NOTE 10: INCOME TAXES

Income (loss) before income taxes consisted of the following:

	Year Ended December 31,
	2014			2013		2012
	(in thousands)
Income (loss) before income taxes
United States	$	(20,892	)	$	12,273	$	32,148
Foreign		15,040			4,832		3,258

Total	$	(5,852	)	$	17,105	$	35,406

Income tax expense (benefit) for 2014, 2013 and 2012 consists of the following:

	Year Ended December 31,
	2014			2013			2012
	(in thousands)
Current:
Federal	$	(6,735	)	$	9,121		$	9,447
State		(362	)		1,849			1,221
Foreign		3,120			1,542			838

Total current		(3,977	)		12,512			11,506

Deferred:
Federal		2,599			(4,687	)		946
State		(3,270	)		(1,724	)		619
Foreign		133			(106	)		(92	)

Total deferred		(538	)		(6,517	)		1,473

Total income tax expense (benefit)	$	(4,515	)	$	5,995		$	12,979

The jurisdictions where we generate income (or loss) before income taxes have a significant effect on our effective tax rate. In 2014, we incurred a pre-tax loss in the U.S. and pre-tax income in our primary foreign jurisdictions. The income (or loss) earned in the United States will be subject to an approximate 42% combined statutory federal and state tax rate. Our foreign-sourced income (or loss), which is earned primarily in the United Kingdom, will be subject to a statutory rate of approximately 22%. In 2014, the significantly higher tax rate in computing the tax benefit on the U.S. losses than the tax rate used in computing the tax expense on the foreign income results in an overall effective tax rate that is not customary.

The following is a summary of our income tax expense (benefit) and resulting effective tax rate by jurisdiction:

	Year Ended December 31,
	2014			2013			2012
	(in thousands)
Income tax expense (benefit) by jurisdiction:
United States	$	(7,768	)	$	4,559		$	12,233
Foreign		3,253			1,436			746

Consolidated income tax expense (benefit)	$	(4,515	)	$	5,995		$	12,979

Effective income tax rate by jurisdiction:
United States		37.2	%		37.1	%		38.1	%
Foreign		21.6	%		29.7	%		22.9	%
Consolidated effective tax rate		77.2	%		35.0	%		36.7	%

A reconciliation of the provision for income taxes at the statutory rate of 35% to the provision for income taxes at our effective rate is shown below:

	Year Ended December 31,
	2014			2013			2012
	(in thousands)
Income tax expense (benefit) at the statutory rate	$	(2,048	)	$	5,987		$	12,392
Change in taxes resulting from:
State income taxes, net of federal tax effect		(1,922	)		81			1,136
Foreign tax and change in foreign valuation allowance		(2,032	)		(322	)		(394	)
Permanent differences		1,189			797			578
Uncertain tax positions		(112	)		447			—
Research and development credits		(513	)		(676	)		(239	)
Nondeductible compensation		411			—			—
Share-based compensation		469			—			—
Domestic production activities deduction		(5	)		(422	)		(568	)
Other		48			103			74

Total income tax expense (benefit)	$	(4,515	)	$	5,995		$	12,979

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities on the accompanying Consolidated Balance Sheets are as follows:

	December 31,
	2014			2013
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts	$	1,379		$	1,661
Share-based compensation		6,206			10,474
Intangible assets		2,408			2,653
Deferred rent		426			527
Accrued liabilities		4,765			2,094
Cash flow hedges		1,067			—
Other		195			—
Foreign loss carryforwards		831			639
State net operating loss carryforwards		3,579			838
Valuation allowances		(1,903	)		(808	)

Total deferred tax assets		18,953			18,078

Deferred tax liabilities:
Prepaid expenses		(1,875	)		(2,199	)
Intangible assets		(33,655	)		(33,300	)
Property and equipment and software development costs		(11,324	)		(11,321	)
Deferred debt discharge income		(1,985	)		(2,649	)
Other		—			(100	)

Total deferred tax liabilities		(48,839	)		(49,569	)

Net deferred tax liability	$	(29,886	)	$	(31,491	)

Prior to our acquisition of Encore, as part of a debt restructuring in 2009, Encore elected to defer recognition of approximately $8.9 million of debt discharge income pursuant to Section 108(i) of the Internal Revenue Code of 1986, as amended. For each year 2013 through 2017, we will include approximately $1.8 million of deferred debt discharge income in taxable income.

In 2014, we generated a federal net operating loss of approximately $15.0 million, which we will carry back to our 2012 tax year. We have recorded a corresponding $5.0 million current federal income tax receivable. In February 2015, we filed for a $2.9 million refund for taxes which had been credited to our 2014 tax year. As of December 31, 2014, we have generated state operating loss carryforwards totaling $44.9 million which generated a deferred tax asset included above of $3.6 million. These carryforwards expire in varying amounts in years 2015 through 2034. Of these carryforwards, $4.7 million was generated in states in which management believes it is unlikely that we will be able to utilize these carry forwards. A $0.2 million valuation allowance was recorded relating to these losses.

