Note 15 — Income Taxes

Losses before income taxes for the years ended December 31, 2015 and 2014 were primarily attributable to the United States.

Income tax expense attributable to income included the following:

	Year Ended December 31,
(in thousands)	2015		2014
Current income tax expense:
United States federal	$	—	$	—
State and local		157		291
Total current income tax expense		157		291
Deferred income tax expense:
United States federal		—		(902	)
State and local		36		1,211
Total deferred income tax expense		36		309
Income tax expense	$	193	$	600

Reconciliation of income tax expense and the domestic federal statutory income tax benefit is as follows:

	Year Ended December 31,
(in thousands)	2015			2014
Statutory federal income tax benefit	$	(396	)	$	(3,274	)
Increase (reduction) from:
State taxes (net of federal benefit)		193			600
Change in valuation allowance		2,632			3,096
Provision to return adjustment - capital loss		(1,325	)		—
Amortization of goodwill		(621	)		(621	)
Non-deductible expenses		181			156
Other		(471	)		643
Income tax expense	$	193		$	600

Deferred income taxes are primarily provided for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities.

The tax effects of each type of temporary difference and carryforward that give rise to a significant portion of deferred tax assets (liabilities) at December 31, 2015 and 2014 were as follows:

	December 31,
(in thousands)	2015			2014
Deferred tax assets attributable to:
Net operating loss carryforwards	$	31,572		$	27,645
Tax credit carryforwards		7,622			7,622
Reserves		4,259			4,864
Inventory		4,260			5,090
Deferred financing costs		—			2,064
Fixed assets		—			263
Deferred revenue		4,417			3,853
Intangibles		5,594			5,434
Other		2,295			1,895
Total gross deferred tax assets		60,019			58,730
Valuation allowance		(57,577	)		(54,945	)
Net deferred tax assets		2,442			3,785

Deferred tax liabilities attributable to:
Intangibles		(2,408	)		(3,798	)
Fixed assets		(34	)		—
Net deferred tax liability	$	—		$	(13	)

The deferred tax asset (liability) is classified as follows:

	December 31,
(in thousands)	2015		2014
Short-term deferred tax asset	$	—	$	546
Long-term deferred tax liability		—		(559	)
Net deferred tax liability	$	—	$	(13	)

The net increase in the valuation allowance in 2015 and 2014 was $2.6 million and $3.1 million, respectively. The valuation allowance increased primarily because it offset the increase in the deferred tax asset derived from pre-tax losses. As of December 31, 2015, there is no amount of the valuation allowance for which subsequently recognized benefits will be allocated to reduce goodwill.

At December 31, 2015, the amounts and expiration dates of loss and tax credit carryforwards were as follows:

(in thousands)	Amount as of December 31, 2015		Expire or start expiring at the end of:
U.S. net operating loss ⁽¹⁾	$	84,769	2028
U.S. federal capital losses		3,785	2019

State net operating loss carryforward (net):
State tax net operating losses		3,249	2016 – 2035

Tax credits:
Minimum tax credit		7,444	Carry forward indefinitely
Other tax credits		178	2016 – 2021
Total tax credits	$	7,622

(1)

$27.8 million of the U.S. net operating loss (NOL) above is related to the VLCY acquisition.

Income taxes paid, net of tax refunds, was $0.6 million and $0.2 million for the years ended December 31, 2015 and 2014, respectively.

Uncertain Tax Positions

The Company recognizes the financial statement impacts of a tax return position when it is more likely than not, based on technical merits, that the position will ultimately be sustained. For tax positions that meet this recognition threshold, the Company applies judgment, taking into account applicable tax laws, experience managing tax audits, and relevant GAAP, to determine the amount of tax benefits to recognize in the financial statements. For each position, the difference between the benefit realized on the Company’s tax return and the benefit reflected in the financial statements is recorded to Other Liabilities in the Consolidated Balance Sheets as an unrecognized tax benefit (“UTB”). The Company updates its UTBs at each financial statement date to reflect the impacts of audit settlements and other resolution of audit issues, expiration of statutes of limitation, developments in tax law and ongoing discussions with tax authorities.

A reconciliation of the change in the UTB balance for the years ended December 31, 2015 and 2014 is as follows:

	Year Ended December 31,
(in thousands)	2015			2014
Unrecognized tax benefit, beginning of period	$	6,464		$	6,389
Increases for tax positions in prior periods		—			778
Decreases for effectively settled tax positions		(228	)		(703	)
Decreases for expiration of the statute of limitations		—			—
Unrecognized tax benefit, end of period	$	6,236		$	6,464

Included in the balance of unrecognized tax benefits at December 31, 2015 are approximately $0.9 million of tax benefits that, if recognized, would affect the effective tax rate. The recognition of the remaining uncertain tax positions would not affect the effective tax rate, but would instead increase or would have increased available tax attributes. However, the recognition of the tax attribute would be offset by an increase in the deferred tax asset valuation allowance resulting in no net impact in the effective tax rate.

The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. Related to the unrecognized tax benefits noted above, the Company recognized no penalties (gross) and $0.1 million for interest (gross) during the year ended December 31, 2015. At December 31, 2015, the Company has liabilities of $0.2 million for penalties (gross) and $0.2 million for interest (gross).

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. All U.S. tax years prior to 2008 related to the VLCY acquired entities have been audited by the Internal Revenue Service. Cambium and its subsidiaries have been examined by the Internal Revenue Service through the end of 2006. The Company has been audited by the various state tax authorities through 2007.