Income Taxes

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are expected to become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The Company includes interest accrued on the underpayment of income taxes in interest expense and penalties, if any, related to unrecognized tax benefits in general and administrative expenses.

Under Section 382 of the Internal Revenue Code of 1986, as amended, the Company’s use of its federal net operating loss (“NOL”) carryforwards may be limited if the Company experiences an ownership change, as defined in Section 382. Such an annual limitation could result in the expiration of the net operating loss carryforwards before utilization. As of December 31, 2013, the Company had approximately $6.0 million of federal NOL carryforwards available to offset future taxable income. Included in this amount is $5.1 million of federal NOL carryovers from the Company’s acquisition of Proficient. These carryforwards expire in various years through 2027.

The domestic and foreign components of (loss) income before provision for (benefit from) income taxes consist of the following (amounts in thousands):



	Year Ended December 31,
	2013			2012		2011
United States	$	(10,117	)	$	6,252	$	16,495
Israel	3,549			2,819		1,837
United Kingdom	1,688			1,449		818
Netherlands	1,044			—		—
Australia	(301		)	197		—
	$	(4,137	)	$	10,717	$	19,150

No additional provision has been made for U.S. income taxes on the undistributed earnings of its Israeli subsidiary, LivePerson Ltd (formerly HumanClick Ltd.), as such earnings have been taxed in the U.S. and accumulated earnings of the Company’s other foreign subsidiaries are immaterial through December 31, 2013.

The (benefit from) provision for income taxes consists of the following (amounts in thousands):



	Year Ended December 31,
	2013			2012			2011
Current income taxes:
U.S. Federal	$	1,499		$	5,750		$	5,839
State and local	232			812			600
Foreign	2,508			671			444
Total current income taxes	4,239			7,233			6,883

Deferred income taxes:
U.S. Federal	(4,280		)	(2,867		)	232
State and local	331			265			(38		)
Foreign	(928		)	(269		)	35
Total deferred income taxes	(4,877		)	(2,871		)	229
Total income taxes	$	(638	)	$	4,362		$	7,112

The difference between the total income taxes computed at the federal statutory rate and the benefit from income taxes consists of the following:



	Year Ended December 31,
	2013		2012		2011
Federal Statutory Rate	35.00	%	35.00	%	34.48	%
State taxes, net of federal benefit	2.66	%	2.78	%	2.56	%
Non-deductible expenses – ISO	(18.19	)%	4.82	%	0.47	%
Non-deductible expenses – Other	(8.15	)%	1.15	%	0.51	%
Foreign taxes	5.10	%	(2.92	)%	(0.13	)%
Other	(1.00	)%	(0.12	)%	(0.76	)%
Total provision	15.42	%	40.71	%	37.13	%

The effects of temporary differences and tax loss carryforwards that give rise to significant portions of federal deferred tax assets and deferred tax liabilities at December 31, 2013 and 2012 are presented below (amounts in thousands):



	2013			2012
Deferred tax assets:
Net operating loss carryforwards	$	2,134		$	2,356
Accounts payable and accrued expenses	4,623			2,132
Non-cash compensation	6,035			4,167
Goodwill and intangibles amortization	771			1,123
Allowance for doubtful accounts	504			267
Net deferred tax assets	14,067			10,045

Deferred tax liabilities:
Plant and equipment	(1,289		)	(2,096		)
Intangibles related to the Amadesa acquisition	(474		)	—
Intangibles related to the Engage acquisition	(494		)	(912		)
Intangibles related to the LookIO acquisition	(141		)	(238		)
Total deferred tax liabilities	(2,398		)	(3,246		)
Net deferred assets	$	11,669		$	6,799

ASC Topic 740-10 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with other provisions contained within this guidance. This topic prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate audit settlement. The Company had no unrecognized tax benefits as of December 31, 2013 and 2012.

The tax years subject to examination by major tax jurisdictions include the years 2009 and forward for U.S states and New York City, the years 2010 and forward for U.S. Federal, and the years 2010 and forward for certain foreign jurisdictions.