Income Taxes

We have deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In assessing the realizability of deferred tax assets, we consider all available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income, tax planning strategies and recent financial operations. Realization of our deferred tax assets, net of liabilities, depends upon the achievement of projected future taxable income. Through the year ended December 31, 2012, we had recorded a valuation allowance on our net deferred tax asset, as prior to 2012, we had recorded operating losses. As a result of operating income generated in 2013 and 2014, and operating loss in 2015, management concluded that our deferred tax assets that are set to expire in 2015 would not be realized. As a result of the expiring state net operating losses and our change in judgment regarding the realization of our deferred tax assets in prior periods, our valuation allowance decreased by $0.4 million, $0.7 million and $47.9 million in the years ended December 31, 2015, 2014, and 2013, respectively.

The components of income tax provision were as follows at December 31:



	2015			2014		2013
	(in thousands)
Current:
U.S. federal	$	(12	)	$	546	$	30
U.S. state and local taxes	172			224		58
Total current	160			770		88
Deferred:
U.S. federal	(28,378		)	1,512		(35,672		)
U.S. state and local taxes	(5,322		)	1,017		(1,877		)
Foreign	—			63		(63		)
Total deferred	(33,700		)	2,592		(37,612		)
Total income tax (benefit) expense	$	(33,540	)	$	3,362	$	(37,524	)

A reconciliation of income tax computed at the U.S. statutory rate to the effective income tax rate is as follows at December 31:



	2015		2014		2013
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State tax expense, net of federal benefit	2.3	%	6.3	%	3.7	%
Tax credits	2.1	%	—	%	—	%
Other nondeductible expenses	-0.2	%	9.2	%	3.4	%
Effect of change in income tax rates	0.1	%	-2.2	%	-1.9	%
Impact of state net operating losses	—	%	23.2	%	5.4	%
Stock options	-0.2	%	—	%	0.1	%
Other	1.5	%	-1.9	%	—	%
Expired net operating losses	-1.4	%	—	%	15.7	%
Change in valuation allowance	0.5	%	-12.2	%	-283.0	%
Total expense	39.7	%	57.4	%	-221.6	%

For the years ended December 31, 2015, 2014, and 2013, our effective tax rate on income before income taxes was 39.7%, 57.4%, and -221.6%, respectively. Included in the effective tax rates for the years ended December 31, 2015, 2014 and 2013 is a tax benefit of $0.4 million, $0.7 million, and $47.9 million, respectively, for the release of valuation allowance against deferred tax assets that were determined to be realizable or expired unutilized. Our effective tax rate for the year ended December 31, 2015 differed from the statutory rate primarily as a result of state taxes, tax credits, and expired state losses.

The following is a summary of the components of our deferred tax assets and liabilities at December 31:



	2015			2014

Deferred tax assets:
Net operating losses and credit carryforwards	$	64,881		$	41,447
Stock options	12,394			8,133
Deferred rent	2,887			2,536
Deferred revenue	—			1
Accrued expenses	8,486			9,362
Tax credits	2,338			—
Other	7			—
Total deferred tax assets	90,993			61,479
Valuation allowance	(127		)	(512		)
Net deferred tax assets	$	90,866		$	60,967
Deferred tax liabilities:
Property, equipment, and intangibles	$	(12,826	)	$	(16,620	)
Other	(677		)	(610		)
Total deferred tax liabilities	(13,503		)	(17,230		)
Net deferred tax assets	$	77,363		$	43,737

We estimate that U.S. federal and state net operating losses, or NOLs, available to be carried forward approximated $231.3 million and $99.9 million, respectively, as of December 31, 2015. The U.S. federal NOLs expire in the years 2027 through 2035. The majority of the state NOLs will expire between 2016 and 2035. Our ability to utilize our U.S. federal and state NOLs may be limited if we experience an ownership change as defined by Section 382 of the Internal Revenue Code. When a company undergoes such an ownership change, Section 382 limits the future use of NOLs generated before the change in ownership and certain subsequently recognized “built-in” losses and deductions, if any, existing as of the date of the ownership change. A company’s ability to utilize new NOLs arising after the ownership change is not affected. In 2013, in connection with the acquisition of Lemon, we completed an analysis of Lemon’s prior ownership changes, including the change which arose as a result of our acquisition of Lemon. As a result of the analysis, we determined that due to the ownership changes of certain former shareholders, approximately $5.0 million of Lemon’s federal and state net operating loss carryforwards will expire solely as a result of the Section 382 limitations.

As of December 31, 2015, we had $1.0 million of federal alternative minimum tax credit carryover, which does not expire.

As of December 31, 2015, we have $1.1 million of federal research and development tax credit carryovers and $0.9 million of state research and development tax credit carryovers. The federal research and development tax credit carryovers expire in years 2034 through 2035. The state research and development tax credit carryovers expire in years 2029 through 2030.

As of December 31, 2015 and 2014, we have $21.7 million and $21.5 million, respectively, of unrealized excess tax benefits from stock option exercises which have been removed from our net operating loss deferred tax asset. When realized upon utilization of our net operating losses, the excess tax benefits will result in a credit to additional paid in capital.

Accruals for unrecognized tax benefits, as well as any related interest and penalties, are included in "accrued expenses and other liabilities" and "other long term liabilities" on the consolidated balance sheet. These contingency reserves relate to various tax matters that result from uncertainties in the application of complex income tax regulations in certain jurisdictions in which the Company operates. As of December 31, 2015, 2014, and 2013, our unrecognized tax benefits were $0.5 million, $0.4 million, and $0.4 million, respectively. If recognized, the entire amount of unrecognized tax benefit would impact the effective rate. There are no positions for which it is reasonably possible that the uncertain tax benefit will significantly increase or decrease within twelve months. As of December 31, 2015, there was no accrued interest or penalties recorded in the consolidated financial statements.

Reconciliations of the beginning and ending accrual balances for unrecognized tax benefits are as follows:



	2015		2014	2013
	(in thousands)
Balance at beginning of the year	393		393	393
Additions for tax positions taken in current period	178		—	—
Reductions as a result of lapse of statute of limitations	(108	)	—	—
Balance at end of year	463		393	393

We are subject to taxation in the U.S. and various states. We are still subject to U.S. federal, state and local tax authorities due to our net operating loss, for tax years starting after December 31, 2009.

We continually evaluate all positive and negative information to determine if our deferred tax assets are realizable in accordance with ASC 740-10-30, which states that "all available evidence shall be considered in determining whether a valuation allowance for deferred tax assets is needed". In December 2015, the proposed agreements on a comprehensive settlement resolving outstanding litigation relating to our past marketing representations and information security programs were approved by the FTC, the representatives of a national class of consumers, and the court. As a result of these settlements, we paid $100 million in December 2015, resulting in a remaining cumulative accrual of $16 million. Based on the reserves of $96 million and $20 million recorded in the years ended December 31, 2015 and 2014, respectively, we have three years of cumulative pretax net losses. We reviewed the cumulative settlement of $116 million and determined that it was non-recurring in nature, not indicative of future performance, and, as such, would not materially affect our ability to generate taxable income in the future. In addition to excluding the impact of the non-recurring settlement amounts, we have seen improving pre-tax book income over the past 5 years and we are forecasting to continue generating pre-tax book income. As a result of the consideration of the factors discussed above, we believe that it is more likely than not that we will be able to realize our net deferred tax assets not currently subject to a valuation allowance.