5. Income Taxes
Provision for income taxes is based upon the estimated annual effective tax rate. The effective tax rate for the nine
months ended September 30, 2012 and 2011 was (31.7%) and 45.8%, respectively. The difference in the effective rate from the statutory rate is primarily due to permanent timing differences between expenses recorded for financial and tax
reporting, increases in the valuation allowance of approximately $178,000 and $39,000 for the nine months ended September 30, 2012 and 2011, respectively, and the reversal of a previously accrued tax provision. During the first nine months of
2012, certain statutes of limitations expired. As a result, in the first nine months of 2012, the Company reduced its income tax payable and tax provision by a net favorable amount of $69,791.