10. INCOME TAXES

ARLP’s indirect subsidiary, ASI, is subject to federal and state income taxes. ASI’s income is principally due to its subsidiary, Matrix Design. ASI has minor temporary differences between Matrix Design’s financial reporting basis and the tax basis of its assets and liabilities. Components of income tax expense (benefit) are as follows (in thousands):

	Year Ended December 31,
	2013		2012		2011

Current:
Federal	$	8	$	(37)	$	(337)
State	16		(183)		(75)
	24		(220)		(412)
Deferred:
Federal	1,022		(753)		(17)
State	351		(109)		(1)
	1,373		(862)		(18)

Income tax expense (benefit)	$	1,397	$	(1,082)	$	(430)

The ARLP Partnership has deferred tax assets due to net operating losses and research and development credits associated with ASI’s operations in the amount of $4.4 million, partially offset by liabilities of $0.9 million. State and federal valuation allowances have been established to reduce these deferred tax assets to an amount that will, more likely than not, be realized. During 2013, the federal and state valuation allowances increased to $2.7 million and $0.8 million, respectively, primarily due to the ongoing evaluation process of the losses and credits anticipated to be realized in future years.

Reconciliations from the provision for income taxes at the U.S. federal statutory tax rate to the effective tax rate for the provision for income taxes are as follows (in thousands):

	Year Ended December 31,
	2013		2012		2011

Income taxes at statutory rate	$	137,547	$	115,550	$	135,069

Less: Income taxes at statutory rate on Partnership income not subject to income taxes	(139,107)		(116,260)		(135,204)

Increase/(decrease) resulting from:
State taxes, net of federal income tax	(192)		(83)		(7)
Valuation allowance for deferred tax assets	3,483		-		-
Other	(334)		(289)		(288)

Income tax expense (benefit)	$	1,397	$	(1,082)	$	(430)