(12)Income Taxes

The Company recorded a net income tax benefit of $3,549,000 for the fiscal year ended October 31, 2015 compared to an income tax benefit of $176,000 for fiscal year ended October 31, 2014. The current year benefit includes a tax benefit of approximately $3,111,000 as result of the Company in the reversing a substantial portion of the valuation allowance on its domestic deferred tax assets. In addition approximately $544,000 of foreign deferred income tax benefit related to Medisoft Belgium was recorded. These tax benefits were partially offset by current estimated federal AMT, state tax expense, minimum fees, and provincial tax expense totaling $106,000. The fiscal 2014 benefit includes a deferred foreign tax benefit of $197,000 related to MediSoft, offset by current foreign provincial taxes, state income tax expenses, minimum fees, and an increase in reserves for uncertain tax positions totaling $21,000.

The Company has federal net operating loss (“NOL”) and general business tax credit carry forwards; however, the utilization of some of these tax loss and tax credit carry forwards is limited under Internal Revenue Code (“IRC”) §382 and §383, respectively, as a result of a IRS-deemed change in ownership that occurred in the fourth quarter of fiscal 2006. The Company estimates that the amount of federal NOL carry forward at October 31, 2015 that is not limited is approximately $10.1 million. These loss carry forwards will expire in years 2018 through 2032. Additionally, the Company has concluded that all general business credit carry forwards generated prior to the 2006 change in ownership are limited and not available for use in future years. The Company also has federal and state combined general business credits of $299,000, which will carry forward and begin to expire in 2033. Usage of this general business credit carry forward is not limited because it was generated after the change in ownership. The Company also has $193,000 of alternative minimum tax credit carry forwards that do not expire. The alternative minimum tax credit carry forward benefits are limited by IRC §383 but their ultimate use is not affected since these do not expire. Due to the extension from 15 to 20 years for the carry forward of these NOLs, none of the current loss carry forward benefits expire until 2018 after considering the statutory limitations described above. In addition, the Company has combined foreign NOL’s of approximately $4.3 million.

The (benefit from) provision for income taxes was as follows:



	Year ended October 31,
(In thousands)	2015		2014
Current:
Federal	$	47	$	-
State		68		13
Foreign		(9)		8
		106		21
Deferred:
Federal	$	(3,016)	$	-
State		(95)		-
Foreign		(544)		(197)
		(3,655)		(197)
	$	(3,549)	$	(176)

A reconciliation of the provision (benefit) for income taxes to the statutory federal rate was as follows:



	2015		2014
Federal statutory rate	34.0	%	(34.0)	%
State taxes, net of federal benefit	9.0		(2.4)
Valuation allowance reversal	(729.8)		—
Other changes in valuation allowance	(148.9)		(10.3)
Research and development credits	(13.9)		—
Non-deductible meals and entertainment	8.1		3.7
Non-deductible acquisition costs	—		23.9
Non-taxable foreign payroll subsidies	(6.9)		—
Non-deductible foreign expenses	6.7		—
Reserve for uncertain tax positions	(2.0)		—
Foreign rate differential	3.9		0.5
Foreign and other taxes	—		1.4
Stock-based compensation	9.8		1.4
Other	(2.7)		2.6
Effective income tax rate	(832.7)	%	(13.2)	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of October 31, 2015 and 2014 are presented below:



(In thousands)	2015		2014
Deferred tax assets:				(Revised – Note 3)
Net operating loss carry forwards	$	3,969	$	4,558
Tax credit carry forwards		492		234
Deferred revenue		1,066		928
Unrealized foreign currency loss		486		—
Inventory reserve		223		337
Stock-based compensation		10		54
Accrued expenses and other		162		465
Valuation allowance		(963)		(4,708)
Total deferred tax assets		5,445		1,868
Deferred tax liabilities:
Intangible assets		(1,546)		(1,512)
Fixed assets		(499)		(635)
Deferred rent and other		(58)		(68)
Total deferred tax liabilities		(2,103)		(2,215)
Net deferred income tax asset (liability)	$	3,342	$	(347)

The Company has adopted Accounting Standards Update (ASU) 2015-17 to present balance sheet classification of deferred income taxes as noncurrent. As of October 31, 2014, $20,000 of current deferred tax assets were reclassified to non-current deferred income tax liabilities. Components of resulting noncurrent deferred tax assets (liabilities) as of October 31, 2015 and 2014 are as follows:



