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,
(Dollars in thousands)	2016		2015			2014
Income before income tax expense (benefit)	$	22,971	$	26,298		$	27,327
Current:
Federal tax	$	669	$	432		$	753
State tax	1,294		622			1,087
Foreign tax	103		16			2
Total current	2,066		1,070			1,842
Deferred:
Federal tax	6,811		(55,716		)	6,046
State tax	41		1,020			(1,249		)
Foreign tax	74		(322		)	(57		)
Total deferred	6,926		(55,018		)	4,740
Total income tax expense (benefit)	$	8,992	$	(53,948	)	$	6,582

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:



Effective tax rate reconciliation	2016				2015					2014
(Dollars in thousands)
Income before income tax expense	$	22,971			$	26,298				$	27,327
Federal income tax expense at the Federal statutory rate	$	8,040	35.0	%	$	9,204		35.0	%	$	9,564		35.0	%
State income taxes, net of Federal benefit	867		3.8	%	1,021			3.9	%	1,188			4.3	%
Change in valuation allowance	—		—	%	(64,159		)	(244.0	)%	(5,087		)	(18.6	)%
Other, including permanent differences	85		0.4	%	(14		)	(0.1	)%	917			3.4	%
Income tax expense (benefit)	$	8,992	39.1	%	$	(53,948	)	(205.1	)%	$	6,582		24.1	%

Income tax expense increased by $62.9 million for the year ended December 31, 2016 compared to the same period in 2015 due primarily to a $64.2 million one-time favorable adjustment to the deferred income tax asset ("DTA") valuation allowance in 2015. This was partially offset by $1.2 million in lower income tax expense related to a decrease of $3.3 million in income before income tax expense and $0.1 million in other changes. The decrease of $60.5 million in income tax expenses for the year ended December 31, 2015 compared to the same period in 2014 was due primarily to a $59.1 million greater reduction in the deferred income tax asset valuation allowance in 2015 than in 2014 and $1.4 million in other changes.

During the year ended December 31, 2016, the US Court of Appeals for the Second Circuit affirmed a Tax Court Decision, unrelated to Spok, regarding the allocation of cancellation of debt income to tax attributes for a company that filed a Federal consolidated income tax return. This impacted the ultimate realization of certain of our net operating loss ("NOL") carryovers. Therefore, during the year ended December 31, 2016, we wrote off our valuation allowance of $50.0 million against the related Federal and State NOL DTAs. This had no impact on the 2016 income tax provision or net income.

The net deferred income tax assets at December 31, 2016 and 2015 were as follows:



	December 31,
(Dollars in thousands)	2016		2015
Long-term:
Net deferred income tax asset	$	73,068	$	130,025
Valuation allowance	—		(50,031		)
Total deferred income tax assets	$	73,068	$	79,994

The components of deferred income tax assets at December 31, 2016 and 2015 were as follows:



	December 31,
(Dollars in thousands)	2016			2015
Net operating losses and tax credits	$	48,146		$	111,538
Property and equipment	12,995			12,628
Accruals and accrued loss contingencies	6,723			5,410
Intangible Assets	5,886			760
Gross deferred income tax assets	73,750			130,336
Deferred income tax liabilities:
Prepaid expenses	(360		)	(311		)
Other	(322		)	—
Gross deferred income tax liabilities	(682		)	(311		)
Net deferred income tax assets	$	73,068		$	130,025
Valuation allowance	—			(50,031		)
Total deferred income tax assets	$	73,068		$	79,994

Net Operating Losses

As of December 31, 2016, we had approximately $125.7 million of NOLs available to offset future taxable income. The Federal NOLs begin expiring in 2025 and will fully expire in 2029. We have foreign NOLs available for future years of approximately $1.7 million which do not expire, foreign tax credits of $0.4 million and AMT minimum tax credit carryforwards of $2.2 million.

Valuation Allowance

We assess the recoverability of our deferred income 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 DTAs will be realized in future periods. The DTA valuation allowance balances at December 31, 2016 and 2015 were $0.0 and $50.0 million, respectively. The valuation allowance reduces the DTAs to their estimated recoverable amounts.

As previously mentioned, as of December 31, 2016, our DTAs consist primarily of NOLs that can be used to offset 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 income tax assets will be realized in future periods. The US Court of Appeals for the Second Circuit affirmed a Tax Court Decision, unrelated to Spok, regarding the allocation of cancellation of debt income to tax attributes for a company that file a Federal consolidated income tax return. This impacted the ultimate realization of certain of our NOL carryovers. As such, during the year ended December 31, 2016, we reduced both our DTAs and the valuation allowance by $50.0 million, which left no remaining valuation allowance as of December 31, 2016, reflecting our assessment that this portion of DTAs would not be realized. This had no impact on our income tax provision or net income for the year ending December 31, 2016.

Consistent with prior years we completed a multi-year forecast of our operations that included taxable income for the period 2017-2021 (long range plan or “LRP”). This LRP of our operations was reviewed and approved by the Board of Directors on December 20, 2016. Based on the following factors determined in the fourth quarter 2016, we concluded that the Company would utilize all of our remaining DTAs.


1.	Through 2016, the Company has generated seven consecutive years (2010-2016) 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 and amortization over a ten year period).


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 Spok name starting in July 2014. This rebranding effort has been successful throughout 2016.


3.	In 2016, 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 December 20, 2016.


4.	Significant management changes were made during 2015 and 2016 to accomplish our goals and LRP. These included hiring a new president, an executive vice president of sales and new product development staff.

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 evaluated in the fourth quarter 2016. Based on the strength of the positive evidence the Company concluded no valuation allowance was required at December 31, 2016.

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 income 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.

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 2013, 2014 and 2015 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 2013 through 2016, and for the four year SOL states, the SOL is open for years ending from 2012 through 2016.