7. Income Taxes

Income Tax Expense

The components of income tax expense (benefit) for the following years ended December 31 were as follows (in thousands):


	2014		2015		2016
Income taxes currently payable:
Federal	$	42,674	$	64,227	$	59,343
State		5,306		5,181		5,675
		47,980		69,408		65,018
Deferred income taxes (benefits):
Federal		(3,236)		(26,573)		3,830
State		(1,055)		(426)		880
		(4,291)		(26,999)		4,710
Total income tax expense	$	43,689	$	42,409	$	69,728

Total income tax expense for the years ended December 31 was different from the amount computed using the statutory federal income tax rate of 35 percent for the following reasons (in thousands):


	2014		2015		2016
Income tax expense at federal statutory rate	$	41,272	$	24,891	$	50,931
State income taxes, net of federal income tax benefit		2,738		2,158		5,799
Tax contingencies reversed due to statute closings		(17,318)		(2,223)		(1,632)
Change in valuation allowances		4,999		5,174		2,130
Non-deductible HIF fees		8,205		9,953		10,204
Other-net		3,793		2,456		2,296
Total income tax expense	$	43,689	$	42,409	$	69,728

Deferred Income Taxes

The significant components of deferred tax assets and liabilities at December 31 were as follows (in thousands):


	2015		2016
Deferred tax assets:
Net operating loss carryforwards	$	20,686	$	19,727
Share-based compensation		12,320		14,704
Other accrued compensation		7,745		9,313
Claims reserves		8,243		6,251
Deferred revenue		3,644		4,986
Other non-deductible accrued liabilities		10,536		3,460
Amortization of goodwill and intangible assets		17,394		444
Indirect tax benefits		3,909		4,396
Other deferred tax assets		1,041		3,858
Total deferred tax assets		85,518		67,139
Valuation allowances		(15,458)		(17,117)
Deferred tax assets after valuation allowances		70,060		50,022
Deferred tax liabilities:
Depreciation		(39,843)		(41,311)
Other deferred tax liabilities		(3,381)		(5,586)
Total deferred tax liabilities		(43,224)		(46,897)
Net deferred tax assets (liabilities)	$	26,836	$	3,125

The Company has $1.8 million of federal net operating loss carryforwards (“NOLs”) available to reduce its federal consolidated taxable income in 2017 and subsequent years. These NOLs will expire in 2018 and 2019 if not used and are subject to examination and adjustment by the IRS. AlphaCare has $41.0 million of federal NOLs available to reduce its consolidated taxable income in 2017 and subsequent years. These NOLs will expire in 2033 through 2036 if not used and are subject to examination and adjustment by the IRS. The Company and its subsidiaries also have $103.6 million of state NOLs available to reduce state taxable income at certain subsidiaries in 2016 and subsequent years. Most of these NOLs will expire in 2017 through 2035 if not used and are subject to examination and adjustment by the respective state tax authorities.

The Company’s valuation allowances against deferred tax assets were $15.5 million and $17.1 million as of December 31, 2015 and 2016, respectively, mostly relating to uncertainties regarding the eventual realization of the AlphaCare federal NOLs and certain state NOLs. The $1.6 million increase in valuation allowance recorded to income tax expense in the current year mostly consists of an additional $3.3 million allowance for federal NOLs at AlphaCare, offset by a $1.8 million reversal for actual and projected utilization of state NOL carryovers due to improved operations. Reversals of valuation allowances are recorded in the period they occur, typically as reductions to income tax expense. Determination of the amount of deferred tax assets considered realizable requires significant judgment and estimation regarding the forecasts of future taxable income which are consistent with the plans and estimates the Company uses to manage the underlying businesses. Although consideration is also given to potential tax planning strategies which might be available to improve the realization of deferred tax assets, none were identified which were both prudent and reasonable. The Company believes taxable income expected to be generated in the future will be sufficient to support realization of the Company’s deferred tax assets, as reduced by valuation allowances. This determination is based upon earnings history and future earnings expectations. Because AlphaCare has no earnings history due to the NOLs incurred to date, a full valuation allowance is recorded on such NOLs. Other than deferred tax benefits attributable to operating loss carryforwards, there are no time constraints within which the Company’s deferred tax assets must be realized. Future changes in the estimated realizability of deferred tax assets could materially affect the Company’s financial condition and results of operations.

