Income Taxes

12 Months Ended

Dec. 31, 2014

Income Tax Disclosure [Abstract]

Income Taxes

Income tax expense (benefit) from continuing operations consists of the following for the years ended December 31: 

	2014			2013
	(in thousands)
Current:
Federal	$	129		$	95
State		150			113
		279			208
Deferred:
Federal		1,714			1,353
State		385			902
		2,099			2,255
Valuation allowance release		(341	)		(37,527	)
Total income tax expense (benefit)	$	2,037		$	(35,064	)

The reconciliations of the U.S. federal statutory rate to the effective income tax rate for the years ended December 31, 2014 and 2013 are as follows:

	2014			2013
Tax provision at U.S. federal statutory rates		34.0	%		34.0	%
State taxes		2.6			3.5
Federal rate adjustment		—			34.6
State rate adjustment		—			0.5
Deferred tax asset adjustments		6.4			5.9
Non-deductible permanent items		0.4			0.6
Stock options		—			0.4
Other		0.3			0.5
Change in valuation allowance		(6.3	)		(1,219.1	)
Effective income tax rate		37.4	%		(1,139.1	%)

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred taxes as of December 31, 2014 and 2013 are as follows:

	2014			2013
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts	$	284		$	149
Accrued liabilities		1,473			832
Net operating loss carry-forwards		34,473			37,426
Fixed assets		83			111
Intangible assets		744			2,006
Share-based compensation expense		1,566			1,143
Other		286			184
Total gross deferred tax assets		38,909			41,851
Valuation allowance		(6,015	)		(6,356	)
		32,894			35,495
Deferred tax liabilities:
Tax deductible goodwill		—			(843	)
Total gross deferred tax liabilities		—			(843	)
Net deferred tax assets	$	32,894		$	34,652

The Company's deferred taxes related to goodwill have been included in the intangible assets classification for the tax year ended December 31, 2014.

During 2014, management assessed the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets.  Significant pieces of objective positive evidence evaluated were the cumulative earnings generated over the three-year period ended December 31, 2014 and the Company’s strong future earnings projections.  Based on this evaluation, as of December 31, 2014, the Company reversed $0.3 million of its valuation allowance.  We believe, however, that it is more likely than not that $1.4 million in state net operating loss carryforwards will not be realized.  Accordingly, a valuation allowance has been placed on these state net operating losses.  In addition, included in the NOL deferred tax asset above is approximately $13.5 million and $0.3 million for federal and state, respectively, of deferred tax assets attributable to excess stock option deductions.  Due to a provision within ASC Topic 718, Compensation – Stock Compensation (“ASC 718”) concerning when tax benefits related to excess stock option deductions can be credited to paid-in-capital, the related valuation allowance of $4.6 million cannot be reversed, even if the facts and circumstances indicate that it is more likely than not that the deferred tax asset can be realized.  The valuation allowance will only be reversed as the related deferred tax asset is applied to reduce taxes payable.  The Company follows ASC 740 ordering to determine when such NOL has been realized.

During 2013 management assessed the available positive and negative evidence to estimate if sufficient future taxable income would be generated to utilize the existing deferred tax assets.  Significant pieces of objective positive evidence evaluated were the cumulative earnings generated over the three-year period ended December 31, 2013 and the Company’s strong future earnings projections.  Based on this evaluation, as of December 31, 2013, the Company reversed $37.5 million of its valuation allowance.

At December 31, 2014, the Company had federal and state net operating loss carry-forwards (“NOLs”) of approximately $94.5 million and $59.4 million, respectively.  The federal NOLs expire through 2031 as follows (in millions):

2021	$15.2
2022	1.7
2023	—
2024	4.1
2025	7.7
2026	25.5
2027	15.5
2028	5.2
2029	7.7
2030	10.6
2031	1.3
	$94.5

The state NOLs expire through 2031 as follows (in millions):

2015	$	6.5
2016		20.6
2017		3.2
2028		2.7
2029		5.8
2030		11.0
2031		1.2
California NOLs		51.0
Other State NOLs		8.4
Total State NOLs	$	59.4

Utilization of the net operating loss and tax credit carry-forwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the IRC, as well as similar state provisions. These ownership changes may limit the amount of NOLs and research and development credit carry-forwards that can be utilized annually to offset future taxable income and tax, respectively.  A Section 382 ownership change occurred in 2006 and any changes have been reflected in the NOLs presented above as of December 31, 2014.  As a result of an acquisition in 2001, approximately $9.9 million of the NOLs are subject to an annual limitation of approximately $0.5 million per year.

The federal and state NOLs begin to expire in 2021 and 2015, respectively. Approximately $10.8 million and $5.0 million, respectively, of the federal and state net operating loss carry-forwards were incurred by subsidiaries prior to the date of the Company’s acquisition of such subsidiaries. The Company established a valuation allowance of $4.1 million at the date of acquisitions related to these subsidiaries. During 2013, the valuation allowance has been reversed.  The tax benefits associated with the realization of such NOLs will be credited to the provision for income taxes. In addition, federal and state NOLs of approximately $13.5 million and $0.3 million, respectively, relate to stock option deductions. Therefore, once the stock option deductions reduce income taxes payable in the future in accordance with ASC 718, approximately $4.6 million and $0.0 million, respectively, will be credited to stockholders’ equity rather than to income tax benefit.

At December 31, 2014, deferred tax assets exclude approximately $0.9 million and $0.2 million of tax-effected federal and state NOLs pertaining to tax deductions from stock-based compensation. Upon future realization of these benefits, the Company expects to increase additional paid-in capital and reduce income taxes payable. The benefit of excess stock option deductions is not recorded until such time that the deductions reduce income taxes payable. For purposes of determining when the stock options reduce income taxes payable, the Company has adopted the “with and without” approach whereby the Company considers NOLs arising from continuing operations prior to NOLs attributable to excess stock option deductions.

At December 31, 2014, the Company has federal and state research and development tax credit carry-forwards of $0.3 million and $0.2 million, respectively.  The federal credits begin to expire in 2021.  The state credits do not expire.

As of December 31, 2014 and 2013, the Company had unrecognized tax benefits of approximately $0.6 million and $0.6 million, respectively, all of which, if subsequently recognized, would have affected the Company’s tax rate.  A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: 

	2014		2013
	(in thousands)
Balance at January 1,	$	636	$	636
Additions based on tax positions related to prior years		—		—
Balance at December 31,	$	636	$	636

The Company files income tax returns in the United States and various state jurisdictions. In general, the Company is no longer subject to U.S. federal and state income tax examinations for years prior to 2009 (except for the use of tax losses generated prior to 2009 that may be used to offset taxable income in subsequent years). The Company has estimated that $0.1 million of unrecognized tax benefits related to income tax positions may be affected by expiring statutes of limitation within the next twelve months.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company accrued $28,000 and $20,000 of interest, respectively, associated with its unrecognized tax benefits in the years ended December 31, 2014 and 2013.