Income Taxes

12 Months Ended

Dec. 31, 2013

Income Taxes

Income Taxes

(7) Income Taxes

The components of income (loss) from continuing operations before income taxes are as follows

	Years ended December 31,
	2013		2012		2011
	(in thousands)
US	$	10,408	$	2,335	$	23,902
Non U.S.	892		361		(17		)
Income from continuing operations before income taxes	11,300		2,696		23,885

The components of income tax expense for the years ended December 31, 2013, 2012 and 2011, included in the accompanying consolidated statements of income were as follows:

	Federal			State			Foreign		Total
	(in thousands)
December 31, 2013
Current	$	(155	)	$	123		$	95	$	63
Deferred	(3,755		)	(634		)	—		(4,389		)
Total 2013	$	(3,910	)	$	(511	)	$	95	$	(4,326	)
December 31, 2012
Current	$	175		$	37		$	—	$	212
Deferred	707			242			—		949
Total 2012	$	882		$	279		$	—	$	1,161
December 31, 2011
Current	$	1,373		$	(331	)	$	—	$	1,042
Deferred	9,783			(1,448		)	—		8,335
Total 2011	$	11,156		$	(1,779	)	$	—	$	9,377

The following is a reconciliation of the federal income tax expense at the statutory rate of 34% to the effective income tax expense:

	Years Ended December 31,
	2013				2012				2011
	(in thousands and % of pre-tax income)
	$		%		$		%		$		%
Statutory federal income tax expense	3,842		34.0		916		34.0		8,147		34.0
State taxes, net of federal benefit	(338	)	(3.0	)	185		6.9		(38	)	(0.2	)
Foreign tax paid	95		0.8		—		—		—		—
State income tax apportionment adjustment	—		—		—		—		(1,137	)	(4.7	)
Extraterritorial income exclusion	—		—		—		—		(7	)	—
Tax consequences of the sale of engines to WMES	(36	)	(0.3	)	(46	)	(1.7	)	1,214		5.1
Uncertain tax positions	160		1.4		97		3.6		195		0.8
Permanent differences-162(m)	732		6.5		385		14.3		737		3.1
ETI basis restoration	(8,728	)	(77.2	)	—		—		—		—
Permanent differences and other	(53	)	(0.5	)	(376	)	(14.1	)	266		1.0
Effective income tax expense (benefit)	(4,326	)	(38.3	)	1,161		43.0		9,377		39.1

In 2011, we determined that a number of assets and their associated leases qualify for exclusion from federal taxable income under the Extraterritorial Income Exclusion rules, resulting in a reduction in the federal effective tax rate in those years. In 2012, these assets and their associated leases no longer qualify for exclusion from federal taxable income under the Extraterritorial Income Exclusion rules.

In 2011, the Company’s effective tax rate was reduced by $1.1 million related to a change in California state tax law enacted during 2009 regarding state apportionment of income which became effective in 2011.

In 2013, we recorded an income tax benefit of $8.7 million related to an extraterritorial income (“ETI”) adjustment for certain of our engines. We recognized this income tax benefit in the current period resulting from adjustments made to the tax basis of certain of our engines due to a decision in a recent court case on behalf of another company in which our circumstances are similar. The Company records tax expense or benefit for unusual or infrequent items discretely in the period in which they occur.

The following table summarizes the activity related to the Company’s unrecognized tax benefits:

	(in thousands)
Balance as of December 31, 2011	$	308
Increases related to current year tax positions	98
Balance as of December 31, 2012	406
Increases related to current year tax positions	160
Balance as of December 31, 2013	$	566

As of December 31, 2013, we reserved $0.2 million for the benefit resulting from the Extraterritorial Income Exclusion noted above.  As of December 31, 2012 and 2011, we reserved $0.1 million and $0.2 million, respectively, for tax exposure in Europe, no reserve was established as of December 31, 2013 for the exposure in Europe. If the Company is able to eventually recognize these uncertain tax positions, all of the unrecognized benefit would reduce the Company’s effective tax rate.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:

	As of December 31,
	2013			2012
	(in thousands)
Deferred tax assets:
Unearned lease revenue	$	1,134		$	1,550
State taxes	532			706
Reserves and allowances	853			1,596
Other accruals	1,048			962
Alternative minimum tax credit	377			542
Net operating loss carry forward	36,778			32,470
Charitable contributions	17			18
Total deferred tax assets	40,739			37,844
Deferred tax liabilities:
Depreciation and impairment on aircraft engines and equipment	(125,675		)	(124,292		)
Other deferred tax liabilities	(1,575		)	(4,451		)
Net deferred tax liabilities	(127,250		)	(128,743		)
Other comprehensive income, deferred tax asset	(174		)	261
Net deferred tax liabilities	$	(86,685	)	$	(90,638	)

As of December 31, 2013, we had net operating loss carry forwards of approximately $103.6 million for federal tax purposes and $19.2 million for state tax purposes. The federal net operating loss carry forwards will expire at various times from 2022 to 2033 and the state net operating loss carry forwards will expire at various times from 2016 to 2023. The Company’s ability to utilize the net operating loss and tax credit carry forwards in the future may be subject to restriction in the event of past or future ownership changes as defined in Section 382 of the Internal Revenue Code and similar state tax law. As of December 31, 2013, we also had alternative minimum tax credit of approximately $0.3 million for federal income tax purposes which has no expiration date and which should be available to offset future regular tax liabilities. Management believes that no valuation allowance is required on deferred tax assets, as it is more likely than not that all amounts are recoverable through future taxable income.

Deferred tax assets relating to tax benefits of employee stock option grants have been reduced to reflect exercises in 2013.  Some exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant (“windfall”).  Although these additional tax benefits are reflected in net operating tax loss carryforwards, pursuant to ASC 718, in the amount of $0.5 million as of December 31, 2013, the additional tax benefit associated with the windfall is not recognized until the deduction reduces taxes payable. The tax effect of windfalls included in net operating loss carryforwards but not reflected in deferred tax assets for 2013 are $0.2 million and will be recorded to paid in capital when recognized.