NOTE G – INCOME TAXES

A reconciliation of the U.S. Federal statutory income tax rate to the effective income tax rate is as follows:

	Year Ended December 31, 2013			Year Ended December 31, 2012

Tax expense at federal statutory rate		34	%		34	%
State tax expense, net of federal tax effect		5	%		5	%
Permanent timing differences		(10)	%		(4)	%
Deferred income tax asset valuation allowance		(29)	%		(35)	%
Effective income tax rate		0	%		0	%

Significant components of the Company’s deferred income tax assets are as follows:

	December 31, 2013		December 31, 2012

Inventory	$	15,000	$	18,000
Inventory allowance		156,000		102,000
Allowance for doubtful accounts		23,000		23,000
Accrued compensation		27,000		27,000
Net operating loss carry forward expired		0		(197,000)
Net operating loss carry-forward		5,026,000		5,013,000
Total gross deferred income tax assets		5,247,000		4,986,000
Less deferred income tax assets valuation allowance		(5,247,000)		(4,986,000)
Net deferred income tax assets	$	0	$	0

The valuation allowance for deferred income tax assets as of December 31, 2013 and December 31, 2012 was $5,247,000 and $4,986,000, respectively. The net change in the deferred income tax assets valuation allowance was $261,000 for Fiscal 2013. The net change in the deferred income tax assets valuation allowance was an increase of $213,000 for Fiscal 2012.

As of December 31, 2013, the prior three years remain open for examination by the federal or state regulatory agencies for purposes of an audit for tax purposes.

At December 31, 2013, the Company had Federal and New York State net operating loss carry-forwards for income tax purposes of approximately $12,888,000. The Company’s net operating loss carry-forwards began to expire in 2011 and continue to expire through 2033. In assessing the realizability of deferred income tax assets, management considers whether or not it is more likely than not that some portion or all deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment.

The Company’s ability to utilize the operating loss carry-forwards may be subject to an annual limitation in future periods pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, if future changes in ownership occur.

The Company recognizes potential interest and penalties related to income tax positions as a component of the provision for income taxes on operations. The Company does not anticipate that total unrecognized tax benefits will materially change in the next twelve months.