7. Income Taxes

The following table presents the components of income tax (benefit) expense (dollars in thousands):


	Years Ended December 31,
	2012			2011		2010
Current tax (benefit) expense:
Federal	$	(77	)	$	26	$	(463	)
U.S. State and local		(61	)		104		113

Total current		(138	)		130		(350	)

Deferred tax expense (benefit):
Federal	$	—		$	—	$	418
U.S. State and local		—			—		(25	)

Total deferred		—			—		393

Total income tax (benefit) expense	$	(138	)	$	130	$	43

The following table presents loss before income taxes (dollars in thousands):


	Years Ended December 31,
	2012			2011			2010
United States	$	(8,706	)	$	(6,092	)	$	(20,546	)
Canada		51			24			12

Total	$	(8,655	)	$	(6,068	)	$	(20,534	)

The following table reconciles the U.S. statutory federal income tax rate and the tax (benefit) expense shown in our Consolidated Statements of Operations and Comprehensive Loss (dollars in thousands):


	Years Ended December 31,
	2012			2011			2010
Tax at statutory U.S. federal income tax rate of 35%	$	(3,029	)	$	(2,124	)	$	(7,187	)
State and local income taxes, net of federal benefit		(293	)		(148	)		(699	)
Permanent differences		33			171			19
Resolution and reevaluation of tax positions		(102	)		75			12
Other		281			(131	)		124
Valuation allowance		2,972			2,287			7,774

Income tax (benefit) expense	$	(138	)	$	130		$	43

We have made no provision for U.S. income taxes on undistributed earnings of approximately $4.7 million from our Canadian subsidiary because it is our intention to reinvest those earnings in that operation. If those earnings are distributed in the form of dividends, we may be subject to both foreign withholding taxes and U.S. income taxes net of allowable foreign tax credits. The amount of additional tax that might be payable upon repatriation of these foreign earnings is approximately $326,000.

U.S. GAAP requires a company to establish a valuation allowance for deferred tax assets when it is more-likely-than-not that the deferred tax asset will not be realized. Deferred tax assets may be realized through future reversals of existing taxable temporary differences, future taxable income, taxable income in prior carryback year(s) if carryback is permitted, and tax planning strategies.

In 2009, we considered all positive and negative evidence in determining whether or not the net deferred tax assets were more-likely-than-not to be realized, including the current economic conditions and our 2010 operating projections completed during 2009. After considering all of the evidence, we concluded that reliance on future projections of income was no longer sufficient to support realization of our deferred tax assets. Accordingly, in 2009 we established a valuation allowance against all of our net deferred tax assets in the amount of $12.2 million as we believed it was not more-likely-than-not that our net deferred tax assets would be utilized. After undertaking a similar analysis again in 2010, 2011 and 2012, we still believe that we cannot support the realization of our deferred tax assets.

As of December 31, 2012, we had net operating loss carryforwards for federal and state income taxes of approximately $39.3 million and $68.3 million, respectively, which will be available to offset future taxable income. Approximately $8.6 million of state net operating loss is subject to an annual IRC Section 382 limitation of $5.3 million. If not used, these carryforwards will expire between 2013 and 2032. To the extent net operating loss carryforwards, when realized, relate to non-qualified stock option deductions, the resulting benefits will be credited to stockholders’ investment.

Deferred taxes arise because of temporary differences in the book and tax basis of certain assets and liabilities. The following table shows the significant components of our deferred taxes (dollars in thousands):


	As of December 31,
	2012			2011
Deferred tax assets:
Deferred revenue	$	336		$	1,217
Allowance for doubtful accounts		775			765
Accrued enhancement expense		1,101			1,349
Insurance reserves		1,159			1,281
Deferred lease credits		319			441
Share-based compensation		986			929
Vendor rebates		662			1,192
Investments		—			72
Property and equipment		1,549			778
Net operating and capital loss carryforward		17,563			13,749
Other		2,596			2,245
Valuation allowance		(26,377	)		(23,405	)

Total deferred tax assets	$	669		$	613

Deferred tax liabilities:
Deferred lease incentives	$	566		$	486
Prepaid service		103			124
Other		—			3

Total deferred tax liabilities	$	669		$	613

Net deferred tax assets	$	—		$	—

Changes in unrecognized tax benefits were as follows (dollars in thousands):


	2012			2011
Balance, beginning of year	$	614		$	539
Additions based on tax positions related to the current year		52			50
Additions for tax positions of prior years		1			49
Reductions for tax positions of prior years		—			—
Reductions due to statute expiration		(155	)		(24	)
Settlements		(4	)		—

Balance, end of year	$	508		$	614

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $380,000. It is reasonably possible that the amount of the unrecognized tax benefits may increase or decrease within the next 12 months. However, we do not presently anticipate that any increase or decrease in unrecognized tax benefits will be material to the Consolidated Financial Statements. We record unrecognized tax benefits as a component of “Accrued liabilities and other” in our Consolidated Balance Sheets.

We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense in the Consolidated Statements of Operations. During the year ended December 31, 2012, we recognized tax expense of approximately $24,000 in interest and penalties, offset by $105,000 benefit related to interest expense previously recognized on unrecognized tax benefits whose statute expired in 2012. We have accrued approximately $90,000 and $171,000 in interest and penalties related to unrecognized tax benefits as of December 31, 2012 and 2011, respectively, recorded as a component of “Accrued liabilities and other” in our Consolidated Balance Sheets.

We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and Canada. We are subject to audit by taxing authorities for fiscal years ending after 2010. Our federal and state income tax return filings generally are subject to a three-year statute of limitations from date of filing. During 2012, the Internal Revenue Service began, and completed, an audit for the 2010 tax year without audit adjustments.