NOTE 8 – INCOME TAXES

The provision (benefit) for income taxes is based upon the Company’s annual reported income or loss for each respective accounting period. The Company recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets are recovered or liabilities are settled. The Company also recognizes as deferred tax assets the future tax benefits from net operating losses (“NOLs”) and capital loss carryforwards.

Management assesses the positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. Based upon the weight of the evidence, it is more-likely-than-not that all of the federal deferred tax assets will be realized. The amount of deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or if the weight of the available evidence changes.

Provision (benefit) for income taxes consists of the following (in thousands):

	Year ended December 31,
	2015			2014			2013
Current:
Federal	$	−		$	−		$	−
State		3,683			4,901			−
		3,683			4,901			−
Deferred		(46,480	)		(4,439	)		(10,493	)
	$	(42,797	)	$	462		$	(10,493	)

NOTE 8 – INCOME TAXES (Continued)

Reconciliation of federal statutory tax expense (income) to the provision (benefit) for income taxes follows (in thousands):

	Year ended December 31,
	2015			2014			2013
Income tax expense (income) at federal rate	$	(33,131	)	$	1,875		$	(17,894	)
State income tax expense (income), net of federal income tax expense (income)		(2,726	)		1,581			(1,918	)
Transaction costs		4,832			3,163			(116	)
Impairment charges		890			−			12,395
Prior year contingencies		426			(230	)		(554	)
Noncontrolling interests		(16,926	)		(7,348	)		(1,263	)
Compensation related charges		3,055			1,992			683
Federal and state tax credits		(3,033	)		(1,820	)		(1,944	)
Other items, net		3,816			1,249			118
	$	(42,797	)	$	462		$	(10,493	)

Other items consist of meals, entertainment, lobbying, and other permanent differences, which individually are deemed immaterial.

A summary of net deferred income tax assets (liabilities) by source included in the accompanying consolidated balance sheet at December 31 follows (in thousands):

	2015					2014
	Assets			Liabilities		Assets			Liabilities
Property and equipment	$	−		$	24,968	$	−		$	10,276
Insurance		48,430			−		40,707			−
Accounts receivable allowances		34,029			−		9,562			−
Compensation		75,277			−		68,095			−
Net operating losses		179,074			−		120,263			−
Assets held for sale		−			189		2,458			−
Litigation		47,078			−		−			−
Goodwill and intangibles		−			265,608		−			128,405
Other		57,683			−		42,130			−
		441,571		$	290,765		283,215		$	138,681
Reclassification of deferred tax liabilities		(290,765	)				(138,681	)
Net deferred tax assets		150,806					144,534
Valuation allowance		(46,676	)				(50,969	)
	$	104,130				$	93,565

Net deferred income taxes totaling $104.1 million and $93.6 million at December 31, 2015 and 2014, respectively, were classified as noncurrent assets.

The Company identified deferred income tax assets for state income tax NOLs of $60.0 million and $68.8 million at December 31, 2015 and 2014, respectively, and a corresponding deferred income tax valuation allowance of $46.7 million and $50.9 million at December 31, 2015 and 2014, respectively, for that portion of the net deferred income tax assets that the Company will likely not realize in the future. The Company had deferred tax assets for federal income tax NOLs of $119.1 million and $51.4 million at December 31, 2015 and 2014, respectively, with no corresponding deferred income tax valuation allowance at December 31, 2015 or December 31, 2014. The federal income tax NOLs expire in various amounts through 2035. The Company’s deferred income tax assets for NOLs at December 31, 2014 did not include $2.2 million of excess tax benefits related to stock compensation since the Company had a tax loss in 2014.

The Company follows the provisions of the authoritative guidance for accounting for uncertainty in income taxes which clarifies the accounting for uncertain income tax issues recognized in an entity’s financial statements. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an income tax return.

NOTE 8 – INCOME TAXES (Continued)

A reconciliation of unrecognized tax benefits follows (in thousands):

Balance, December 31, 2012	$	906
Reductions due to lapses of applicable statute of limitations and the conclusion of income tax examinations		(608	)
Balance, December 31, 2013		298
Reductions due to lapses of applicable statute of limitations and the conclusion of income tax examinations		(298	)
Balance, December 31, 2014		−
Acquisition		6,814
Balance, December 31, 2015	$	6,814

The Company records accrued interest and penalties associated with uncertain tax positions as income tax expense in the consolidated statement of operations. Accrued interest related to uncertain tax provisions totaled $2.7 million as of December 31, 2015.

The federal statute of limitations remains open for tax years 2012 through 2014. During 2015, the Company resolved federal income tax audits for the 2013 tax year. During 2015, Gentiva and its subsidiaries resolved federal tax audits for the 2014 tax year under the Internal Revenue Service (the “IRS”) Compliance Assurance Process (“CAP”) program. The Company is currently under examination by the IRS for the 2014 and 2015 tax years. The Company has been accepted into the IRS’s CAP for the 2014 through 2016 tax years. CAP is an enhanced, real-time review of a company’s tax positions and compliance. The Company expects participation in CAP to improve the timeliness of its federal tax examinations.

State jurisdictions generally have statutes of limitations for tax returns ranging from three to five years. The state impact of federal income tax changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Currently, the Company has various state income tax returns under examination.