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 and 2012, the Company claimed the 100% and 50% bonus depreciation deductions on such equipment. As a result, the Company generated a net operating loss (“NOL”) for the 2011 federal income tax return. The Company recorded refundable income taxes in the amount of $4.8 million as of December 31, 2011, which was received during 2012, 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 carried back a portion of this NOL to 2010 to obtain a refund of the $5.2 million paid for federal income taxes for the 2010 tax year and as a result no longer benefited from the 2010 domestic production deduction. All remaining federal NOL carry forwards can be carried forward and will expire in 2031 and 2032.

Components of the provision for income taxes are as follows:


For the years ended December 31,	2012			2011		2010

*(dollars in thousands)*
Current provision (benefit)
Federal	$	(5,782	)	$	3	$	5,887
State		(440	)		280		205

Deferred provision (benefit)
Federal		13,143			9,897		568
State		(587	)		176		161


Provision for income taxes	$	6,334		$	10,356	$	6,821

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


For the years ended December 31,	2012			2011			2010

Federal statutory tax rate		35.0	%		35.0	%		35.0	%
Research and development tax credit		(3.5	)		-			-
State government grants, net of federal tax impact		(0.1	)		(0.3	)		(0.1	)
Domestic manufacturing deduction		2.7			-			(2.8	)
State income taxes, net of federal impact		(4.0	)		1.6			1.6
Other, net		0.1			0.1			0.3

Effective income tax rate		30.2	%		36.4	%		34.0	%

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 $65,000, $125,000 and $43,000 for the years ended December 31, 2012, 2011 and 2010, 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.

The Company filed amended federal tax returns with the Internal Revenue Service during 2012 for tax years 2008 through 2010 claiming $1.3 million in research and development tax credits for qualifying research activities performed by the Company. The Company is seeking a refund of $615,000, which is included as a component of refundable income taxes on the consolidated balance sheets, for amounts previously paid during these tax years. The remaining $726,000 of research and development tax credits will be carried forward. These carryforwards will expire in 2032.

The American Taxpayer Relief Act of 2012 extended the tax benefit for research and development tax credits for 2012 and 2013. At December 31, 2012, the Company had approximately $38.0 million of federal NOL carryforwards available to offset future tax liabilities.

Deferred taxes result from the following:


December 31,	2012		2011

*(dollars in thousands)*
Current deferred tax assets:
Inventory	$	7,457	$	12,466
Federal tax carryforwards		11,774		12,418
Share-based compensation		2,271		2,000
Receivables		684		765
Accrued liabilities		746		679
Other		65		348

Total current deferred tax assets	$	22,997	$	28,676

Noncurrent deferred tax assets:
Federal and state tax carryforwards	$	4,640	$	4,498

Deferred tax liabilities:
Property, plant and equipment (noncurrent)	$	59,867	$	52,789
Other (current)		258		238

	$	60,125	$	53,027

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 under examination by the Internal Revenue Service for 2009 through 2011, and are subject to examination by state tax jurisdictions for tax years 2008 through 2011.