Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

Income Taxes

9. Income Taxes

The following is a geographic breakdown of income (loss) before the provision for income taxes:

	Year Ended December 31, 2011		Seven  Months Ended December 31, 2010			Year Ended May 31,
(In thousands)						2010		2009
United States		$106,348		($5,314	)		$103,536		$44,398
Foreign		11,131		2,355			0		0
Total income (loss) before income taxes		$117,479		($2,959	)		$103,536		$44,398

The following is a summary of the components of the provision for income taxes:

	Year Ended December 31, 2011			Seven  Months Ended December 31, 2010			Year Ended May 31,
(In thousands)							2010		2009
Current tax provision
Federal		$2,827			($2,353	)		$8,119		$3,705
State		4,685			1,245			6,324		4,399
Foreign		2,483			510			0		0
		9,995			(598	)		14,443		8,104
Deferred tax provision
Federal		36,637			3,376			24,458		10,816
State		(2,391	)		(238	)		1,765		(544	)
Foreign		(371	)		66			0		0
		33,875			3,204			26,223		10,272
Provision for income taxes		$43,870			$2,606			$40,666		$18,376

Taxes computed at the statutory federal income tax rate of 35% are reconciled to the provision for income taxes as follows:

	Year Ended December 31, 2011			Seven  Months Ended December 31, 2010			Year Ended May 31,
(In thousands)							2010			2009
United States federal tax at statutory rate		35.0	%		35.0	%		35.0	%		35.0	%
Items affecting federal income tax rate
Non-deductible acquisition and reorganization expenses		0.0	%		(59.5	%)		2.3	%		0.0	%
Research credits		(2.7	%)		33.1	%		(0.1	%)		0.0	%
Change in unrecognized tax benefits		1.8	%		(28.9	%)		0.0	%		0.0	%
State income taxes, net of federal benefit		4.6	%		(27.0	%)		5.1	%		5.9	%
Compensation		1.4	%		(26.2	%)		0.0	%		0.0	%
Meals and entertainment		0.9	%		(20.9	%)		0.9	%		1.0	%
Impact of foreign operations		(1.6	%)		16.7	%		0.0	%		0.0	%
Federal, state and local rate changes		(3.2	%)		(12.8	%)		0.0	%		0.0	%
Domestic manufacturing deduction		0.0	%		7.2	%		(0.5	%)		(0.1	%)
Non-deductible items		0.2	%		(4.4	%)		0.0	%		0.0	%
Valuation allowance		0.0	%		(0.4	%)		0.0	%		0.0	%
Other		0.9	%		0.0	%		(3.4	%)		(0.4	%)
Provision for income taxes		37.3	%		(88.1	%)		39.3	%		41.4	%

Significant components of the Company's deferred tax assets and liabilities consist of the following:

(In thousands)	December 31, 2011			December 31, 2010
Deferred tax assets
Accruals and reserves, net		$14,006			$13,449
Allowance for doubtful accounts		5,853			5,860
Inventory, net		338			711
Stock-based compensation, net		6,839			6,653
Deferred compensation		148			294
Net operating loss carryforwards		93,474			132,430
Research and development tax credit		16,253			13,970
AMT credits		3,400			1,027
Other		9,105			10,711
Total deferred tax assets		149,416			185,105
Deferred tax liabilities
Prepaid expense		(13,094	)		(6,762	)
Property and equipment, net		(2,220	)		(3,271	)
Acquired intangibles, net		(205,775	)		(213,614	)
Deferred revenue		(2,438	)		(11,496	)
Other		0			(2,227	)
Total deferred tax liabilities		(223,527	)		(237,370	)
Net deferred tax liabilities		($74,111	)		($52,265	)

The deferred tax assets (liabilities) are classified in the consolidated balance sheets as follows:

(In thousands)	December 31, 2011			December 31, 2010
Current deferred tax assets, net		$40,600			$30,739
Non-current deferred tax assets, net		5,017			5,497
Non-current deferred tax liabilities, net		(119,728	)		(88,501	)
Non-current deferred tax assets (liabilities), net		(114,711	)		(83,004	)
Net deferred tax liabilities		($74,111	)		($52,265	)

As of December 31, 2011, the Company had federal and state net operating loss carryforwards of $243 million and $8 million, respectively. Of the total federal net operating loss carryforwards, approximately $7 million relates to stock compensation tax deductions that will be tax-effected and the related benefit credited to additional paid-in capital when realized. The net operating loss carryforwards expire in various amounts starting in 2020 for both federal and state tax purposes. The utilization of the federal net operating loss carryforwards is subject to limitation under the rules regarding changes in stock ownership as determined by the Internal Revenue Code. Historical federal net operating losses of Allscripts are subject to annual limitation on usage of approximately $62 million per year. In connection with the Eclipsys Merger, the Company acquired federal net operating losses totaling approximately $265 million. Due to the change in control in Eclipsys, these net operating losses are subject to annual limitation on usage of approximately $48 million per year. Net operating losses incurred subsequent to the Eclipsys Merger have no restrictions on utilization. The Company has Canadian net operating loss carryovers of approximately $15 million that expire in varying amounts through 2026.

