Note 5 - Income Taxes

12 Months Ended

Dec. 31, 2015

5. Income Taxes

Income before income taxes is summarized as follows (in thousands):

	Year Ended December 31,
	20 15		20 14
Domestic	$	517	$	1,265
Foreign		2,777		2,158
Total:	$	3,294	$	3,423

The income tax benefit is summarized as follows (in thousands):

	Year Ended December 31,
	20 15			20 14
Current:
Federal	$	2		$	15
Foreign		949			623
State		76			116

Deferred:
Federal		(192	)		(1,525	)
Foreign		(65	)		(8	)
State		49			(169	)
Net expense (benefit)	$	819		$	(948	)

The provision for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The items causing this difference are as follows (dollars in thousands):

	Year Ended December 31,
	20 15			Rate			20 14			Rate
Provision for income taxes at federal statutory rate	$	1,120			34.0	%	$	1,164			34.0	%
State income taxes, net of federal benefit		30			0.9	%		37			1.1	%
Permanent differences		28			0.8	%		(79	)		(2.3	%)
Federal Research and Development Credit		(192	)		(5.8	)%		–			–	%
Change in valuation allowance		–			–	%		(1,900	)		(55.5	%)
Return to provision		(51	)		(1.5	)%		–			–	%
Foreign tax rate differential		(60	)		(1.8	)%		(161	)		(4.7	%)
Other		(56	)		(1.7	)%		(9	)		(0.3	%)
Net (benefit) expense	$	819			24.9	%	$	(948	)		(27.7	%)

Deferred taxes consist of the following (in thousands):	December 31,
	20 15		20 14
Deferred tax assets:
Net operating loss carry forwards	$	2,929	$	3,163
Federal Research and Development Credit		192		–
Deferred revenue		165		157
Allowance for doubtful accounts and other receivable		78		80
Share-based compensation expense		769		604
Foreign subsidiaries		529		464
Depreciation		479		174
Other		38		166
Federal Alternative Minimum Tax		116		–
Total deferred tax assets		5,295		4,808

Deferred tax liabilities:
Goodwill		307		128
Capitalized software development costs		723		622
Total deferred tax liabilities		1,030		750
Net deferred taxes	$	4,265	$	4,058

At December 31, 2015, and December 31, 2014, the Company has Federal and State NOL carryforwards of $7.7 million and $8.4 million, respectively, which if unused will expire in years 2018 through 2029.

Approximately $1.8 million of the NOLs were incurred prior to the acquisition of PIA Merchandising Services, Inc. in 1999. The acquisition resulted in a change of ownership under Internal Revenue Code ("IRC") section 382 and placed a limit on the amount of pre-acquisition NOLs that may be used each year to reduce taxable income. The annual limitation is $657,500.

The Company does not provide currently for U.S. income taxes on the undistributed earnings of its profitable foreign subsidiaries (which are approximately $2.5 million as of December 31, 2015), since, at the present time, management expects any earnings to be reinvested in the foreign subsidiaries and not distributed. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. income taxes, which could potentially be offset by foreign tax credits. Distribution of those earnings can also subject the Company to related withholding taxes payable to various non-U.S. jurisdictions. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculations.

A reconciliation of the beginning and ending amount of uncertain tax position reserves is as follows (in thousands):

	Year Ended December 31,
	20 15		20 14
Beginning balance	$	113	$	102
Additions for tax provisions of prior years		3		11
Ending balance	$	116	$	113

Interest and penalties that the tax law requires to be paid on the underpayment of taxes should be accrued on the difference between the amount claimed or expected to be claimed on the return and the tax benefit recognized in the financial statements. The Company's policy is to record this interest and penalties as additional tax expense.

Details of the Company's tax reserves at December 31, 2015, are outlined in the table below (in thousands):

	Taxes		Interest		Penalty		Total Tax Liability
Domestic
State	$	116	$	40	$	8	$	164
Federal		–		–		–		–
International		–		–		–		–
Total reserve	$	116	$	40	$	8	$	164

In management's view, the Company's tax reserves at December 31, 2015, for potential domestic state tax liabilities were sufficient. The Company has evaluated the tax liabilities of its international subsidiaries and does not believe a reserve is necessary at this time.

SPAR and its subsidiaries file numerous consolidated, combined and separate company income tax returns in the U.S. Federal jurisdiction and in many U.S. states and foreign jurisdictions. With few exceptions, SPAR is subject to U.S. Federal, state and local income tax examinations for the years 2012 through the present. However, tax authorities have the ability to review years prior to the position taken by the Company to the extent that SPAR utilized tax attributes carried forward from those prior years.