Note 8: Income Taxes

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act, enacted in December 2010 provided for 100% bonus depreciation for qualified investments made during 2011, and 50% bonus depreciation for qualified investments made during 2012. As a result of the North Jackson Facility acquisition and the significant amount of machinery and equipment that was placed in service in 2011, the Company will claim the 100% bonus depreciation deduction on such equipment. As a result, the Company will generate a net operating loss ("NOL") for the 2011 federal income tax return. The Company has recorded refundable income taxes in the amount of $4.8 million as of December 31, 2011, which primarily represents the amount of estimated federal taxes paid for 2011, prior to the North Jackson Facility acquisition. At December 31, 2011, the Company had a deferred tax asset of $15.1 million related to federal NOL carry forwards. The Company is currently evaluating whether to carry back a portion of this NOL to 2010 to obtain a refund of $5.4 million paid for federal income taxes for the 2010 tax year. If the Company chooses to carry back the NOL to 2010, it will no longer benefit from the 2010 domestic production deduction. The Company expects to finalize the treatment of the NOL by the end of the second quarter of 2012. All remaining NOL federal carry forwards can be carried forward until 2031.

Components of the provision (benefit) for income taxes are as follows:


For the years ended December 31,	2011		2010		2009

*(dollars in thousands)*
Current provision (benefit)
Federal	$	3	$	5,887	$	(4,109	)
State		280		205		1,164


Deferred provision (benefit)
Federal		9,897		568		2,450
State		176		161		(598	)


Provision (benefit) for income taxes	$	10,356	$	6,821	$	(1,093	)

A reconciliation of the federal statutory tax rate and the Company's effective tax rate is as follows:


For the years ended December 31,	2011			2010			2009

Federal statutory tax (benefit) rate		35.0	%		35.0	%		(35.0	)%
Reconciliation of federal and state tax balances to tax returns		-			-			13.4
Statutory tax rate changes		-			-			(4.5	)
Loss carryback realized at higher statutory rate		-			-			(1.9	)
State government grants, net of federal tax impact		(0.3	)		(0.1	)		(1.2	)
Domestic manufacturing deduction		-			(2.8	)		-
State income taxes, net of federal impact		1.6			1.6			-
Other, net		0.1			0.3			2.2

Effective income tax (benefit) rate		36.4	%		34.0	%		(27.0	)%

Dunkirk Specialty Steel operates in a New York State Empire Zone and is qualified to benefit from investments made and employees hired at the Dunkirk, New York facility for up to 15 years from its 2002 acquisition date. The Company recognized deferred tax credit benefits of $125,000, $43,000 and $73,000 for the years December 31, 2011, 2010 and 2009, respectively. These credits, which have no expiration date, will be applied against future tax liabilities for income apportioned to New York State. The Company believes it will generate sufficient taxable income to utilize these tax credits.

Deferred taxes result from the following:


December 31,	2011		2010

*(dollars in thousands)*
Current deferred tax assets:
Inventory	$	12,466	$ 1,598
Federal tax carryforwards		12,418	-
Share-based compensation		2,000	1,443
Receivables		765	809
Accrued liabilities		679	386
Other		348	90

Total current deferred tax assets	$	28,676	$ 4,326

Noncurrent deferred tax assets:
Federal and state tax carryforwards	$	4,498	$ 1,294
Other		-	105

Total noncurrent deferred tax assets	$	4,498	$ 1,399

Deferred tax liabilities:
Property, plant and equipment (noncurrent)	$	52,789	$ 15,276
Other (current)		238	124

	$	53,027	$ 15,400

State tax carry forwards represent New York Empire Zone tax credits with no expiration date and a state net operating loss carry forwards expiring at various times through 2031.

The Company is routinely under audit by federal or state authorities. The Company's tax returns are subject to examination by the Internal Revenue Service for tax years 2009 through 2011, and by state tax jurisdictions for tax years 2007 through 2011.