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I I I I I I I I I ,I I I I I I I .1 !. ). Consul-Tech Enterprises, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31,2006 and 2005 A. Summary of Significant Accounting Policies (continued) Property and equipment (continued) Depreciation for tax purposes is provided by using the best methods available to reduce taxable income under existing IRS regulations. Expenditures for maintenance and repairs are charged to income as incurred. Expenditures for betterments and renewals are capitalized. The canying amount of assets sold or retired and related accumulated depreciation are eliminated from the accounts in the year of disposal and the resulting gain or loss is included in income. Income Taxes During the fIrst eight months of fIscal year 2005 the Company had elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those Subchapter S provisions, the Company did not pay federal corporate income taxes on its taxable income. Instead, the stockholders were liable for individual federal income taxes on their respective shares of the Company's consolidated net operating income. Upon adoption of the ESOP Trust in September 2005 (Note J) the Company elected to have the Subchapter "S" revoked. As a result, the Company fIled two partial-year consolidated returns for the year ended 2005, Income taxes will be provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between fInancial and tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets are also recognized for operating losses that are available to offset future taxable income. Use of Estimates The preparation of fmancial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 8