INCOME TAXES

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



	Years Ended December 31,
	2016			2015			2014
United States	$	(5,306	)	$	(244	)	$	(3,369	)
Foreign	8,777			2,152			3,911
	$	3,471		$	1,908		$	542

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



	Years Ended December 31,
	2016			2015			2014
Current:
Federal	$	—		$	—		$	—
State	—			(13		)	(11		)
Foreign	2,103			1,494			1,686
	2,103			1,481			1,675
Deferred:
Federal	—			—			—
State	—			—			—
Foreign	(861		)	(1,112		)	1,566
	(861		)	(1,112		)	1,566
Total	$	1,242		$	369		$	3,241

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,
	2016			2015			2014
Statutory federal income tax rate	$	1,180		$	649		$	184
State income taxes, net of federal effect	(173		)	(240		)	(189		)
Deferred tax true-up	(4,103		)	8,078			—
Change in deferred tax asset valuation allowance	4,877			(6,729		)	2,094
Foreign taxes in excess of U.S. statutory rate	(712		)	(223		)	714
Compensation deduction limitation	113			(1,201		)	381
Other, net	60			35			57
Total	$	1,242		$	369		$	3,241

The reconciliations shown above reflect changes to prior period schedules as a result of the reporting of discontinued operations for those periods. Additionally, it has been determined that permanent adjustments for compensation deduction limitations were inappropriately applied in 2014. This correction is reflected as a credit in the rate reconciliation for 2015. There was an offsetting increase in the valuation allowance for the 2015 deduction recorded.

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,
	2016		2015
Deferred income tax assets:
Accounts payable and accrued expenses	$	737	$	954
Accrued payroll and related expenses	3,062		1,713
Stock-based compensation expense	3,531		2,668
Depreciation of property and equipment	2,579		3,061
Capitalized software	—		94
Non-compete agreements	—		—
Unbilled receivables and refund liabilities	2,216		2,029
Operating loss carry-forwards of foreign subsidiary	10,907		3,275
Federal operating loss carry-forwards	33,087		31,884
State operating loss carry-forwards	3,919		4,038
Other	1,181		883
Gross deferred tax assets	61,219		50,599
Less valuation allowance	50,114		45,565
Gross deferred tax assets net of valuation allowance	11,105		5,034
Deferred income tax liabilities:
Intangible assets	2,299		2,775
Capitalized software	1,928		—
Other	4,609		898
Gross deferred tax liabilities	8,836		3,673
Net deferred tax assets	$	2,269	$	1,361

During 2016, the Company recorded deferred tax assets and liabilities associated with foreign jurisdictions where branch operations are conducted. The deferred tax impacts were generally offset by changes to the Company's valuation allowance and have been reflected in the 2016 year end balances noted above.

During 2015, the Company undertook a detailed review of the Company's deferred taxes and it was determined that some reclassifications and adjustments were needed. All adjustments were offset by changes to the Company's valuation allowance and have been reflected in the 2015 year end balances noted above.

Our reported effective tax rates on income approximated 35.8% in 2016, 19.3% in 2015, and 598.0% in 2014. 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, 2015, 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 $50.1 million as of December 31, 2016, representing a change of $4.5 million from the valuation allowance of $45.6 million recorded as of December 31, 2015.

In 2015, management determined that a valuation allowance was no longer required against the deferred tax assets of one of its foreign subsidiaries. As of December 31, 2015, we had gross deferred tax assets of $1.5 million relating to this subsidiary. The benefit of these deferred tax assets is reflected as a credit to tax expense of $1.5 million during the year ended December 31, 2015.

In 2016, management determined that a valuation allowance was no longer required against the deferred tax assets of certain of its foreign subsidiaries. As of December 31, 2016, we had gross deferred tax assets of $8.4 million relating to those foreign subsidiaries. The benefit of these deferred tax assets is reflected as a credit of $1.7 million to tax expense during the year ended December 31, 2016.

As of December 31, 2016, we had approximately $94.5 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 2035. As of December 31, 2016, we had approximately $135.1 million of state loss carry-forwards available to reduce future state taxable income. The state loss carry-forwards expire to varying degrees between 2021 and 2036 and are subject to certain limitations. The state loss carry-forwards at December 31, 2016, reflect adjustments for prior period write-downs associated with ownership changes for state tax purposes.

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 and Brazilian subsidiaries, we assert that we are not permanently reinvested. We provided additional deferred taxes of $0.2 million in 2016, $0.3 million in 2015, and $0.2 million in 2014 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 and our Brazilian subsidiary did not have undistributed earnings during the year.

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 $94.5 million of U.S. federal loss carry-forwards available to the Company, $13.5 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. The Company believes that there has been an ownership change as defined under IRC Section 382 in the fourth quarter of 2016. The Company is currently assessing what impact this ownership change may have on our ability to utilize the reported net operating losses and related deferred tax assets in future periods.

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 number of years may elapse before a particular tax position is audited and finally resolved or when a tax assessment is raised. The number of years subject to tax assessments also varies by tax jurisdictions. As a part of an ongoing Canadian tax audit, we continue to defend our tax position related to the valuation of an intercompany transaction. While we have established accruals for this matter, an assessment by the Canadian Revenue Authority may exceed such amounts.

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, 2014	$	724		$	260
Additions based on tax positions related to the current year	—			—
Additions based on tax positions related to the prior years	—			33
Decrease based on payments made during the year	—			—
Decreases based on tax positions related to the prior years	$	(47	)	$	(73	)
Balance at December 31, 2014	$	677		$	220
Additions based on tax positions related to the current year	—			—
Additions based on tax positions related to the prior years	—			24
Decreases based on payments made during the year	—			—
Decreases based on tax positions related to the prior years	(142		)	(42		)
Balance at December 31, 2015	$	535		$	202
Additions based on tax positions related to the current year	—			—
Additions based on tax positions related to the prior years	—			11
Decreases based on payments made during the year	—			—
Decreases based on tax positions related to the prior years	(38		)	(59		)
Balance at December 31, 2016	$	497		$	154

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, 2016, the 2013 through 2015 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 2013 may also subject returns for those years to examination.