(In thousands)	2015		2014
Deferred taxes recorded on the balance sheet:				(Revised – Note 3)
Deferred tax assets—long-term Federal	$	3,016	$	—
Deferred tax assets—long-term State		95		—
Deferred tax assets (liabilities)—long-term Foreign		231		(347)
	$	3,342	$	(347)

The valuation allowance for deferred tax assets as of October 31, 2015 and 2014 was $963,000 and $4,708,000 respectively. The total valuation allowance decreased by $3,745,000 for the year ended October 31, 2015 due to reversing a substantial portion of the Company’s valuation allowance on its domestic deferred assets. The valuation allowance increased $48,000 for the year ended October 31, 2014.

The $347,000 net foreign deferred tax liability in the prior year, relates to the Belgium subsidiary acquired as part of the MediSoft acquisition. The net deferred tax liability was related to intangible and fixed asset deferred tax liabilities established through purchase accounting that were partially offset by deferred tax assets attributed to Belgium NOLs. Belgian NOLs do not expire and therefore, do not require a valuation allowance based on taxable income that is expected in future periods.

In assessing the need for a valuation allowance, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future table income and tax planning strategies in making this assessment. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Based on the Company’s assessment of all available evidence including (i) previous three-year cumulative income before infrequent and unusual items, (ii) a history of generating income before taxes for the past two years and (iii) estimates of future Company profitability, the Company determined that it was more-likely-than-not that the Company would be able to realize a substantial portion of its deferred tax assets in the future. During the third quarter of fiscal year 2015, the Company incurred a non- cash benefit of approximately $3,111,000 due to the reversal of a substantial portion of the valuation allowance on the Company’s domestic deferred tax assets.

Deferred tax assets relating to the tax benefits of employee stock option grants have been reduced to reflect exercises through the year ended October 31, 2015. Certain exercises resulted in tax deductions in excess of previously recorded tax benefits. The Company’s U.S. federal NOL carry forwards of $10.1 million referenced above as of October 31, 2015 include $2.8 million of income tax deductions in excess of previously recorded tax benefits. Although these additional tax deductions are reflected in NOL carry forwards referenced above, the related tax benefit of $1,032,000 will not be recognized until the deductions reduce taxes payable. Accordingly, since the tax benefit does not reduce the Company’s current taxes payable in 2015, these tax benefits are not reflected in the Company’s deferred tax assets presented above. The tax benefit of these excess deductions will be reflected as a credit to additional paid-in capital when and if recognized. In addition, the Company has state NOL carry forwards of approximately $1.7 million and foreign NOL carry forwards of approximately $4.3 million. Expiration of state NOL’s vary by state and approximately $166,000 will expire in fiscal 2016 if not utilized. Foreign NOL expiration varies by country; however a substantial portion of the foreign NOL’s are in Belgium which do not expire.

In accounting for uncertainty in income taxes, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes interest and penalties on any unrecognized tax benefits as a component of income tax expense. For the years ended October 31, 2015 and 2014, the liability for uncertainties in income taxes increased by $4,000 and $3,000 respectively. The Company does not expect the amount of reserves for uncertain tax positions to change significantly in the next twelve months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits as of October 31, 2015 and 2014 follows:



	Year ended October 31,
(In thousands)	2015		2014
Balance, beginning of period	$	57	$	54
Current year additions		52		3
Current year decreases related to prior year tax positions		(48)		-
Balance, end of period	$	61	$	57

If recognized, approximately $41,000 of these benefits would lower the effective tax rate. The remaining $20,000 if recognized would result in a deferred tax asset subject to a valuation allowance and therefore not affect the effective rate. The unrecognized tax benefits are related to potential state income tax liabilities in prior years including interest as well as current year research and development credits.

The Company is subject to income taxes in the U.S. federal and various state and international jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years ending prior to 1998. We are generally subject to U.S. federal and state examinations for all tax years since 1998 due to our net operating loss carryforwards and utilization of the carryforwards in years still open under statute. The expiration of the statute of limitations related to the various state income tax returns that the Company file varies by state. There is no statute of limitations for assessments related to jurisdictions where the Company may have a nexus but has chosen not to file an income tax return. The expiration of the statute of limitations related to foreign jurisdictions varies by country.