Note 9. Provision for Income Taxes

ASC 740 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In the Company’s opinion, it is uncertain whether they will generate sufficient taxable income in the future to fully utilize the net deferred tax asset. Accordingly, a valuation allowance equal to the deferred tax asset has been recorded. The total deferred tax asset is calculated by multiplying a 44% combined marginal tax rate by the cumulative NOL of $1,235,280. The total valuation allowance is equal to the total deferred tax asset which includes various temporary differences.

The tax effects of significant items comprising the Company's net deferred taxes as of December 31, 2011 and 2010 were as follows:

	2011	2010

Cumulative NOL	$1,235,280	$1,702,758

Deferred Tax assets:

(35% Federal, 9% New Jersey)
Net operating loss carry forwards	543,523	749,214
Depreciation	15,454	23,804
Research and Development Credit	169,251	126,915
Warranty Reserve	11,831	21,184
Vacation Adjustment	19,338	14,805
Inventory Reserve	22,313	24,051
Valuation allowance	3,729	3,729
	(785,439)	(963,702)
	-	-

The income tax provision differs from the amount of income tax determined by applying the combined U.S. federal and state income tax rates of 44% to pretax income from continuing operations for the years ended December 31, 2011 and 2010 due to the following:

	2011	2010
Reconciliation of tax rate:

Tax Effect of Book Income (loss)
Federal (35%)	$173,460	$15,645
State (9%)	44,604	4,023

Utilization of NOLS Previously Charged
Off Against Valuation Allowance	(205,690)	(70,246)

Increase in Research Credits	(42,336)	(21,770)

Net Increase in Valuation Allowance due to
Increase in Separate Company NOLS
Research Credits and Other Items	27,428	68,533

Non-Deductible Meals and Entertainment
and Other Items	2,534	3,815

Net Provision	-	-

The Company’s net operating loss carry forwards of approximately $1,235,280 expire in various years through 2030.

In July, 2006, the FASB issued ASC 740, Accounting for Uncertainty in Income Taxes which clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a return. ASC 740 provides guidance on the measurement, recognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. ASC 740 became effective as of January 1, 2007 and had no impact on the Company’s financial statements.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 740

-SubTopic 10

-Section 50

-Paragraph 2

-URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319

Reference 2: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 109

-Paragraph 136, 172

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 3: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 109

-Paragraph 43, 44, 45, 46, 47, 48, 49

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 4: http://www.xbrl.org/2003/role/presentationRef

-Publisher SEC

-Name Regulation S-X (SX)

-Number 210

-Section 08

-Paragraph h

-Article 4

Reference 5: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 740

-SubTopic 10

-Section 50

-Paragraph 3

-URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319

Reference 6: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 740

-SubTopic 10

-Section 50

-Paragraph 9

-URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319

Reference 7: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 740

-SubTopic 10

-Section 50

-Paragraph 15

-URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319

Reference 8: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 235

-SubTopic 10

-Section S99

-Paragraph 1

-Subparagraph (SX 210.4-08.(h))

-URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690

+ Details

Princeton Security Technologies, Inc. 10-K