Income Taxes (Tables)

12 Months Ended

Dec. 31, 2017

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

	For the Years Ended December 31,
	2017			2016		2015
Current (benefit) provision
Federal	$	(86	)	$	114	$	(902	)
State		29			28		54
Total current		(57	)		142		(848	)

Deferred (benefit) provision
Federal		(2,622	)		155		4,333
State		(88	)		37		780
Total deferred		(2,710	)		192		5,113
Total provision (benefit)	$	(2,767	)	$	334	$	4,265

Reconciliation of Effective Tax Rate

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,
	2017	2016	2015
Computed expected income tax provision	34.0%	34.0%	34.0%
State income taxes, net of federal income tax benefit	0.9	0.8	2.1
Change in valuation allowance for deferred tax assets, exclusive of impact of Tax Act	(26.9)	(21.5)	(61.3)
Cumulative deferred adjustments	--	(0.3)	(0.1)
Provision to return adjustments	--	(0.4)	1.3
Other permanent differences	(1.3)	(1.8)	(1.1)
Dividend and accretion on preferred stock	(15.2)	(19.3)	(11.3)
FIN 48 liability	(0.9)	0.7	(0.8)
R&D credit	4.6	3.3	1.6
Impact of Tax Act	35.5	--	--
Other	1.5	(0.4)	(0.9)
	32.2%	(4.9)%	(36.5)%

Deferred Tax Assets and Liabilities

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are as follows (in thousands):

	December 31,
	2017			2016
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts	$	108		$	161
Allowance for inventory obsolescence and amortization		818			778
Accrued liabilities not currently deductible		1,657			2,234
Accrued compensation		735			1,006
Deferred rent		5,134			7,682
Telos ID basis difference		65			--
Net operating loss carryforwards - federal		2,453			1,301
Net operating loss carryforwards - state		848			405
Federal tax credit		666			533
Total gross deferred tax assets		12,484			14,100
Less valuation allowance		(7,219	)		(10,499	)
Total deferred tax assets, net of valuation allowance		5,265			3,601
Deferred tax liabilities:
Amortization and depreciation		(2,127	)		(2,696	)
Unbilled accounts receivable, deferred for tax purposes		(1,282	)		(787	)
Goodwill basis adjustment and amortization		(2,597	)		(3,451	)
Telos ID basis difference		--			(58	)
Total deferred tax liabilities		(6,006	)		(6,992	)

Net deferred tax liabilities	$	(741	)	$	(3,391	)

Components of Valuation Allowance

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

	Balance Beginning of Period		Additions		Recoveries			Balance End of Period

December 31, 2017	$	10,499	$	--	$	(3,280	)	$	7,219
December 31, 2016	$	9,027	$	1,472	$	--		$	10,499
December 31, 2015	$	1,868	$	7,159	$	--		$	9,027

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, 2017 and 2016. We were 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, 2017 and 2016. Under the Tax Act, we will be able to use hanging credit deferred tax liabilities as a source of taxable income to support the indefinite-lived net operating losses created by the future reversal of our temporary differences. Accordingly, we have re-measured our existing deferred tax assets and liabilities using the enacted tax rate, and adjusted the valuation allowance on our deferred taxes and recorded a decrease in deferred tax liabilities of $3.0 million, with a corresponding adjustment to deferred tax benefit for the same amount for the year ended December 31, 2017.

At December 31, 2017, for federal income tax purposes there was approximately $11.7 million net operating loss available to be carried forward to offset future taxable income. These net operating loss carryforwards expire in 2037. In addition, there was approximately $60,000 of alternative minimum tax credit available to be carried forward indefinitely to reduce future regular tax liabilities until 2020, after which time it will be fully refundable in 2021, in accordance with the Tax Act.

Unrecognized Tax Benefits Roll Forward

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

	2017			2016			2015
Unrecognized tax benefits, beginning of period	$	762		$	803		$	708
Gross (decreases) increases—tax positions in prior period		(127	)		(66	)		92
Gross increases—tax positions in current period		77			46			38
Settlements		(35	)		(21	)		(35	)
Unrecognized tax benefits, end of period	$	677		$	762		$	803