Annual report pursuant to section 13 and 15(d)

14. Income Taxes

14. Income Taxes
12 Months Ended
Dec. 31, 2013
Income Tax Disclosure [Abstract]  
Income Taxes

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.


Net deferred tax liabilities consist of the following components as of December 31, 2013 and 2012: 


    2013     2012  
Deferred tax assets:                
NOL Carryover   $ 3,252,200     $ 2,531,500  
Returns Reserve     16,800       20,700  
Inventory Reserve     36,500       22,300  
Accrued Related Party Interest           36,700  
Accrued Officer Compensation           158,600  
Accrued Compensated Absences     14,800       38,100  
Charitable Contributions     1,300       1,900  
Deferred tax liabilities:                
Depreciation and Amortization     80,100       (58,700 )
Valuation Allowance     (3,401,700 )     (2,751,100 )
Net deferred tax asset   $     $  



The income tax provision differs from the amount of income tax determined by applying the U.S. federal tax rate to pretax income from continuing operations for the years ended December 31, 2013 and 2012 due to the following:


    2013     2012  
Book Loss   $ (2,813,900 )   $ (806,400 )
Meals and Entertainment     5,900       2,800  
Stock Compensation for Services     525,900       229,600  
Stock issued for debt extinguishment     1,762,000       (66,800 )
Related Party Interest     (12,500 )     (45,700 )
Accrued Compensated Absences     (23,300 )     11,200  
Accrued Officer Compensation     (158,600 )     116,800  
Returns Reserve     (3,900 )     (12,100 )
Inventory Reserve     14,200       5,800  
Depreciation and Amortization     10,200       33,300  
Valuation Allowance     694,000       531,500  
    $     $  


At December 31, 2013, the Company had net operating loss carry forwards of approximately $8,339,000 that may be offset against future taxable income from the year 2014 through 2033. No tax benefit has been reported in the December 31, 2012 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.


Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry forwards may be limited as to use in future years.


The Company accounts for income taxes in accordance with Accounting Standards Codification Topic 740, Income Taxes (“Topic 740”), which requires the recognition of deferred tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have been included in the financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset to an amount that is more likely than not to be realized.


Topic 740 provides guidance on the accounting for uncertainty in income taxes recognized in a company’s financial statements. Topic 740 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position.  If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements.


At the adoption date of January 1, 2008, the Company had no unrecognized tax benefit which would affect the effective tax rate if recognized.


The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operation in the provision for income taxes.  As of December 31, 2013, the Company had no accrued interest or penalties related to uncertain tax positions.


The Company files income tax returns in the U.S. federal jurisdiction and in the state of California. The Company is currently subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities since inception of the Company.