INCOME TAXES

Income (loss) before income taxes relate to the following jurisdictions (in thousands):



	Years Ended December 31,
	2013			2012		2011
United States	$	(5,457	)	$	3,158	$	(3,182	)
Foreign	8,026			3,531		7,290
	$	2,569		$	6,689	$	4,108

The provision for income taxes consists of the following (in thousands):



	Years Ended December 31,
	2013			2012			2011
Current:
Federal	$	—		$	78		$	—
State	(452		)	(30		)	79
Foreign	3,230			2,048			3,364
	2,778			2,096			3,443
Deferred:
Federal	—			—			(1,603		)
State	—			—			(133		)
Foreign	(23		)	(799		)	(415		)
	(23		)	(799		)	(2,151		)
Total	$	2,755		$	1,297		$	1,292

The significant differences between the U.S. federal statutory tax rate of 34% and the Company’s effective income tax expense for earnings (in thousands) are as follows:



	Years Ended December 31,
	2013			2012			2011
Statutory federal income tax rate	$	873		$	2,274		$	1,397
State income taxes, net of federal effect	(657		)	24			(130		)
Change in deferred tax asset valuation allowance	(142		)	(1,883		)	(1,910		)
Foreign taxes in excess of U.S. statutory rate	1,784			486			1,481
Compensation deduction limitation	820			265			360
Other, net	77			131			94
	$	2,755		$	1,297		$	1,292

The tax effects of temporary differences and carry-forwards that give rise to deferred tax assets and liabilities consist of the following (in thousands):



	Years Ended December 31,
	2013		2012
Deferred income tax assets:
Accounts payable and accrued expenses	$	1,864	$	2,088
Accrued payroll and related expenses	1,933		3,902
Stock-based compensation expense	9,811		9,221
Depreciation of property and equipment	5,836		3,746
Non-compete agreements	8		27
Operating loss carry-forwards of foreign subsidiary	1,690		1,501
Federal operating loss carry-forwards	31,003		27,494
Intangible assets	865		6,195
State operating loss carry-forwards	2,925		2,648
Other	2,165		3,243
Gross deferred tax assets	58,100		60,065
Less valuation allowance	48,453		48,489
Gross deferred tax assets net of valuation allowance	9,647		11,576
Deferred income tax liabilities:
Intangible assets	3,970		5,790
Unbilled receivables and refund liabilities	1,765		2,538
Capitalized software	984		969
Other	1,220		675
Gross deferred tax liabilities	7,939		9,972
Net deferred tax assets	$	1,708	$	1,604

Our reported effective tax rates on income approximated 107.2% in 2013, 19.4% in 2012 and 31.5% in 2011. Reported income tax expense in each year primarily results from taxes on the income of foreign subsidiaries. The effective tax rates generally differ from the expected tax rate primarily due to the Company’s deferred tax asset valuation allowance on the domestic earnings and taxes on income of foreign subsidiaries.

We reduce our deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. In making this determination, we consider all available positive and negative evidence affecting specific deferred tax assets, including our past and anticipated future performance, the reversal of deferred tax liabilities, the length of carry-back and carry-forward periods and the implementation of tax planning strategies. Since this evaluation requires consideration of future events, significant judgment is required in making the evaluation, and our conclusion could be materially different should certain of our expectations not be met.

Objective positive evidence is necessary to support a conclusion that a valuation allowance is not needed for all or a portion of deferred tax assets when significant negative evidence exists. Cumulative tax losses in recent years are the most compelling form of negative evidence considered by management in this determination. As of December 31, 2013, management determined that based on all available evidence, a valuation allowance was required for all U.S. deferred tax assets due to losses incurred for income tax reporting purposes for the past several years. We recorded a valuation allowance of $48.5 million as of December 31, 2013, representing a change of less than $0.1 million from the valuation allowance of $48.5 million recorded as of December 31, 2012.

