INCOME TAXES

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Abstract]

INCOME TAXES

14. INCOME TAXES

The current and deferred income tax provision (benefit) was as follows (in thousands):

	Year Ended December 31,
	2012		2011			2010
Current:
Federal	$	—	$	12		$	194
State		165		140			351
Foreign		—		—			—
		165		152			545
Deferred:
Federal		—		(6,002	)		—
State		—		—			1
Foreign		288		238			406
		288		(5,764	)		407
Net income tax provision (benefit)	$	453	$	(5,612	)	$	952

A reconciliation of the effect of applying the federal statutory rate and the effective income tax rate on our income tax provision is as follows:

	Year Ended December 31,
	2012			2011			2010
Federal income tax at statutory rates		(34	)%		(34	)%		(34	)%
Foreign income tax (benefit)		—			6			(10	)
State income tax		(2	)		(3	)		8
Other permanent differences		3			4			2
Statutory tax rate change		4			2			3
Compensation		9			2			7
Change in valuation allowance		31			(49	)		55
Effective tax rate		11	%		(72	)%		31	%

Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of deferred taxes related to the following (in thousands):

	December 31,
	2012			2011
Current deferred income tax assets:
Provision for doubtful accounts	$	2,457		$	3,691
Accrued compensation		1,745			1,251
Other accrued expenses		5			45
Deferred revenue		1,097			758
Restructuring liability		953			1,029
Other		165			116
Current deferred income tax assets		6,422			6,890
Less: valuation allowance		(6,422	)		(6,890	)
Net current deferred income tax assets		—			—
Long-term deferred income tax assets:
Property and equipment		38,340			36,093
Goodwill		4,323			4,790
Intangible assets		(4,495	)		(2,605	)
Deferred revenue, less current portion		909			779
Restructuring liability, less current portion		1,279			1,856
Deferred rent		5,777			6,304
Stock-based compensation		2,387			1,660
U.S. net operating loss carryforwards		62,313			60,972
Foreign net operating loss carryforwards, less current portion		3,755			3,650
Capital loss carryforwards		2,271			2,271
Tax credit carryforwards		980			968
Other		2,081			1,881
Long-term deferred income tax assets		119,920			118,619
Less: valuation allowance		(118,011	)		(116,523	)
Net long-term deferred income tax assets		1,909			2,096
Net deferred tax assets	$	1,909		$	2,096

As of December 31, 2012, we had U.S. net operating loss carryforwards for federal tax purposes of $186.3 million that will expire beginning 2018 through 2032. Of the total U.S. net operating loss carryforwards, $22.3 million of net operating losses related to the deduction of stock-based compensation that will be tax-effected and the benefit credited to additional paid-in capital when realized. In addition, we have alternative minimum tax and research and development tax credit carryforwards of approximately $1.0 million. Alternative minimum tax credits have an indefinite carryforward period while our research and development credits will begin to expire in 2026. Finally, we have foreign net operating loss carryforwards of $15.0 million that will begin to expire in 2013.

We determined that through December 31, 2012, no further ownership changes have occurred since 2001 pursuant to Section 382 of the Internal Revenue Code (“Section 382”). Therefore, as of December 31, 2012, no additional material limitations exist on the U.S. net operating losses related to Section 382. However, if we experience subsequent changes in stock ownership as defined by Section 382, we may have additional limitations on the future utilization of our U.S. net operating losses.

A deferred tax asset is also created by accelerated depreciable lives of fixed assets for financial reporting purposes compared to income tax purposes. Network equipment and leasehold improvements comprise the majority of the income tax basis differences. These assets are deductible over a shorter life for financial reporting than for income tax purposes. As we retire assets in the future, the income tax basis differences will reverse and become deductible for income taxes.

We periodically evaluate the recoverability of the deferred tax assets and the appropriateness of the valuation allowance. As of December 31, 2012, we established a valuation allowance of $120.5 million against the U.S. deferred tax asset and $3.9 million against the foreign deferred tax asset that we do not believe are more likely than not to be realized. We will continue to assess the requirement for a valuation allowance on a quarterly basis and, at such time when we determine that it is more likely than not that the deferred tax assets will be realized, we will reduce the valuation allowance accordingly.

Changes in our deferred tax asset valuation allowance are summarized as follows (in thousands):

	Year Ended December 31,
	2012		2011			2010
Balance, January 1,	$	123,414	$	138,693		$	128,978
Increase (decrease) in deferred tax assets		1,019		(15,279	)		9,715
Balance, December 31,	$	124,433	$	123,414		$	138,693

We intend to reinvest future earnings indefinitely within each country. Accordingly, we have not recorded deferred taxes for the difference between our financial and tax basis investment in foreign entities. Based on negative cumulative earnings from foreign operations, we estimate that we will not incur incremental tax costs in the hypothetical instance of a repatriation and thus no deferred asset or liability would be recorded in our consolidated financial statements.

Our accounting for uncertainty in income taxes requires us to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, we must measure the tax position to determine the amount to recognize in the financial statements.

Changes in our unrecognized tax benefits are summarized as follows (in thousands):

	Year Ended December 31,
	2012		2011		2010
Unrecognized tax benefits balance, January 1,	$	283	$	—	$	—
Additions for tax positions of current year		58		283		—
Unrecognized tax benefits balance, December 31,	$	341	$	283	$	—

There were no changes in the liability for unrecognized tax benefits and thus had no impact on our effective income tax rate. We expect the total of $0.3 million of unrecognized tax benefits to reverse over the next 12 months.

We classify interest and penalties arising from the underpayment of income taxes in the consolidated statements of operations and comprehensive loss as a component of “General and administrative” expenses. As of December 31, 2012, 2011 and 2010, we had an accrual of $48,000, $48,000 and $0, respectively, for interest and penalties related to uncertain tax positions. No additional interest and penalties accrued during 2012.

Our federal income tax returns remain open to examination for the tax years 2009 through 2011; however, tax authorities have the right to adjust the net operating loss carryovers for years prior to 2009. Returns filed in other jurisdictions are subject to examination for years prior to 2009.