Note 9. Income Taxes

The provision (benefit) for income taxes attributable to income from operations includes the following (in thousands):

	For the Years Ended December 31,
	2014			2013		2012
Current (benefit) provision
Federal	$	(1,759	)	$	1,219	$	4,362
State		(194	)		264		829
Total current		(1,953	)		1,483		5,191

Deferred (benefit) provision
Federal		(3,820	)		133		1,881
State		(215	)		62		158
Total deferred		(4,035	)		195		2,039
Total (benefit) provision	$	(5,988	)	$	1,678	$	7,230

The provision for income taxes related to operations varies from the amount determined by applying the federal income tax statutory rate to the income or loss before income taxes, exclusive of net income attributable to non-controlling interest. The reconciliation of these differences is as follows:

	For the Years Ended December 31,
	2014			2013			2012
Computed expected income tax provision		35.0	%		35.0	%		35.0	%
State income taxes, net of federal income tax benefit		2.5			(17.3	)		3.6
Change in valuation allowance for deferred tax assets		0.1			(0.3	)		(1.3	)
Cumulative deferred adjustments		(0.3	)		(16.9	)		--
Provision to return adjustments		1.1			(11.5	)		--
Other permanent differences		(0.5	)		(15.4	)		(0.1	)
Dividend and accretion on preferred stock		(7.5	)		(146.0	)		10.7
FIN 48 liability		(0.6	)		(5.9	)		0.6
R&D credit		3.0			--			--
Other		--			--			0.8
		32.8	%		(178.3	)%		49.3	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2014 and 2013 are as follows (in thousands):

	December 31,
	2014			2013
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts	$	137		$	124
Allowance for inventory obsolescence and amortization		694			356
Accrued liabilities not currently deductible		2,196			2,071
Accrued compensation		535			527
Amortization and depreciation		3,862			2,442
Telos ID basis difference		--			150
Net operating loss carryforwards - state		180			213
Total gross deferred tax assets		7,604			5,883
Less valuation allowance		(1,868	)		(1,901	)
Total deferred tax assets, net of valuation allowance		5,736			3,982
Deferred tax liabilities:
Unbilled accounts receivable, deferred for tax purposes		(756	)		(1,413	)
Goodwill basis adjustment and amortization		(3,021	)		(2,763	)
Telos ID basis difference		(45	)		--

Total deferred tax liabilities		(3,822	)		(4,176	)

Net deferred tax assets	$	1,914		$	(194	)

The components of the valuation allowance are as follows (in thousands):

	Balance Beginning of Period		Additions		Recoveries			Balance End of Period

December 31, 2014	$	1,901	$	--	$	(33	)	$	1,868
December 31, 2013	$	2,084	$	--	$	(183	)	$	1,901
December 31, 2012	$	2,281	$	--	$	(197	)	$	2,084

At December 31, 2014, for federal income tax purposes there was approximately $4.0 million net operating loss generated, which will be carried back to 2012 for refund of taxes paid.

Under the provisions of ASC 740-10, we determined that there were approximately $708,000 and $607,000 of unrecognized tax benefits required to be recorded in other current liabilities as of December 31, 2014 and 2013, respectively. We believe that the total amounts of unrecognized tax benefits will not significantly increase or decrease within the next 12 months. The period for which tax years are open, 2011 to 2014, has not been extended beyond the applicable statute of limitations.

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

	2014			2013		2012
Unrecognized tax benefits, beginning of period	$	607		$	534	$	400
Gross increases—tax positions in prior period		105			55		34
Gross increases—tax positions in current period		47			18		100
Settlements		(51	)		--		--
Unrecognized tax benefits, end of period	$	708		$	607	$	534