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BUDGET CONSTRUCTION CO., INC. AND BUDGET HOLDINGS, LLC NOTES TO THE COMBINED FINANCIAL STATEMENTS Years Ended December 31, 2007 and 2006 NOTE 16 - Income taxes: The Company recognizes income from long-term contracts on the percentage-of-completion method for both financial statements reporting purposes and tax reporting purposes. The Affiliate is treated as a partnership for federal and state income tax purposes. Consequently, federal and state income taxes are not payable by, or provided for, The Affiliate. Members are taxed individually on their shares of The Affiliate's earnings, The Affiliate's profit (loss) is allocated among the members in accordance with their corresponding ownership allocation. The Company's stockholders have elected for the corporation to be taxed as a subchapter S-Corporation effective on May 23, 1991. As an S-Corporation, The Company passes through items of income and deductions to the stockholders each year as earned, and thus pays no federal corporate income tax itself. At December 31, 2007, current federal income tax liabilities passed through to the stockholders, using an estimated effective rate of28%, are summarized as follows: Net estimated stockholders' current federal tax liability (refund) $ 705,132 28% 197,437 (294,000) $ (96,563) Estimated taxable income pass through to stockholders Estimated effective tax rate Estimated stockholders current tax liability Less: estimated tax deposits and credits NOTE 17 - Off-balance sheet arrangements and related parties: F ASB Interpretation 46 (R), "Consolidation of Variable Interest Entities", also requires disclosures about V ariable Interest Entities that the variable interest holder is not required to consolidate but in which it has significant variable interest. At December 31,2007, the stockholders of The Company held the following investments that, for purposes of FIN 46 (R), were evaluated and determined that the investments do not require combination in The Company's financial statements: Companies Purpose Book Value Market Value City Engineering, Inc. Payroll Staff Leasing $ 1,000 $ 1,000 Miami Contracting, Inc. ceased operations as of October 15, 2007 and is no longer determined to be a variable interest entity. 16 Benitez & Company. CPA's