NOTE 10 - INCOME TAXES

The Company files separate tax returns in the United States and in Macau. The Macau Subsidiary has received approval from the Macau government to operate its business as a Macau Offshore Company (MOC), and is exempt from the Macau income tax. For the fiscal years ended March 31, 2013, 2012 and 2011, the Macau Subsidiary recorded no tax provision. The Company has now exhausted its ability to carry back any further losses and therefore will only be able to recognize tax benefits to the extent that it has future taxable income.

Due to the change of control of the Company, the net operating loss carry over is subject to the IRS Section 382 limitation. As of March 31, 2013, 2012 and 2011, The Singing Machine had net deferred tax assets before valuation allowances of approximately $3.2 million, $3.9 million, and $3.5 million, respectively, against which the Company recorded valuation allowances totaling approximately $1.6 million, $3.9 million, and $3.5 million, respectively.

The income tax provision (benefit) for federal, foreign, and state income taxes in the consolidated statement of operations consisted of the following components for 2013, 2012 and 2011:

	2013		2012		2011
Income tax provision:
Current:
Federal	$	-	$	-	$	-
State		-		-		-

Total current Federal and State	$	-	$	-	$	-

Deferred:
Federal	$	(1,412,535)	$	-	$	-
State		(206,924)

Total net income tax benefit	$	(1,619,459)	$	-	$	-

The United States and foreign components of income (loss) before income taxes are as follows:

	2013		2012		2011

United States	$	92,122	$	(432,111)	$	(1,152,015)
Foreign		1,429,354		895,227		532,467
	$	1,521,476	$	463,116	$	(619,548)

The actual tax expense differs from the "expected" tax expense for the years ended March 31, 2013, 2012 and 2011 (computed by applying the U.S. Federal Corporate tax rate of 34 percent to income before taxes) as follows:

	2013		2012		2011

Expected tax expense (benefit)	$	517,302	$	157,459	$	(210,646)
State income taxes, net of Federal income tax benefit		25,236		26,299		(34,794)
Permanent differences		5,421		5,247		4,347
Deemed Dividend		537,866		304,377		181,039
Change in valuation allowance		(2,246,235)		385,219		(632,559)
Tax rate differential on foreign earnings		(537,866)		(304,377)		(181,039)
Prior year adjustments		78,817		(574,224)		873,652
Actual tax (benefit) expense	$	(1,619,459)	$	-	$	-

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows:

	2013		2012		2011

Deferred tax assets:
Federal net operating loss carryforward	$	2,189,622	$	2,579,924	$	2,141,339
State net operating loss carryforward		413,849		431,306		852,549
AMT credit carryforward		36,808		70,090		70,090
Inventory differences		358,130		438,773		24,572
Allowance for doubtful accounts		67,849		57,308		59,773
Reserve for sales returns		81,082		74,718		48,967
Charitable contributions		-		60,700		60,700
Accrued Vacation		9,839		9,551		8,550
Depreciation and amortization		81,739		135,660		198,606
Amortization of reorganization intangible		-		7,664		15,329
Deferred tax assets before valuation allowance		3,238,918		3,865,694		3,480,475
Valuation allowance		(1,619,459)		(3,865,694)		(3,480,475)
Net deferred tax assets	$	1,619,459	$	-	$	-

Due to economic conditions prior to the fiscal year ended March 31, 2013, the Company believed that it was more likely than not that the benefit from the net deferred tax assets would not be realized, and established a valuation allowance on the deferred tax assets for the entire balance.

During the fiscal year ended March 31, 2013, the Company released a portion of the valuation allowance. The release of the valuation allowance was determined in accordance with the provisions of ASC 740, which require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. The analysis performed to assess the realizability of the deferred tax assets included an evaluation of the pattern and timing of the reversals of temporary differences and the length of carryback and carry forward periods available under the applicable federal and state laws; and the amount and timing of future taxable income. The analysis indicated that it is more likely than not that at least 50% of the deferred tax asset recorded will be realized. As a result, approximately $1.6 million of the valuation allowance was released during the fiscal year ended March 31, 2013, recognizing an approximate tax benefit of $1.6 million.

At March 31, 2013, the Company has federal tax net operating loss carry forwards in the amount of approximately $6.4 million that expire beginning in the year 2027. In addition, the Company has state tax net operating loss carry forwards in the amount of approximately $8.9 million that expire beginning in 2015. Net operating loss carry forward amounts and their year of expiration are as follows:

Year of	NOL		NOL
Expiration	Federal		State

2013	$	-	$	-
2014		-		-
2015		-		1,984,323
2016		-		-
2017		-		-
2018 and beyond		6,440,060		6,918,172

	$	6,440,060	$	8,902,495

The Company is no longer subject to income tax examinations for fiscal years before 2010.