10. Income Taxes

The Company files income tax returns in the U.S. federal, the United Kingdom and various state jurisdictions. The Company’s primary operating unit is Seamless North America, LLC, which was incorporated in 1999 as a taxable C-Corporation, and acquired by Aramark in April of 2006. The Company was converted to a single member limited liability company (“LLC”) in April of 2007. In June of 2011, the entity was converted into a partnership for tax purposes upon the sale of a 26% interest to SLW Investors. In October of 2012, Aramark spun off its interest in Seamless North America, LLC by contributing the partnership interest to a newly formed C-Corporation, Seamless Holdings, and distributing those shares to the shareholders of Aramark. The income taxes paid on behalf of Seamless North America, LLC by Aramark, while it was a single member LLC, have been reflected as income tax expense and as contributed capital for the period prior to the sale to SLW Investors in June of 2011. On that date, the Company recorded tax benefits of approximately $8.1 million relating to the reversal of existing deferred tax liabilities relating to the C-Corporation and recognition of a deferred tax asset at the partnership level relating to tax status of the underlying LLC. A deferred tax liability of approximately $8.2 million was assumed by Seamless Holdings at the time it was spun off from Aramark in October of 2012. This liability was reflected as an offset to equity, as part of the spin off.

For the years ended December 31, 2014, 2013 and 2012, the income tax provision was comprised of the following:

	Year Ended December 31,
	2014		2013		2012
	(in thousands)
Current:
Federal	$	8,073	$	2,912	$	316
State		7,610		3,056		132
Foreign		426		468		365
Total current		16,109		6,436		813
Deferred:
Federal		1,056		1,300		—
State		3,556		406		—
Total deferred		4,612		1,706		—
Total income tax expense	$	20,721	$	8,142	$	813

Income before provision for income taxes for the years ended December 31, 2014, 2013 and 2012, was as follows:

	Year Ended December 31,
	2014		2013		2012
	(in thousands)
Domestic source	$	43,069	$	12,986	$	7,153
Foreign source		1,915		1,903		1,579
Income before provision for income taxes	$	44,984	$	14,889	$	8,732

The following is a reconciliation of income taxes computed at the U.S. federal statutory rate to the income taxes reported in the consolidated statements of operations for the years ended December 31, 2014, 2013 and 2012:

	Year Ended December 31,
	2014			2013			2012
	(in thousands)
Income tax expense at statutory rate	$	15,747		$	5,211		$	3,056
State income taxes		8,038			2,522			251
Deferred tax impact of reorganization		(2,382	)		—			—
Nondeductible transaction costs		—			1,148			—
Tax benefit of partnership status		—			(726	)		(2,211	)
Valuation allowance reversal		—			(502	)		—
Foreign rate differential		(253	)		(220	)		(188	)
All other		(429	)		709			(95	)
Total income tax expense	$	20,721		$	8,142		$	813

On December 31, 2014, the Company undertook a series of transactions intended to simplify its legal and tax structure in the U.S. The result of the reorganization was a combination of GrubHub Holdings Inc. and Seamless North America, which resulted in the deemed liquidation of the Seamless North America, LLC partnership status for tax purposes. The reorganization resulted in a net income tax benefit of $0.4 million for the year ended December 31, 2014. The income tax benefit consisted of a deferred tax benefit of $2.2 million as a result of converting the Seamless North America, LLC partnership into a division of GrubHub Holdings Inc., partially offset by an increase in deferred tax expense of $1.8 million as a result of the adjusted deferred state tax rate applicable to the Company’s U.S. operations.

The Company recorded a $2.0 million increase in deferred tax expense during the second quarter of 2014 as a result of a change in state tax law.

The tax effects of temporary differences giving rise to deferred income tax assets and liabilities as of December 31, 2014 and 2013 were as follows:

	As of December 31,
	2014			2013
	(in thousands)
Deferred tax assets:
Loss and credit carryforwards	$	7,212		$	16,606
Accrued expenses		2,221			620
Stock-based compensation		7,752			5,200
Total deferred tax assets		17,185			22,426
Valuation allowance		(910	)		(902	)
Net deferred tax assets		16,275			21,524
Deferred tax liabilities:
Fixed assets		(2,721	)		(1,145	)
Intangible assets		(104,973	)		(105,435	)
Investment in partnership		—			(1,751	)
Total deferred tax liabilities		(107,694	)		(108,331	)
Net deferred tax liability	$	(91,419	)	$	(86,807	)

