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 and 2013. As a result of the North Jackson facility acquisition and the significant amount of machinery and equipment that was placed in service in 2011, 2012 and 2013, we claimed the 100% and 50% bonus depreciation deductions on such equipment. As a result, we generated a NOL for the 2011 and 2012 federal income tax returns. We recorded refundable income taxes in the amount of $4.8 million as of December 31, 2011, which was received during 2012, which primarily represented the amount of estimated federal taxes paid for 2011, prior to the North Jackson Facility acquisition. At December 31, 2011, we had a deferred tax asset of $15.1 million related to federal NOL carry forwards. We 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.

Components of the provision for income taxes are as follows:



For the years ended December 31,	2013		2012		2011
(dollars in thousands)
Current provision (benefit)
Federal	$	85	$	(5,782)	$	3
State		(6)		(440)		280

Deferred (benefit) provision
Federal		(3,205)		13,143		9,897
State		622		(587)		176

(Benefit) provision for income taxes	$	(2,504)	$	6,334	$	10,356

A reconciliation of the federal statutory tax rate and our effective tax rate is as follows:



For the years ended December 31,	2013		2012		2011
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
Research and development tax credit	14.6		(3.5)		-
State government grants, net of federal tax impact	4.2		(0.1)		(0.3)
Valuation allowance, state government grants, net of federal impact	(15.0)		-		-
Domestic manufacturing deduction	-		2.7		-
State income taxes, net of federal impact	1.4		(4.0)		1.6
Other, net	(2.1)		0.1		0.1

Effective income tax rate	38.1	%	30.2	%	36.4	%

Our facility in Dunkirk 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. We recognized deferred tax credit benefits of $47,000, $195,000 and $125,000 for the years ended December 31, 2013, 2012 and 2011, respectively. These credits, which have no expiration date, will be applied against future tax liabilities for income apportioned to New York State. We do not believe that we will generate sufficient taxable income to utilize all of these tax credits, therefore a valuation allowance of approximately $1.0 million has been recorded during the year ended December 31, 2013 against this deferred tax asset.

We 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. We are seeking a refund of $615,000, which is included as a component of other current assets 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, generating approximately $633,000 and $550,000 for 2012 and 2013, respectively. At December 31, 2013, we had approximately $52.5 million of federal NOL carryforwards available to offset future tax liabilities. These federal NOL’s will expire in varying amounts between 2031 and 2033.

Deferred taxes result from the following:



December 31,	2013		2012
(dollars in thousands)
Current deferred tax assets:
Inventory	$	3,454	$	7,457
Federal tax carryforwards		6,459		11,774
Share-based compensation		2,621		2,271
Receivables		98		684
Accrued liabilities		633		746
Other		65		65

Total current deferred tax assets	$	13,330	$	22,997

Noncurrent deferred tax assets:
Federal and state tax carryforwards	$	15,553	$	4,640

Deferred tax liabilities:
Property, plant and equipment (noncurrent)	$	58,085	$	59,867
Other (current)		288		258

	$	58,373	$	60,125

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.

We are routinely under audit by federal or state authorities. Our 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 2009 through 2012.