Uncertain Tax Positions

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):


	2014		2015		2016
Balance as of beginning of period	$	30,176	$	13,528	$	12,597
Additions for current year tax positions		2,734		3,371		3,274
Additions for tax positions of prior years		118		949		141
Reductions for tax positions of prior years		(35)		(1,807)		(173)
Reductions due to lapses of applicable statutes of limitations		(19,465)		(3,071)		(2,235)
Reductions due to settlements with taxing authorities		—		(373)		—
Balance as of end of period	$	13,528	$	12,597	$	13,604

If these unrecognized tax benefits had been realized as of December 31, 2015 and 2016, $8.6 million and $9.1 million, respectively, would have reduced income tax expense.

The Company continually performs a comprehensive review of its tax positions and accrues amounts for tax contingencies related to uncertain tax positions. Based upon these reviews, the status of ongoing tax audits and the expiration of applicable statutes of limitations, accruals are adjusted as necessary. The tax benefit from an uncertain tax position is recognized when it is more likely than not that, based on the technical merits, the position will be sustained upon examination, including resolution of any related appeals or litigation processes.

The Company also adjusts these liabilities for unrecognized tax benefits when its judgment changes as a result of the evaluation of new information not previously available. However, the ultimate resolution of a disputed tax position following an examination by a taxing authority could result in a payment that is materially different from that accrued by the Company. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined. However, reversals of unrecognized tax benefits related to deductions for stock compensation in excess of the related book are recorded as reductions to deferred tax assets, although prior to the adoption of ASU 2016-09 in 2016 were recorded as increases in additional paid‑in capital.

The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2012 expired during 2016. As a result, $2.2 million of tax contingency reserves recorded as of December 31, 2015 were reversed in 2016, of which $1.5 million was reflected as a reduction to income tax expense and $0.7 million as a decrease to deferred tax assets. Additionally, $0.1 million of accrued interest was reversed in 2016 and reflected as reductions to income tax expense due to the closing of statutes of limitations on tax assessments.

The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2011 expired during 2015. As a result, $3.1 million of tax contingency reserves recorded as of December 31, 2014 were reversed in 2015, of which $2.0 million was reflected as a reduction to income tax expense, $1.0 million as a decrease to deferred tax assets, and the remainder as an increase to additional paid-in capital. Additionally, $0.4 million of accrued interest and $0.7 million of unrecognized state tax benefits were reversed in 2015 and reflected as reductions to income tax expense due to the closing of statutes of limitations on tax assessments and the favorable settlement of state income tax examinations.

The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2010 expired during 2014. As a result, $19.5 million of tax contingency reserves recorded as of December 31, 2013 were reversed in 2014, of which $16.0 million was reflected as a reduction to income tax expense, $2.6 million as an increase to additional paid-in capital, and the remainder as a decrease to deferred tax assets. Additionally, $1.4 million of accrued interest was reversed in 2014 and reflected as a reduction to income tax expense due to the closing of statutes of limitations on tax assessments.

With few exceptions, the Company is no longer subject to income tax assessments by tax authorities for years ended prior to 2013. Further, it is reasonably possible the statutes of limitations regarding the assessment of federal and most state and local income taxes for 2013 could expire during 2017. Up to $2.6 million of unrecognized tax benefits recorded as of December 31, 2016 could be reversed during 2017 as a result of statute expirations, of which $1.8 million would be reflected as a reduction to income tax expense and $0.8 million as a decrease to deferred tax assets. All reversals from statute expirations would be reflected as discrete adjustments during the quarter in which the respective event occurs. As of December 31, 2015 and 2016, the Company had accrued approximately $0.2 million and $0.3 million, respectively, for the potential payment of interest and penalties. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. During the years ended December 31, 2014, 2015 and 2016, the Company recorded approximately $(0.8) million, $(0.4) million and $0.1 million in interest and penalties.