Income Taxes

For the year ended December 31, 2012, the Company recorded an income tax provision of approximately $0.8 million, which was comprised of a tax provision of $1.7 million allocated to continuing operations and a tax benefit of $0.9 million allocated to discontinued operations. For the year ended December 31, 2011, the Company recorded an income tax provision of approximately $2.2 million, which was comprised of a tax provision of approximately $3.1 million allocated to continuing operations and a tax benefit of $5.3 million allocated to discontinued operations. For the year ended December 31, 2010, the Company recorded a tax provision of approximately $5.2 million, which was comprised of a tax provision of approximately $8.8 million allocated to continuing operations and a tax benefit of approximately $3.6 million allocated to discontinued operations.

The Company’s effective income tax expense differs from the expense computed using statutory tax rates for the years ended December 31, 2012, 2011 and 2010 as follows (in thousands):



	Years Ended December 31,
	2012			2011			2010
Tax computed at the federal statutory rate	$	(18	)	$	2,826		$	5,973
State tax, federally effected	19			173			1,212
Stock compensation	1,459			21			1,080
Tax credits	(261		)	(131		)	(152		)
State rate adjustment	(21		)	15			764
Meals & entertainment	72			75			49
Transaction costs	146			—			35
Uncertain tax positions	6			8			14
Return to provision	60			40			(80		)
Rate differential	—			2			(80		)
Valuation allowance	237			31			—
Income tax provision	$	1,699		$	3,060		$	8,815

The provision for income taxes for the years ended December 31, 2012, 2011 and 2010 are as follows (in thousands):



	Years Ended December 31,
	2012			2011			2010
Current tax expense (benefit):
Federal	$	(566	)	$	3,539		$	4,194
State	86			495			508
	(480		)	4,034			4,702
Deferred tax expense (benefit):
Federal	2,058			(584		)	1,987
State	121			(390		)	2,126
	2,179			(974		)	4,113
Income tax provision	$	1,699		$	3,060		$	8,815

The Company recorded an income tax benefit from discontinued operations of $0.9 million, $5.3 million and $3.6 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Significant components of the Company’s deferred tax assets and liabilities from federal and state income taxes as of December 31, 2012 and 2011 are as follows (in thousands):



	December 31,
	2012			2011
Deferred tax assets:
Net operating losses	$	1,420		$	1,300
Tax credits	2,039			911
Deferred revenue	4,186			7,021
Stock compensation	2,174			3,718
Accrued expenses	849			1,388
Charitable contributions	20			—
Total deferred tax assets	10,688			14,338
Valuation allowance	(904		)	(668		)
	9,784			13,670
Fixed assets	(1,902		)	(2,126		)
Intangible assets	(1,709		)	(2,875		)
Net deferred tax assets	$	6,173		$	8,669

The Company recorded increases in the valuation allowance of approximately $0.2 million and $0.5 million during December 31, 2012 and 2011, respectively. The increase in the valuation allowance in 2012 was recorded against state deferred tax assets related to certain research and development credits for which the Company has determined it is more likely than not that such deferred tax assets will not be realized in the future.

At December 31, 2012, the Company had federal and state tax net operating loss carryforwards before the valuation allowance and before the excess tax benefit of $2.6 million and $17.1 million, respectively. Of these amounts, $0.7 million and $3.0 million is associated with windfall tax benefits and will be recorded as additional paid-in capital when realized. The federal and state net operating losses will begin to expire in 2019 and 2014, respectively. At December 31, 2012, the Company had federal and state research tax credit carryforwards of $2.0 million and $1.7 million, respectively. Of these amounts, $0.2 million and zero, respectively, is associated with windfall tax benefits and will be recorded as additional paid-in capital when realized. The federal research credit carryforward begins to expire in 2028. The state research credit carryforwards do not expire. At December 31, 2012, the Company had federal alternative minimum tax ("AMT") credit carryforwards of $0.7 million which are associated with windfall tax benefits and will be recorded as additional paid-in capital when realized. The federal AMT credit carryforwards do not expire.

At December 31, 2012, the Company's unrecognized tax benefit totalled $1.2 million, of which $1.1 million, if recognized, would affect the Company's effective tax rate. The Company will recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.

The rollforward of gross unrecognized tax benefits is as follows (in thousands):



Balance as of January 1, 2010	$	668
Additions based on tax positions related to the current year	142
Additions for tax positions of prior years	—
Additions related to Modality acquisition	83
Reductions for tax positions of prior years	(2		)
Settlements	—
Balance as of December 31, 2010	891
Additions based on tax positions related to the current year	236
Additions for tax positions of prior years	—
Reductions for tax positions of prior years	(1		)
Settlements	—
Balance as of December 31, 2011	1,126
Additions based on tax positions related to the current year	97
Additions for tax positions of prior years	1
Reductions for tax positions of prior years	(1		)
Settlements	—
Balance as of December 31, 2012	$	1,223

As of December 31, 2012, the amount of interest and penalties associated with the unrecognized tax benefits were insignificant. The Company does not expect any significant increases or decreases to its unrecognized tax benefits within the next 12 months.

The Company is subject to federal and state income tax in the jurisdictions in which the Company operates. The tax years that remain subject to examination are 2009 for federal income taxes and 2008 for state income taxes. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward and make adjustments up to the amount of the net operating losses or credit carryforward amount.

The Company completed an examination of its 2007 and 2008 California state tax returns during December 2010 with no adjustment. The Company is currently under examination in Florida. The Company is not currently under examination in any other jurisdictions.

On January 2, 2013, the American Taxpayer Relief Act of 2012 was enacted. The Act included several provisions related to corporate income tax including the reinstatement of the credit for qualified research and development. The credit was reinstated for years beginning after January 1, 2012. As the law was not enacted until after December 31, 2012, the federal research credit will not be recognized until the first quarter of 2013.

Note: prior period amounts have been revised to conform to current period presentation, which reflects the EHR business as a discontinued operation.