

9.	Income Taxes

Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. Significant components of the net deferred tax assets and net deferred tax liabilities as reflected on the Consolidated Balance Sheets are as follows:



	December 31,
	2014			2013
	(in thousands)
Deferred tax liabilities:
Prepaid assets	$	(9,291	)	$	(5,084	)
Depreciation	(8,083		)	(8,937		)
Software development costs	(2,252		)	(2,739		)
Total deferred tax liabilities	(19,626		)	(16,760		)

Deferred tax assets:
Accrued incentive compensation	7,204			3,909
Net operating loss carryforward	1,556			1,773
Workers’ compensation accruals	6,308			5,568
Accrued rent	1,058			1,008
Stock-based compensation	3,615			3,742
Intangibles	1,575			837
Minority investment impairment	1,003			991
Other	551			412
Total deferred tax assets	22,870			18,240
Valuation allowance	(1,003		)	(991		)
Total net deferred tax assets	21,867			17,249

Net deferred tax assets	$	2,241		$	489

Net current deferred tax assets	$	6,316		$	8,185
Net noncurrent deferred tax liabilities	(4,075		)	(7,696		)
	$	2,241		$	489

The components of income tax expense are as follows:



	Year ended December 31,
	2014			2013			2012
	(in thousands)
Current income tax expense:
Federal	$	18,034		$	20,476		$	29,280
State	3,322			3,512			4,351
Total current income tax expense	21,356			23,988			33,631
Deferred income tax (benefit) expense:
Federal	(1,764		)	(2,258		)	(5,363		)
State	31			(30		)	(380		)
Total deferred income tax benefit	(1,733		)	(2,288		)	(5,743		)
Total income tax expense	$	19,623		$	21,700		$	27,888

As a result of nonqualified stock option exercises, disqualifying dispositions of certain employee incentive stock options and vesting of restricted stock awards, we had a net income tax benefit of $0.5 million in 2014, $1.3 million in 2013 and $1.8 million in 2012. The excess income tax benefit is reported as a component of additional paid-in capital.

The reconciliation of income tax expense computed at U.S. federal statutory tax rates to the reported income tax expense from continuing operations is as follows:



	Year ended December 31,
	2014			2013			2012
	(in thousands)
Expected income tax expense at 35%	$	16,670		$	18,806		$	23,901
State income taxes, net of federal benefit	2,204			2,286			2,497
Nondeductible expenses	1,939			1,993			1,663
Section 199 benefits	(592		)	(2,531		)	—
Expense Management non-cash impairment	—			797			—
Valuation allowance related to TRE impairment	—			938			—
Research and development credit	(455		)	(534		)	—
Other, net	(143		)	(55		)	(173		)
Reported total income tax expense	$	19,623		$	21,700		$	27,888

We have developed customer facing software that is included as a component of the PEO HR Outsourcing solutions. In addition, several Strategic Business Units (“SBU”) market both software products and cloud based offerings. Prior to 2013, we were not certain that these software offerings met the IRS “Qualified Production Activities Deduction” requirements. As a result, no such tax deduction was taken on the annual tax returns filed with the IRS. However, in 2013, we engaged tax specialists to conduct a study of our various software offerings to assess the qualifications with IRS guidelines. Based on this study, we concluded certain of our software offerings met the IRS requirements, resulting in amendments to previously filed open year tax returns. Accordingly, in 2013 we recognized $2.0 million in tax benefits for the years 2009 to 2012, and $0.5 million in tax benefits for the 2013 tax year.

At December 31, 2014, we have net operating loss carryforwards totaling approximately $4.2 million that expire from 2023 to 2030 related to our acquisition of ExpensAble.

We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2014, 2013 and 2012, we made no provisions for interest or penalties related to uncertain tax positions. The tax years 2011 through 2014 remain open to examination by the Internal Revenue Service of the United States. The tax years 2010 through 2014 remain open to examination by various state tax authorities.