In 2011, management determined that a valuation allowance was no longer required against the deferred tax assets of one of its foreign subsidiaries given its return to profitability and future projected profitability. In the past two years, the foreign subsidiary did not meet its projections, and incurred losses in both 2012 and 2013. At December 31, 2013, we had gross deferred tax assets of $2.0 million relating to this subsidiary. Given the recent losses, management considered the need to record a valuation allowance against the net deferred tax assets of this foreign subsidiary. Our assessment considered both positive and negative evidence regarding future profitability. The positive evidence includes improvements we have made and plan to further in 2014 in the cost structure of the subsidiary; our recent expansion of services to a promising industry that we believe will help to improve the financial performance of the subsidiary; and our forecasts for future taxable income for this subsidiary. The negative evidence includes the recent losses generated by the subsidiary. After consideration of these factors, we determined that it was more likely than not that in future periods we will generate sufficient pre-tax income to utilize substantially all of the net deferred tax assets of this subsidiary, and we did not record a valuation allowance against the net deferred tax assets of this subsidiary.

As of December 31, 2013, we had approximately $88.6 million of U.S. federal loss carry-forwards available to reduce future U.S. federal taxable income. The U.S. federal loss carry-forwards expire through 2033. As of December 31, 2013, we had approximately $100.9 million of state loss carry-forwards available to reduce future state taxable income. The state loss carry-forwards expire to varying degrees between 2018 and 2033 and are subject to certain limitations.

Generally, we have not provided deferred taxes on the undistributed earnings of international subsidiaries as we consider these earnings to be permanently reinvested. As it relates to the earnings of our Canadian subsidiary, we assert that we are not permanently reinvested. We provided additional deferred taxes of $0.4 million in 2013, $0.2 million in 2012, and $0.2 million in 2011 representing the estimated withholding tax liability due if such amounts are repatriated. We did not provide additional incremental U.S. income tax expense on these amounts as the Canadian subsidiary is classified as a branch for U.S. income tax purposes.

On March 17, 2006, the Company experienced an ownership change as defined under Section 382 of the Internal Revenue Code (“IRC”). This ownership change resulted in an annual IRC Section 382 limitation that limits the use of certain tax attribute carry-forwards and also resulted in the write-off of certain deferred tax assets and the related valuation allowances that the Company recorded in 2006. Of the $88.6 million of U.S. federal loss carry-forwards available to the Company, $16.5 million of the loss carry-forwards are subject to an annual usage limitation of $1.4 million. The Company has reviewed subsequent potential ownership changes as defined under IRC Section 382 and has determined that on August 4, 2008, the Company experienced an additional ownership change. This subsequent ownership change did not decrease the original limitation nor did it impact the Company’s financial position, results of operations, or cash flows.

We apply a “more-likely-than-not” recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We refer to GAAP for guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Our policy for recording potential interest and penalties associated with uncertain tax positions is to record such items as a component of income before income taxes.

A reconciliation of our beginning and ending amount of unrecognized tax benefits and related accrued interest thereon is as follows:



	Unrecognized Tax Benefits			Accrued Interest and Penalties
Balance at January 1, 2011	$	2,055		$	1,765
Additions based on tax positions related to the current year	—			—
Additions based on tax positions related to the prior years	594			453
Balance at December 31, 2011	$	2,649		$	2,218
Additions based on tax positions related to the current year	—			—
Additions based on tax positions related to the prior years	333			456
Decreases based on tax positions related to the prior years	(785		)	(1,214		)
Balance at December 31, 2012	$	2,197		$	1,460
Additions based on tax positions related to the current year	—			—
Additions based on tax positions related to the prior years	—			119
Decreases based on payments made during the year	(932		)	(385		)
Decreases based on tax positions related to the prior years	(541		)	(934		)
Balance at December 31, 2013	$	724		$	260

The decreases in the unrecognized tax benefits and the related accrued interest and penalties in 2013 and 2012 occurred for several reasons, including the expiration of the statute of limitations for certain of these taxes in several states and in two foreign jurisdictions, completion of an audit by a foreign jurisdiction that resulted in a lower tax assessment than we had estimated, and the imposition of limitations on our potential liability resulting from our participation in voluntary disclosure agreement processes with several states. Due to the complexity of the tax rules underlying these unrecognized tax benefits, and the unclear timing of tax audits, tax agency determinations, and other events, we cannot establish reasonably reliable estimates for the periods in which the cash settlement of these liabilities will occur.

We file U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. As of December 31, 2013, the 2010 through 2012 tax years generally remain subject to examination by federal and most state and foreign tax authorities. The use of net operating losses generated in tax years prior to 2010 may also subject returns for those years to examination.