Tucows 2012 Annual Report Download - page 99

F-23
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
liabilities as of December 31, 2012 and 2011 are presented below:
December 31,
2012
December 31,
2011
Deferred tax assets:
Deferred revenue $ 5,429,220 $ 5,648,563
Amortization 541,242 1,231,814
Total gross deferred tax assets 5,970,462 6,880,377
Less valuation allowance
—
—
N
et deferred tax assets $ 5,970,462 $ 6,880,377
Deferred income tax asset, current portion
—
—
Deferred income tax asset, long-term portion 5,970,462 6,880,377
$ 5,970,462 $ 6,880,377
Deferred tax liabilities:
Reserves and other $ (914,429) $ (880,008)
Limited life intangible assets (394,100) (505,700)
Indefinite life intangible assets (4,840,000) (4,840,000)
Total deferred tax liabilities (6,148,529) (6,225,708)
Less deferred tax liability, current portion (914,429) (880,008)
Deferred tax liability, long-term portion $ (5,234,100) $ (5,345,700)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the years in which those temporary differences become
deductible. Management considers projected future taxable income, uncertainties related to the industry in which the
Company operates, and tax planning strategies in making this assessment. During the fourth quarter of 2011
management released its remaining valuation allowance of $3.6 million.
At December 31, 2012 Tucows’ unrecognized tax benefits amounted to $0.4 million, which if recognized
would favorably affect the income tax rate in future periods. The unrecognized tax benefit relates primarily to prior year
Pennsylvania state franchise taxes and other insignificant US state taxes, unrecognized tax benefits for potential 2012
research and development tax credits as well as prior year German income tax. We will record the tax benefit of the
2012 research and development claim once we have reasonable assurance that it is more likely than not that all or a
portion of the benefit arising from the claim will be realized.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in tax expense. The
Company did not have any significant interest and penalties accrued as of January 1, 2011 and December 31, 2012.
Tucows believes that it is reasonably possible that $0.4 million of the unrecognized tax benefit will decrease in
the next twelve months as it is anticipated that the foreign tax authorities will finalize their review of prior years’ taxes
owing in Pennsylvania and Germany respectively and that the 2012 ITC claim will be filed and assessed within that
period.
The following is a reconciliation of Tucows’ change in uncertain tax position under ASC 740, “Income Taxes”:
Total Gross
Unrecognized
Tax Benefits
Balance as at December 31, 2011 $ 167,000
Increase in uncertain tax benefits for the current year 100,000
Increase in uncertain tax benefits for the prior year 165,000
Decrease in uncertain tax benefits of prior years (50,000)
Balance as at December 31, 2012 $ 382,000