We use the tax law ordering approach for determining when tax benefits derived from stock-based awards are utilized. Under this approach, the utilization of excess tax deductions associated with stock-based awards is dictated by provisions in the tax law that identify the sequence in which such benefits are utilized for tax purposes when net operating losses exist.

For federal purposes, 1993 to 2011 tax years remain subject to income tax examination by federal authorities. Due to net operating loss carry forwards, in some cases the tax years continue to remain subject to examination with respect to such NOLs. For the Company's state tax jurisdictions, 2003 to 2011 tax years remain open to income tax examination by state tax authorities. In Canada, the 2002 to 2011 tax years remain open for examination and in India the 2008 to 2011 tax years remain open.

The Company has a subsidiary in India that is entitled to a tax holiday which allows for tax-free operations during the holiday, which slightly reduces income tax expense. The tax holiday for the subsidiary begins to partially expire in 2012 and will fully expire in 2017. Tax savings realized from this holiday for the year ended December 31, 2011 totaled $1 million, which increased the Company's diluted earnings per share by $0.01. The amount realized during the seven months ended December 31, 2010 was not material.

On June 1, 2007, the Company adopted the provisions of accounting guidance for uncertainty in income taxes recognized in the Company's financial statements. These principles prescribe a threshold of more-likely-than-not to be sustained upon examination for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These principles also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The following table reconciles unrecognized tax benefits:

(In thousands)	Year Ended December 31, 2011			Seven  Months Ended December 31, 2010			Year Ended May 31,
							2010			2009
Beginning balance at January 1, 2011 and June 1, 2010, 2009 and 2008, respectively		$42,840			$2,808			$3,124			$0
Increases for tax positions related to prior years		282			0			0			0
Increases for tax positions related to the current year		719			882			228			0
Increases acquired in business acquisitions		0			13,340			0			3,124
Increases acquired in Coniston Transactions		0			25,863			0			0
Foreign currency translation		(215	)		224			0			0
Reductions due to lapsed statute of limitations		(342	)		(277	)		(544	)		0
Ending balance at December 31, 2011 and 2010, and May 31, 2010 and 2009, respectively		$43,284			$42,840			$2,808			$3,124

As a result of the 2008 Transactions, whereas Allscripts and Misys Healthcare Systems were merged together for U.S. federal income tax purpose, income taxes are calculated on a consolidated basis subsequent to the 2008 Transactions. The Company's income taxes in years prior to the 2008 Transactions were calculated on a separate tax return basis, although the Company's operations at that point in time were included in the U.S. federal and state returns of the U.S. Misys consolidated group of companies.

The acquired tax position related to the Coniston Transactions is indemnified by Misys in accordance with the Framework Agreement. Accordingly, an indemnification asset totaling $29 million, including related interest, has been recorded and is included in other assets. The recoverability of the indemnification asset is supported by a bank guarantee. The amount of the bank guarantee might be insufficient to fully cover taxes applicable to the historical transactions of Coniston Exchange LLC (successor to Coniston, Inc.) that might be imposed. Furthermore, although not expected, there could be circumstances in which the bank guarantee is reduced or terminated prior to the extinguishment of the resulting tax liabilities.

We recognized interest and penalties related to uncertain tax positions in our consolidated statements of operations as follows:

	Year Ended December 31, 2011		Seven Months Ended December 31, 2010		Year Ended May 31,
(In thousands)					2010		2009
Interest and penalties included in provision for income taxes		$1,174		$473		$0		$0

The amount of interest and penalties included in our consolidated balance sheets is as follows:

(In thousands)	December 31, 2011		December 31, 2010
Interest and penalties included in the liability for uncertain income taxes		$4,737		$3,563

The Company does not anticipate that within the next 12 months the total amount of unrecognized tax benefits will significantly increase or decrease. If these unrecognized benefits were recognized, they would have decreased the Company's annual effective tax rate.

Misys also agreed to indemnify us against any taxes that may be imposed by the Coniston Transactions. In particular, the Coniston Transactions might have resulted in the recognition of the built-in gain inherent in our shares of common stock held by Misys, which is significant. While we do not expect taxes to be imposed, we may be required to rely on Misys' indemnification obligation and ability to satisfy such indemnification obligation.

We intend to indefinitely reinvest the undistributed earnings of our foreign subsidiaries. Accordingly, no deferred taxes have been recorded for the difference between the financial and tax basis investment in our foreign subsidiaries. If these earnings were distributed to the U.S. in the form of dividends or otherwise, we would have additional U.S. taxable income and, depending on our tax position in the year of repatriation, may have to pay additional U.S. income taxes. Withholding taxes may also apply to the repatriated earnings. Determination of the amount of unrecognized income tax liability related to these permanently reinvested and undistributed foreign subsidiary earnings is currently not practicable.

During 2011, we determined that approximately $14 million of these foreign subsidiaries' undistributed earnings are now indefinitely reinvested outside the United States. As management has determined that the earnings of these subsidiaries are not required as a source of funding for U.S. operations, such earnings are not planned to be distributed to the U.S. in the foreseeable future.