8. Income Taxes

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

	2013			2012
	(in thousands)
Current:
Federal	$	95		$	12,000
State		113			66
		208			78
Deferred:
Federal		1,353			225
State		902			41
		2,255			266

Valuation Allowance Release		(37,527	)		-

Total income tax expense	$	(35,064	)	$	344

The reconciliations of the U.S. federal statutory rate to the effective income tax rate for the years ended December 31, 2013 and 2012 are as follows:

	2013			2012
Tax provision at U.S. federal statutory rates		34.0	%		35.0	%
State taxes		3.5			5.9
State rate adjustment		0.5			8.8
Non-deductible permanent items		0.6			0.7
Stock options		0.4			3.4
Other		0.5			(0.7	)
Change in federal valuation allowance		(1,219.1	)		(33.2	)
Effective income tax rate		-1,139.1	%		19.9	%

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, 2013 and 2012 are as follows:

	2013			2012
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts	$	149		$	160
Accrued liabilities		832			248
Net operating loss carry-forwards		37,426			40,350
Fixed assets		111			144
Intangible assets		2,006			1,991
Share-based compensation expense		1,143			944
Deferred revenue		-			2
Other		184			44
Total gross deferred tax assets		41,851			43,883
Valuation allowance		(6,356	)		(43,883	)
		35,495

Deferred tax liabilities:
Tax deductible goodwill		(843	)		(620	)
Total gross deferred tax liabilities		(843	)		(620	)
Net deferred income taxes	$	34,652		$	(620	)

During 2013 management assessed the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. Significant pieces of objective positive evidence evaluated were the cumulative earnings generated over the three-year period ended December 31, 2013 and the Company's strong future earnings projections. Based on this evaluation, as of December 31, 2013, the Company reversed $37.5 million of its valuation allowance.We believe, however, that it is more likely than not that $1.6 million in state net operating loss carryforwards will not be realized. Accordingly, a valuation allowance has been placed on these state net operating losses. In addition, included in the NOL deferred tax asset above is approximately $13.5 million and $6.6 million for federal and state, respectively, of deferred tax asset attributable to excess stock option deductions. Due to a provision within ASC Topic 718, Compensation – Stock Compensation ("ASC 718"), concerning when tax benefits related to excess stock option deduction can be credited to paid-in-capital, the related valuation allowance of $4.8 million cannot be reversed, even if the facts and circumstances indicate that it is more likely than not that the deferred tax asset can be realized. The valuation allowance will only be reversed as the related deferred tax asset is applied to reduce taxes payable. The Company follows ASC 740 ordering to determine when such NOL has been realized.

At December 31, 2013, the Company had federal and state net operating loss carry-forwards ("NOLs") of approximately $100.9 million and $66.1 million, respectively. The federal NOLs expire through 2031 as follows (in millions):

2021	$	21.6
2022		1.7
2023		-
2024		4.1
2025		7.7
2026		25.5
2027		15.5
2028		5.2
2029		7.7
2030		10.6
2031		1.3
	$	100.9

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

2014	$	4.6
2015		6.6
2016		20.6
2017		3.2
2028		2.6
2029		5.8
2030		11.0
2031		1.3
California NOLs		55.7
Other State NOLs		10.4
Total State NOLs	$	66.1

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 and any changes have been reflected in the NOLs presented above as of December 31, 2013. 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 2014, 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. During 2013, the valuation allowance has been reversed. 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 $6.7 million, respectively, relate to stock option deductions. Therefore, once the stock option deductions reduce income taxes payable in the future in accordance with ASC 718, approximately $4.6 million and $0.2 million, respectively, will be credited to stockholders' equity rather than to income tax benefit.

At December 31, 2013, 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, 2013, 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, 2013 and 2012, the Company had unrecognized tax benefits of approximately $0.6 million and $0.6 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:


	2013		2012
	(in thousands)
Balance at January 1,	$	636	$	500
Additions based on tax positions related to prior years		-		136

Balance at December 31,	$	636	$	636

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 2008 (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 $20,000 and $13,000 of interest, respectively, associated with its unrecognized tax benefits in the years ended December 31, 2013 and 2012.