Classification of net deferred tax assets (liabilities) on the consolidated balance sheets as of December 31, 2014 and 2013 was as follows:

	As of December 31,
	2014			2013
	(in thousands)
Current assets	$	825		$	3,688
Non-current liabilities		(92,244	)		(90,495	)
Total deferred tax liability	$	(91,419	)	$	(86,807	)

During 2013, the Company reversed the $0.5 million valuation allowance it previously established against the net deferred tax assets of its subsidiary, Slick City Media, Inc., as the Company believes that it is more likely than not that these assets will be utilized, based on projected future income levels. The NOL carryover of this subsidiary, which was acquired in October of 2011, as well as the NOL and credit carryovers of GrubHub Holdings Inc., which was acquired on August 8, 2013, are subject to Section 382 and 383 of the Internal Revenue Code, which places limits on the utilization of acquired NOL and credit carryovers. Based on preliminary analysis performed by the Company, management does not believe that Sections 382 and 383 will significantly delay the utilization of these subsidiaries’ NOL and credit carryovers. A partial valuation reserve of $0.9 million was recorded as of December 31, 2014 and 2013 against certain state-only credits as those credits have a short carryover period and the Company believes that this portion of the credit carryovers will more likely than not expire before they are utilized.

The Company has not provided U.S. income tax on the accumulated earnings of its U.K. subsidiary, Seamless Europe, Ltd. of approximately $6.6 million as of December 31, 2014, as it intends to permanently reinvest those undistributed earnings into future operations in that country. The Company estimates the potential additional U.S. tax liabilities that would result from the complete repatriation of those accumulated earnings to be approximately $1.9 million as of December 31, 2014.

The Company had the following tax loss and credit carryforwards as of December 31, 2014 and 2013:

	2014		2013		Beginning Year of Expiration
	(in thousands)
U.S. federal loss carryforwards	$	7,706	$	34,297	2027
U.S. state and local loss carryforwards		9,856		36,201	2027
U.S. contribution carryforwards		166		85	2015
Illinois Edge Credits_(a)		2,938		1,654	2017
New York unincorporated business tax credits_(a)		875		—	2021
U.S. research and development credits		—		53	2031
U.S. Alternative Minimum Tax Credit carryover		—		240	No expiration

(a)	Amounts are before the federal benefit of state tax

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In addition to the federal and state NOL carryforwards shown above, the Company has $43.8 million in additional loss carryovers attributable to excess tax benefits on stock option exercises that will be recorded to additional paid-in capital when those losses are deemed utilized applying the “with and without” method of accounting for excess tax benefits.

The Company is not currently under examination in any taxing jurisdiction, and its tax returns are subject to the normal statute of limitations, three years from the filing date for federal income tax purposes. The federal and state statute of limitations generally remain open for years in which tax losses are generated until three years from the year those losses are utilized. Under these rules, the 2007 and later NOLs of Slick City Media, Inc. are still subject to audit by the IRS and state and local jurisdictions. Also, the 2007 and later year NOLs of GrubHub Holdings Inc. and its acquired businesses are still subject to audit by the IRS and state and local jurisdictions. The September 30, 2011 and later U.K. returns of Seamless Europe Ltd. are subject to exam by the U.K. tax authorities.

The Company is subject to taxation in the U.S. federal and various state jurisdictions. Significant judgment is required in determining the provision for income taxes and recording the related income tax assets and liabilities. The Company’s practice for accounting for uncertainty in income taxes is to recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not criteria, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

The following table summarizes the Company’s unrecognized tax benefit activity during the years ended December 31, 2014 and 2013, excluding the related accrual for interest:

	As of December 31,
	2014			2013
	(in thousands)
Balance at beginning of year	$	1,097		$	—
Reductions for tax positions of prior years		(491	)		—
Additions for tax positions of prior years		50			166
Additions for tax positions of the current year		2,532			931
Balance at end of year	$	3,188		$	1,097

The Company records interest and penalties, if any, as a component of its income tax expense in the consolidated statements of operations. The non-current income tax liabilities are recorded in long-term liabilities in the consolidated balance sheets. At December 31, 2014, the Company did not anticipate any significant adjustments to its unrecognized tax benefits caused by the settlement of tax examinations or other factors, within the next twelve months. Included in the consolidated balance sheets at December 31, 2014 and 2013 were deferred tax assets that relate to the potential settlement of these unrecognized tax benefits. After consideration of these amounts, $1.0 million and $0.5 million of the amount accrued at December 31, 2014 and 2013, respectively, would impact the effective tax rate if reversed.