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,
	2015			2014			2013
Current (benefit) provision
Federal	$	(902	)	$	(1,759	)	$	1,219
State		54			(194	)		264
Total current		(848	)		(1,953	)		1,483

Deferred provision (benefit)
Federal		4,333			(3,820	)		133
State		780			(215	)		62
Total deferred		5,113			(4,035	)		195
Total provision (benefit)	$	4,265		$	(5,988	)	$	1,678

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,
	2015	2014	2013
Computed expected income tax provision	34.0%	35.0%	35.0%
State income taxes, net of federal income tax benefit	2.1	2.5	(17.3)
Change in valuation allowance for deferred tax assets	(61.3)	0.1	(0.3)
Cumulative deferred adjustments	(0.1)	(0.3)	(16.9)
Provision to return adjustments	1.3	1.1	(11.5)
Other permanent differences	(1.1)	(0.5)	(15.4)
Dividend and accretion on preferred stock	(11.3)	(7.5)	(146.0)
FIN 48 liability	(0.8)	(0.6)	(5.9)
R&D credit	1.6	3.0	--
Other	(0.9)	--	--
	(36.5)%	32.8%	(178.3)%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2015 and 2014 are as follows (in thousands):

	December 31,
	2015			2014
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts	$	176		$	137
Allowance for inventory obsolescence and amortization		623			694
Accrued liabilities not currently deductible		2,218			2,196
Accrued compensation		840			535
Deferred rent		8,008			8,512
Net operating loss carryforwards - federal		524			--
Net operating loss carryforwards - state		344			180
R&D credit		202			--
Total gross deferred tax assets		12,935			12,254
Less valuation allowance		(9,027	)		(1,868	)
Total deferred tax assets, net of valuation allowance		3,908			10,386
Deferred tax liabilities:
Amortization and depreciation		(3,307	)		(4,650	)
Unbilled accounts receivable, deferred for tax purposes		(589	)		(756	)
Goodwill basis adjustment and amortization		(3,199	)		(3,021	)
Telos ID basis difference		(12	)		(45	)
Total deferred tax liabilities		(7,107	)		(8,472	)

Net deferred tax (liabilities) assets	$	(3,199	)	$	1,914

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

	Balance Beginning of Period		Additions		Recoveries			Balance End of Period

December 31, 2015	$	1,868	$	7,159	$	--		$	9,027
December 31, 2014	$	1,901	$	--	$	(33	)	$	1,868
December 31, 2013	$	2,084	$	--	$	(183	)	$	1,901

We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on available evidence, realization of deferred tax assets is dependent upon the generation of future taxable income. We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment. As such, we have determined that a full valuation allowance is required as of December 31, 2015. We are not able to use temporary taxable differences related to goodwill, as a source of future taxable income. As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability (hanging credit) related to goodwill remains on our consolidated balance sheet at December 31, 2015.

At December 31, 2015, for federal income tax purposes there was approximately $4.6 million net operating loss generated, $3.0 million of which will be carried back to 2013 for refund of taxes paid, the remaining will be carried forward to offset future taxable income. These net operating loss carryforwards expire in 2035.

Under the provisions of ASC 740-10, we determined that there were approximately $803,000 and $708,000 of unrecognized tax benefits, including $210,000 and $188,000 of related interest and penalties, required to be recorded in other current liabilities as of December 31, 2015 and 2014, 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, 2012 to 2015, 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):

	2015			2014			2013
Unrecognized tax benefits, beginning of period	$	708		$	607		$	534
Gross increases—tax positions in prior period		92			105			55
Gross increases—tax positions in current period		38			47			18
Settlements		(35	)		(51	)		--
Unrecognized tax benefits, end of period	$	803		$	708		$	607