Income Taxes

The components of the Company’s income tax expense for the years ended December 31, 2015, 2016, and 2017 were as follows:



	For the Year Ended December 31,
	2015			2016			2017
	(in thousands)
Current income tax expense:
Federal	$	63,626		$	54,726		$	45,809
State and local	10,868			13,329			8,331
Total current income tax expense	74,494			68,055			54,140
Deferred income tax expense (benefit)	(2,058		)	(12,591		)	(72,324		)
Total income tax expense (benefit)	$	72,436		$	55,464		$	(18,184	)

Reconciliations of the statutory federal income tax rate to the effective income tax rate are as follows:



	For the Year Ended December 31,
	2015		2016		2017
Federal income tax at statutory rate	35.0	%	35.0	%	35.0	%
State and local income taxes, less federal income tax benefit	4.0		3.6		3.7
Permanent differences	1.4		1.4		1.7
Tax benefit from the sale of businesses	—		(6.7	)	—
Valuation allowance	(0.9	)	0.2		(7.3	)
Uncertain tax positions	(2.3	)	(1.3	)	(0.6	)
Non-controlling interest	(2.0	)	(0.5	)	0.5
Stock-based compensation	—		(0.7	)	(1.3	)
Deferred income taxes - state income tax rate adjustment	—		—		(2.8	)
Deferred income taxes - tax legislation rate adjustment	—		—		(37.5	)
Other	(0.4	)	(0.3	)	(0.4	)
Total effective income tax rate	34.8	%	30.7	%	(9.0	)%

The Company’s deferred tax assets and liabilities are as follows:



	December 31,
	2016			2017
	(in thousands)
Deferred tax assets
Allowance for doubtful accounts	$	10,735		$	8,792
Compensation and benefit-related accruals	70,199			50,936
Professional malpractice liability insurance	19,763			11,036
Deferred revenue	746			319
Net operating loss carryforwards	39,481			36,112
Stock options	9,533			6,591
Equity investments	1,567			1,452
Uncertain tax positions	499			503
Other	3,496			3,040
Deferred tax assets	$	156,019		$	118,781
Valuation allowance	(26,421		)	(12,986		)
Deferred tax assets, net of valuation allowance	$	129,598		$	105,795
Deferred tax liabilities
Deferred income	$	(26,068	)	$	(19,608	)
Investment in unconsolidated affiliates	(3,885		)	(4,457		)
Depreciation and amortization	(271,914		)	(179,055		)
Deferred financing costs	—			(4,528		)
Other	(5,413		)	(3,673		)
Deferred tax liabilities	$	(307,280	)	$	(211,321	)
Deferred tax liabilities, net of deferred tax assets	$	(177,682	)	$	(105,526	)

The Company’s deferred tax assets and liabilities are included in the consolidated balance sheet captions as follows:



	December 31,
	2016			2017
	(in thousands)
Other assets	$	21,396		$	19,391
Non-current deferred tax liability	(199,078		)	(124,917		)
	$	(177,682	)	$	(105,526	)

The valuation allowance as of December 31, 2017 is primarily attributable to the uncertainty regarding the realization of state net operating losses and other net deferred tax assets of loss entities. The state net deferred tax assets have a full valuation allowance recorded for entities that have a cumulative history of pre-tax losses (current year in addition to the two prior years). For the year ended December 31, 2017, the Company recorded a net valuation allowance release of $13.4 million (comprised of a valuation release of $14.1 million related to federal net operating losses acquired as part of the Physiotherapy acquisition and $0.2 million of expired state net operating losses, partially offset by a $0.9 million increase in the valuation allowance for newly generated state net operating losses) on the basis of management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized.

The net deferred tax liabilities at December 31, 2016 and 2017 of approximately $177.7 million and $105.5 million, respectively, consist of items which have been recognized for tax reporting purposes, but which will increase tax on returns to be filed in the future, and include the use of net operating loss carryforwards. The Company has performed an assessment of positive and negative evidence regarding the realization of the net deferred tax assets. This assessment included a review of legal entities with three years of cumulative losses, estimates of projected future taxable income, generation of income from the turning of existing deferred tax liabilities and the impact of tax planning strategies that management would and could implement in order to keep deferred tax assets from expiring unused. Although realization is not assured, based on the Company’s assessment, it has concluded that it is more likely than not that such assets, net of the determined valuation allowance, will be realized.

The total state net operating losses are approximately $596.7 million. State net operating loss carryforwards expire and are subject to valuation allowances as follows:



	State Net Operating Losses		Gross Valuation Allowance
	(in thousands)
2018	$	1,812	$	1,081
2019	9,770		8,788
2020	10,483		8,333
2021	12,269		6,817
Thereafter through 2036	562,326		426,138

Reserves for Uncertain Tax Positions:

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. The Company establishes reserves for tax related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when it is believed that certain positions might be challenged despite the Company’s belief that its tax return positions are fully supportable. The Company adjusts these reserves in light of changing facts and circumstances. The provision for income taxes includes the impact of reserve provisions and changes to reserves that have resulted from resolution of the tax position or expirations of statutes of limitations. As of December 31, 2016 and 2017, the Company had $3.8 million and $2.8 million of unrecognized tax benefits, respectively, all of which, if fully recognized, would affect the Company’s effective income tax rate.

The federal statute of limitations remains open for tax years 2014 through 2017.

State jurisdictions generally have statutes of limitations for tax returns ranging from three to five years. The state impact of any federal income tax changes remains subject to examination for a period of up to one year after formal notification to the states. Currently, the Company has one state income tax return under examination.