State income tax statutes are generally open for periods back to and including the calendar year 2008.

It is reasonably possible that the Company’s gross unrecognized tax benefits balance may change within the next twelve months due to the expiration of the statutes of limitation of the federal government and various state governments by a range of zero to $38,000. The Company records such unrecognized tax benefits upon the expiration of the applicable statute of limitations or the settlement with tax authorities. As of September 30, 2013, the Company has a liability for unrecognized benefits of $529,000 for federal taxes and $290,000 for state taxes. Such benefits relate primarily to expenses incurred in those jurisdictions.

The Company classifies interest and penalties related to unrecognized tax benefits as income tax expense. At September 30, 2013, and December 31, 2012, the Company has accrued approximately $97,000 and $62,000 for the payment of interest and penalties, respectively.

The final regulations regarding the deduction and capitalization of expenditures related to tangible property were issued during the third quarter of 2013 by the IRS. The Company has reviewed these regulations and does not intend to early adopt or amend any previously filed returns. The implementation of these regulations did not have a material impact on the Company’s consolidated financial statements for the year ending December 31, 2013.