7. Income Taxes

Income tax expense from continuing operations consists of the following for the years ended December 31:


	2012		2011
	(in thousands)
Current:
Federal	$	12	$	—
State		66		91

		78		91
Deferred:
Federal		225		218
State		41		40

		266		258

Total income tax expense	$	344	$	349

The reconciliations of the U.S. federal statutory rate to the effective income tax rate for the years ended December 31, 2012 and 2011 are as follows:


	2012			2011
Tax provision at U.S. federal statutory rates		35.0	%		35.0	%
State taxes		5.9			11.9
State rate adjustment		8.8			—
Non-deductible permanent items		0.7			2.0
Stock options		3.4			0.4
Other		(0.7	)		9.2
Change in federal valuation allowance		(33.2	)		(12.9	)

Effective income tax rate		19.9	%		45.6	%

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred taxes as of December 31, 2012 and 2011 are as follows:


	2012			2011
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts	$	160		$	211
Accrued liabilities		248			269
Net operating loss carry-forwards		40,350			40,845
Fixed assets		144			134
Intangible assets		1,991			2,229
Share-based compensation expense		944			696
Deferred revenue		2			4
Other		44			69

Total gross deferred tax assets		43,883			44,457
Valuation allowance		(43,883	)		(44,457	)
Deferred tax liabilities:
Tax deductible goodwill		(620	)		(354	)

Total gross deferred tax liabilities		(620	)		(354	)

Net deferred income taxes	$	(620	)	$	(354	)

At December 31, 2012, the Company had recorded a valuation allowance of $43.9 million on its net deferred tax assets. Based on the weight of available evidence, the Company believes that it is more likely than not that these deferred tax assets will not be realized.

The Company increased its deferred tax asset related to net operating loss carry-forwards ("NOLS") as of December 31, 2011 to $40.8 million in order to reflect NOLs for certain states that were not previously presented as part of the deferred tax balance. The increase in the deferred tax asset was offset by a corresponding increase of the valuation allowance.

The Company reduced its deferred tax asset related to share-based compensation expense as of December 31, 2011 to $0.7 million to reflect the reversal of amounts attributable to share-based awards forfeited by individuals that are no longer employed with the Company. The adjustment resulted in a corresponding reduction of the valuation allowance.

At December 31, 2012, the Company had federal and state NOLs of approximately $106.4 million and $65.9 million, respectively. The federal NOLs expire through 2031 as follows (in millions):


2021	$	24.4
2022		1.7
2023		—
2024		4.1
2025		7.7
2026		26.4
2027		15.5
2028		5.1
2029		8.6
2030		11.6
2031		1.3

	$	106.4

The state NOLs expire through 2031 as follows (in millions):


2013	$	3.1
2014		4.6
2015		6.6
2016		21.3
2017		3.2
2028		2.7
2029		5.8
2030		11.0
2031		1.4
California NOLs		59.7
Other State NOLs		6.2
Total State NOLs	$	65.9

Utilization of the net operating loss and tax credit carry-forwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), as well as similar state provisions. These ownership changes may limit the amount of NOL carry-forwards that can be utilized annually to offset future taxable income and tax, respectively. A Section 382 ownership change occurred in 2006; however, based on management's current estimate, this change does not limit the utilization of the NOLs presented above as of December 31, 2012. As a result of an acquisition in 2001, approximately $9.9 million of the NOLs are subject to an annual limitation of approximately $0.5 million per year.

The federal and state net operating losses begin to expire in 2021 and 2013, respectively. Approximately $10.8 million and $5.0 million, respectively, of the federal and state net operating loss carry-forwards were incurred by subsidiaries prior to the date of the Company's acquisition of such subsidiaries. The Company established a valuation allowance of $4.1 million at the date of acquisitions related to these subsidiaries. The tax benefits associated with the realization of such net operating losses will be credited to the provision for income taxes. In addition, federal and state net operating losses of approximately $13.5 million and $8.5 million, respectively, relate to stock option deductions. Therefore, to the extent that the valuation allowance is reduced in the future and such options are realized, approximately $4.7 million and $0.5 million, respectively, will be credited to stockholders' equity rather than to income tax benefit.

At December 31, 2012, deferred tax assets exclude approximately $0.6 million and $0.1 million of tax-effected federal and state net operating losses pertaining to tax deductions from stock-based compensation. Upon future realization of these benefits, the Company expects to increase additional paid-in capital and reduce income taxes payable. The benefit of excess stock option deductions is not recorded until such time that the deductions reduce income taxes payable. For purposes of determining when the stock options reduce income taxes payable, the Company has adopted the "with and without" approach whereby the Company considers net operating losses arising from continuing operations prior to net operating losses attributable to excess stock option deductions.

At December 31, 2012, the Company has federal and state research and development tax credit carry-forwards of $0.3 million and $0.2 million, respectively. The federal credits begin to expire in 2021. The state credits do not expire.

As of December 31, 2012 and 2011, the Company had unrecognized tax benefits of approximately $0.6 million and $0.5 million, respectively, all of which, if subsequently recognized, would have affected the Company's tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


	2012		2011
	(in thousands)
Balance at January 1,	$	500	$	500
Additions based on tax positions related to the current year		—		—
Additions based on tax positions related to prior years		136
Reductions based on tax positions related to prior years and settlements		—		—
Reductions based on the lapse of the statutes of limitations		—		—

Balance at December 31,	$	636	$	500

The Company files income tax returns in the United States and various state jurisdictions. In general, the Company is no longer subject to U.S. federal and state income tax examinations for years prior to 2007 (except for the use of tax losses generated prior to 2007 that may be used to offset taxable income in subsequent years). The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.

The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company accrued $13,000 and $0 of interest, respectively, associated with its unrecognized tax benefits in the years ended December 31, 2012 and 2011.

The Company was under examination by the New York State Department of Taxation and Finance for income tax for the period January 1, 2006 through December 31, 2008. The Company paid $24,000 to the New York Department of Taxation and Finance in 2012 related to this income tax audit and the audit is now closed.