ANDREA ELECTRONICS CORP - FORM 10-K - XML - IDEA: XBRL DOCUMENT - March 23, 2012

10. INCOME TAXES

The Company accounts for income taxes in accordance with ASC 740 which prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim period, disclosure and transition. There were no unrecognized tax benefits as of January 1, 2010 and during the years ended December 31, 2011 and 2010.

The Company was required to evaluate all of its tax positions including any limitations from the result of a change in control under Section 382. During 2007, the Company performed a preliminary evaluation as to whether a change in control had taken place. Management has determined that it is more likely than not that a change in control may have taken place. As a result of its preliminary evaluation management has determined that $30 million of its $50 million of total NOL may be subject to limitation and accordingly reduced its net deferred tax asset and related evaluation allowance by $11.7 million.

The Company has identified its federal tax return and its state tax return in New York as "major" tax jurisdictions, as defined in ASC 740. Based on the Company's evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company's consolidated financial statements. The Company's evaluation was performed for tax years ended 2008 through 2011. The Company believes that its income tax positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its consolidated financial position.

The Company's policy for recording interest and penalties associated with audits is to record such items as a component of income tax expense. There were no amounts accrued for penalties or interest as of or during the year ended December 31, 2011. For the years ended December 31, 2010, the Company determined that, more likely than not, a portion of its previously reserved deferred tax assets would be realized and, accordingly, reduced the valuation allowance. The reduction in the valuation allowance is included in the income tax benefit, net, in the accompanying consolidated statement of operations for 2010. The determination that the net deferred tax asset of $154,621 at December 31, 2011 is realizable is based on the Company's expectations of taxable future earnings. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.

The components of loss before income taxes are as follows:

The provision (benefit) for income tax consists of the following:

A reconciliation between the effective rate for income taxes and the amount computed by applying the statutory Federal income tax rate to loss from continuing operations before benefit for income taxes is as follows:

The components of temporary differences that give rise to significant portions of the deferred tax asset, net, are as follows:

The change in the valuation allowance for deferred tax assets are summarized as follows:

As of December 31, 2011, Andrea had net operating loss and credit carryforwards of approximately $18.6 million (net amount after potential Section 382 limitations) expiring in varying amounts beginning in 2011 through 2028. Andrea has foreign tax credits of approximately $100,000 expiring in varying amounts beginning 2016 through 2020 and General Business Credits of approximately $1.1 million expiring in varying amounts beginning in 2011 through 2031. The Company has elected the “with and without approach” regarding ordering of windfall tax benefits to determine whether the windfall tax benefit did reduce taxes payable in the current year. Under this approach the windfall tax benefit would be recognized in additional paid-in-capital only if an incremental tax benefit is realized after considering all other benefits presently available.