Note 3—Income Taxes

Because of the way it is structured, Straight Path and its subsidiaries file various types of income tax returns.

Straight Path Spectrum files its own tax returns. There is no provision for Straight Path Spectrum for the years ended July 31, 2015 and 2014 as it incurred a taxable loss in both years. In addition, there is a 100% valuation allowance against the net operating losses generated by Straight Path Spectrum at both July 31, 2015 and 2014.

The operations of Straight Path IP Group are included in the consolidated tax return of Straight Path. There is no provision of current taxes for Straight Path for the year ended July 31, 2015. In both fiscal 2015 and 2014, capital contributions were made to a wholly-owned limited liability company which allowed Straight Path to utilize certain suspended losses. The Company estimated that such suspended losses made available by the capital contributions would fully offset taxable income generated by Straight Path IP Group for the respective fiscal years. The remaining suspended losses can only be utilized by Straight Path if additional capital contributions are made. In addition, there is a 100% valuation allowance against the net deferred tax assets related to Straight Path Spectrum at July 31, 2015 (see discussion below).

The (provision for) benefit from income taxes consists of the following:

Year ended July 31
(in thousands)	2015			2014		2013
Current:
Federal	$	—		$	21	$	560
State and local		(34	)		6		113
		(34	)		27		673
Deferred:
Federal		(2,211	)		1,925		(560	)
State and local		(469	)		401		(121	)
		(2,680	)		2,326		(681	)
(PROVISION FOR) BENEFIT FROM INCOME TAXES	$	(2,714	)	$	2,353	$	(8	)

Significant components of the Company’s deferred income tax assets consist of the following:

July 31 (in thousands)	2015			2014
Deferred income tax assets:
Current:
Accrued expenses	$	314		$	333
Stock based compensation		(329	)		51
Deferred revenue on litigation settlements		313			2,079
Valuation allowance		(298	)		(71	)
TOTAL CURRENT DEFERRED INCOME TAX ASSETS	$	—		$	2,392

Non-Current:
Deferred revenue on litigation settlements	$	—		$	313
Stock based compensation		—			104
Net operating loss carryforward		53,383			50,120
Valuation allowance		(53,383	)		(50,120	)
TOTAL NON-CURRENT DEFERRED INCOME TAX ASSETS	$	—		$	417

Because of its losses in the current and previous years, the Company concluded that it does not meet the criteria of more likely than not in order to utilize its deferred income tax assets in the foreseeable future for the Spectrum line of business. Accordingly, the Company recorded a 100% valuation allowance against its deferred income tax assets.

Straight Path Ventures, LLC (f/k/a Winstar Holdings, LLC) (“Ventures”) is a wholly-owned affiliate treated as a partnership for Federal income tax purposes. Ventures has generated material losses that are “suspended” in accordance with section 704(d) of the Internal Revenue Code, and accordingly, are not available to the Company unless the Company causes all or part of the suspension to be reversed. As a consequence of the “suspension,” no deferred tax asset is reflected herein with respect of such net operating losses. If any part of such net operating losses does become available, it is recorded as a tax benefit in the period used. In fiscal 2015, approximately $3.0 million of suspended losses became available to offset taxable income but the Company did not recognize a benefit due to taxable losses incurred. In fiscal 2014, approximately $3.0 million of suspended losses became available to offset taxable income and the Company realized a benefit of $1.1 million.

The differences between income taxes expected at the federal statutory income tax rate and income taxes provided are as follows:

Year ended July 31
(in thousands)	2015			2014		2013
Federal income tax at statutory rate	$	(262	)	$	99	$	(1,445	)
Permanent differences		1,048			—		—
Valuation allowance		(3,500	)		2,250		1,445
State and local income tax, net of federal benefit		—			4		(8	)
PROVISION FOR (INCOME TAXES) INCOME TAX BENEFITS	$	(2,714	)	$	2,353	$	(8	)

At July 31, 2015, the Company had net operating loss carryforwards of approximately $134 million. These net operating losses are split $127 million from Straight Path Spectrum and $7 million from Straight Path IP Group (Straight Path). These carryforward losses are available to offset future taxable income. The net operating loss carryforwards will start to expire in fiscal 2022, with fiscal 2015’s loss expiring in fiscal 2035.

The change in the valuation allowance for deferred income taxes was as follows:

Year ended July 31 (in thousands)	Balance at beginning of year		Additions charged to costs and expenses		Deductions			Balance at end of year
2015
Reserves deducted from deferred income taxes, net:
Valuation allowance	$	50,191	$	3,500	$	(10	)	$	53,681

2014
Reserves deducted from deferred income taxes, net:
Valuation allowance	$	50,797	$	—	$	(606	)	$	50,191

2013
Reserves deducted from deferred income taxes, net:
Valuation allowance	$	49,982	$	815	$	—		$	50,797

The Company had no unrecognized income tax benefits at July 31, 2015 or 2014.

The Company was a member of IDT’s consolidated group, therefore its income or loss were included in IDT’s tax return and did not remain with the Company following the Spin-Off. IDT currently remains subject to examinations of its consolidated federal tax returns for fiscal years 2012 and fiscal 2013, and state and local tax returns generally for fiscal 2012 through fiscal 2013. The Company’s various federal, state and local tax returns for fiscal 2015 and 2014 remain subject to examination.