INCOME TAXES

The income tax provision (benefit), in thousands, consists of the following for the years ended December 31, 2013, 2012 and 2011:



	2013			2012			2011
Federal
Current	$	(25	)	$	(770	)	$	(3,373	)
Deferred	(357		)	(2,692		)	436
IRS audit adjustment	—			—			622
	(382		)	(3,462		)	(2,315		)
State
Current	364			(159		)	(818		)
Deferred	1,406			(533		)	92
	1,770			(692		)	(726		)
	$	1,388		$	(4,154	)	$	(3,041	)

A reconciliation of income taxes at the statutory rate to the reported provision (benefit), in thousands, is as follows:



	2013			2012			2011
Federal income tax at statutory rate	$	(4,225	)	$	(3,665	)	$	(2,354	)
State and local income taxes, net of federal income tax effect	(371		)	(457		)	(395		)
Permanent differences	1,140			9			13
Increase (decrease) in deferred tax asset valuation allowance	4,752			(497		)	—
Other differences	92			456			(305		)
	$	1,388		$	(4,154	)	$	(3,041	)

Significant components of the Company’s deferred tax liabilities and assets, in thousands, as of December 31, 2013 and 2012 are as follows:



	2013			2012
Deferred tax liabilities
Property and equipment	$	(2,735	)	$	(3,137	)
Gross deferred tax liabilities	(2,735		)	(3,137		)
Deferred tax assets
Intangibles and goodwill	2,919			2,776
Accrued property taxes	10			12
Allowance for doubtful accounts	43			43
Inventory capitalization	120			210
Stock options	62			—
Federal net operating loss carry forward	2,413			—
State net operating loss carry forward	1,521			599
State recycling equipment tax credit carry forward	4,617			4,659
Interest rate swap	30			100
Accrued expenses	—			11
Other	11			35
Gross deferred tax assets	11,746			8,445
Valuation allowance	(8,914		)	(4,162		)
Net deferred tax assets	$	97		$	1,146

The Internal Revenue Service has conducted an examination of the Company’s 2009 income tax return and, per the final report, proposed changes amounting to approximately $735.0 thousand of additional taxes due for which we received an invoice early in 2012. This increase arose from the Company’s use of bonus depreciation rules for certain additions to shredding equipment which were determined to be disqualified for bonus depreciation. This additional income tax was accrued as of December 31, 2011 and netted against the refund received in 2012 due to the net loss in 2011.

This resulting adjustment to 2009 depreciation deductions allowed the Company to file an amended U.S. tax return for 2010, pursuant to which we claimed additional depreciation deductions and resulted in a claim for refund of income taxes paid amounting to approximately $113.0 thousand which was also accrued at December 31, 2011 and received in 2012.

At December 31, 2013, we have deferred recycling equipment state tax credit carry forwards of $4.6 million relating to our shredder purchase which do not expire. This tax credit is limited to 25 percent of our Kentucky state income tax liability which includes the Limited Liability Entity Tax, which is based on gross receipts or gross profits. We used the available state tax credits of $18.4 thousand, $23.9 thousand and $12.7 thousand in 2013, 2012, and 2011, respectively.

At December 31, 2013, we have a Federal net operating loss ("NOL") carry forward of $7.1 million which expires in 2033. We also have state NOL carry forwards of $20.2 million as of December 31, 2013. The majority of the state NOL carry forwards relate to losses in Kentucky which expire beginning in 2031.

A deferred tax asset valuation allowance is established if it is “more likely than not” that the related tax benefits will not be realized. In determining the appropriate valuation allowance, we consider the projected realization of tax benefits based on expected levels of future taxable income, considering recent operating losses, available tax planning strategies, reversals of existing taxable temporary differences and taxable income in the state in carry back years. As of December 31, 2013, management determined that only the state recycling equipment tax credit carry forwards would be realized to the extent of $97.0 thousand and reserved all other net deferred tax assets by increasing the related valuation allowance. The state tax credit carry forwards have been reduced to their net realizable value based upon estimates of future gross profits and utilization of the credit in the foreseeable future.

The recorded valuation allowance, in thousands, consisted of the following at December 31, 2013 and 2012:



	Year Ended December 31,
	2013		2012
Valuation allowance, beginning of year	$	4,162	$	4,659
Increase (decrease) in deferred tax asset valuation allowance	4,752		(497		)
Valuation allowance, end of year	$	8,914	$	4,162