Income Taxes

The significant components of our income tax (benefit) expense attributable to current operations for the periods stated were as follows:



	For the Year Ended December 31,
	2015			2014			2013
	(Dollars in thousands)
Income before income tax expense	$	26,298		$	27,327		$	45,339
Current:
Federal tax	$	432		$	753		$	575
State tax	622			1,087			958
Foreign tax	16			2			—
	1,070			1,842			1,533
Deferred:
Federal tax	(55,716		)	6,046			16,790
State tax	(2,969		)	(1,249		)	(355		)
Foreign tax	(322		)	(57		)	(159		)
	(59,007		)	4,740			16,276
Total income tax (benefit) / expense	$	(57,937	)	$	6,582		$	17,809

Foreign income before income tax expense is immaterial to consolidated income before income tax expense.

The following table summarizes the principal elements of the difference between the United States Federal statutory rate of 35% and our effective tax rate:



	For the Year Ended December 31,
	2015		2014		2013
Federal income tax at statutory rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in taxes resulting from:
State income taxes, net of Federal tax benefit	3.9	%	4.4	%	3.8	%
Nondeductible compensation expense	—	%	—	%	1.8	%
True-up and rate changes	0.3	%	0.9	%	(2.6	)%
Change in valuation allowance	(260.2	)%	(18.6	)%	1.2	%
Other	0.7	%	2.4	%	0.1	%
Effective tax rate	(220.3	)%	24.1	%	39.3	%

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which allows entities to classify deferred tax assets or liabilities as non-current rather than allocating the balance between a current and non-current balance. We adopted this standard in the fourth quarter of 2015 and have applied it retrospectively. As such, a portion of the deferred tax asset balance as of December 31, 2014 was reclassified as non-current. As of December 31, 2014, we had previously reported a current deferred tax asset balance of $13.4 million and a current valuation allowance of $11.2 million for a net current deferred tax asset balance of $2.2 million. These balances have been reclassified as non-current deferred tax assets. The net deferred income tax assets at December 31, 2015 and 2014 were as follows:



	December 31,
	2015			2014
	(Dollars in thousands)
Long-term:
Net deferred income tax asset	$	129,760		$	138,333
Valuation allowance	(45,777		)	(114,190		)
Total deferred income tax assets	$	83,983		$	24,143

The deferred income tax assets at December 31, 2015 and 2014 were as follows:



	December 31,
	2015			2014
	(Dollars in thousands)
Net operating losses and tax credits	$	111,538		$	118,203
Property and equipment	12,302			12,077
Accruals and accrued loss contingencies	5,410			9,484
Intangible Assets	821			—
Gross deferred income tax assets	130,071			139,764
Deferred income tax liabilities:
Prepaid expenses	(311		)	(951		)
Other	—			(408		)
Intangible assets	—			(72		)
Gross deferred income tax liabilities	(311		)	(1,431		)
Net deferred income tax assets	$	129,760		$	138,333
Valuation allowance	(45,777		)	(114,190		)
Total deferred income tax assets	$	83,983		$	24,143

Current State Income Tax Provision — The current state income tax expense for 2015 decreased from the 2014 state income tax expense by $0.5 million. This is due primarily to the decline in consolidated income before income tax expense.

Net Operating Losses — As of December 31, 2015, we had approximately $282.0 million of net operating losses (“NOLs”) available to offset future taxable income. The Internal Revenue Code (“IRC”) Section 382 (“IRC Section 382”) limited NOLs as of December 31, 2015 totaled $38.1 million which may be used at a rate of $6.1 million per year. The remainder of our Federal NOLs carryforwards of $243.9 million is not subject to a limitation. The IRC Section 382 limited NOLs will fully expire on December 31, 2021, and the unlimited NOLs begin expiring in 2023 and will fully expire in 2029. We have foreign NOLs available for future years of approximately $1.7 million which do not expire and foreign tax credits of $0.4 million.

Valuation Allowance — We assess the recoverability of our deferred tax assets, which represent the tax benefits of future tax deductions, NOLs and tax credits, by considering the adequacy of future taxable income from all sources. This assessment is required to determine whether based on all available evidence, it is “more likely than not” (which means a probability of greater than 50%) that all or some portion of the deferred tax assets will be realized in future periods. The deferred tax asset valuation allowance balances at December 31, 2015 and 2014 were $45.8 million and $114.2 million, respectively. The valuation allowance reduces the deferred tax assets to their estimated recoverable amounts.

As of December 31, 2015, our deferred tax assets consist primarily of NOLs that can be used to offet future taxable income. The assessment of recoverability is required to determine whether based on all available evidence, it is more likely than not that all or some portion of the deferred tax assets will be realized in future periods. In the fourth quarter of 2015, we reduced the valuation allowance by $68.4 million, which left a remaining valuation allowance of $45.8 million, reflecting our assessment that this portion of deferred tax assets would not be realized.

Consistent with prior years we completed a multi-year forecast of our operations that included taxable income for the period 2016-2020 (long range plan or “LRP”). This LRP of our operations was reviewed and approved by the Board of Directors on November 30, 2015. Based on the following factors determined in the fourth quarter 2015, we concluded that the Company would utilize a significant amount of our deferred tax assets.


1.	Through 2015, the Company has generated six consecutive years (2010-2015) of taxable income. This period includes the acquisition of the software related operations in March 2011. In addition the Company has forecasted future taxable income (including the use of tax planning strategies such as the capitalization of research and development costs consistent with our policies).


2.	With the acquisition of the software related operations in March 2011, we have successfully merged the wireless and software operations, hired new software skilled management and rebranded the combined entity under the Spōk name starting in July 2014. This rebranding effort has been successful throughout 2015.


3.	In 2015, management clearly evaluated the risks and benefits associated with the strategy to redesign and enhance our software solution suite into an integrated critical communication platform. These benefits and risks were included in the LRP reviewed and approved by the Board of Directors on November 30, 2015.


4.	Significant management changes were made to accomplish our goals and LRP. These included a new president and new product development staff that were hired in 2015 and included in the LRP.

The long-term history of profitability, the demonstrated commitment to the growth of software revenue through investment in management and product development activities indicated that an analysis of both positive and negative evidence as required by ASC 740 was required in the fourth quarter 2015. Based on the strength of the positive evidence the Company reduced the valuation allowance by $68.4 million to $45.8 million at December 31, 2015.

The anticipated effective income tax rate is expected to continue to differ from the Federal statutory rate of 35% primarily due to the effect of state income taxes, the effect of changes to the deferred tax asset valuation allowance, permanent differences between book and taxable income and certain discrete items. The earnings of non-US subsidiaries are deemed to be indefinitely reinvested in non-US operations.

As of December 31, 2015 and 2014, there were no uncertain income tax positions and as such, no liability for unrecognized tax benefits.

Income Tax Audits — Our Federal income tax returns have been examined by the Internal Revenue Service ("IRS") through December 31, 2008. The audits of the Federal returns for the years ended 2005 through 2008 resulted in no changes. The IRS also audited Amcom’s 2009 Federal tax return (pre-acquisition) with no changes. The 2012, 2013 and 2014 income tax returns of the Company have not been audited by the IRS and are within the statute of limitations (“SOL”).

We operate in all states and the District of Columbia and are subject to various state income and franchise tax audits. The states’ SOL varies from three to four years from the later of the due date of the return or the date filed. We usually file our Federal and all state and local income tax returns on or before September 15 of the following year; therefore, the SOL for those states with a three year SOL is open for calendar years ending 2012 through 2015, and for the four year SOL states, the SOL is open for years ending from 2011 through 2015.