In 2014, we have recorded a $0.5 million tax expense relating to tax detriments which exceeded our available tax benefit pool. As a result of the realization requirements of ASC 718 "Compensation—Stock Compensation" for tax benefits relating to the exercise of stock options, the state net operating loss carryforward deferred tax asset presented in the table above excludes certain deferred tax assets relating to state net operating losses generated in 2014. These losses arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Equity will be increased by $0.2 million if and when such deferred tax assets are ultimately realized. We use tax law ordering for the purpose of determining when excess tax benefits have been realized.

As of December 31, 2014, we have recorded a $0.8 million valuation allowance relating to approximately $2.3 million of net operating losses generated in international jurisdictions. This valuation allowance will be released when management believes it is more likely than not that based on the available positive and negative evidence the losses will be utilized.

We have received certification for the Kansas High Performance Incentive Program ("HPIP") tax credit in conjunction with investments made in our Kansas facilities. As of December 31, 2014, $1.8 million of HPIP credits were available to offset our 2015 and future Kansas income tax. The credit may be carried forward for a period of sixteen years provided we continue to meet the HPIP certification requirements. Due to this uncertainty, we have recorded a $0.9 million valuation allowance against these credits.

On December 19, 2014, the Tax Increase Prevention Act of 2014 was passed and is effective for the tax year ending December 31, 2014. Accordingly, a research tax benefit of approximately $0.5 million is reflected our 2014 results. The research credit was not extended beyond 2014 and if not extended, this would increase our effective tax rate in future tax periods.

In March 2014, New York State passed comprehensive corporate income tax reform with most changes effective for years 2015 and beyond. We have substantial business presence within the state, but we do not expect the new law to have a material impact on our overall expected future tax expense.

The net deferred tax liability is presented on the Consolidated Balance Sheets as follows:

	December 31,
	2014			2013
	(in thousands)
Current deferred income taxes	$	4,625		$	3,824
Other long-term assets		139			243
Long-term deferred income tax liability		(34,650	)		(35,558	)

Net deferred tax liability	$	(29,886	)	$	(31,491	)

United States income and foreign withholding taxes have not been recognized on the excess of earnings for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. Generally, such earnings become subject to United States taxation upon the remittance of dividends or a sale or liquidation of the foreign subsidiary. The amount of such excess totaled approximately $23.9 million at December 31, 2014. It is not practicable to estimate the amount of any deferred tax liability related to this amount.

As of December 31, 2014, 2013 and 2012, the gross amount of unrecognized tax benefits, including penalty and interest, was approximately $6.3 million, $6.4 million and $5.4 million, respectively. If recognized, approximately $5.1 million, $5.2 million and $4.4 million would have affected our effective tax rate in 2014, 2013, and 2012, respectively.

The following table summarizes the activity related to our gross unrecognized tax benefits excluding interest and penalties (in thousands):

	2014			2013			2012
Unrecognized tax benefits as of January 1	$	5,326		$	4,639		$	4,164
Gross increases for prior year tax positions		190			243			1,266
Gross decreases for prior year tax positions		(60	)		(53	)		—
Gross increase for current year tax positions		197			530			323
Settlements		—			(33	)		(755	)
Lapse of statute of limitations		(533	)		—			(359	)

Unrecognized tax benefits at December 31	$	5,120		$	5,326		$	4,639

We file income tax returns in the United States federal jurisdiction, the United Kingdom, Hong Kong, Japan, Canada and various state jurisdictions. We have also made an evaluation of the potential impact of assessments by state and foreign jurisdictions in which we have not filed tax returns.

As of December 31, 2014, the 2011 and subsequent federal, state and foreign tax returns are subject to examination. In addition, the 2010 statute of limitations remains open in certain state and foreign jurisdictions. It is reasonably possible that approximately $0.8 million of unrecognized tax benefits will be recognized in the next twelve months due to statute closings of which $0.6 million will affect our effective tax rate.

During 2013, we were informed that our income tax returns for the years ended December 31, 2009, 2010 and 2011 would be audited by the State of New York. In addition, in January 2014, we were informed that our income tax returns for 2010 and 2011 would be audited by New York City. During 2014, we settled both the New York State and City audits for immaterial amounts.

In 2012, we increased our unrecognized tax benefits for prior year tax positions by $1.3 million. This increase is due to filing amended state returns to claim refunds and to claim credits that will be carried forward to future years. Also, during 2012, the Internal Revenue Service concluded their examination of our 2009 federal return and determined that no additional taxes were owed. As a result, we considered 2009 to be effectively settled and recognized $0.2 million of unrecognized tax benefits which affected our effective tax rate.

We have classified interest and penalties as a component of income tax expense. Estimated interest and penalties classified as a component of income tax expense during 2014, 2013, and 2012 totaled $0.2 million, $0.2 million and $0.1 million, respectively. Accrued interest and penalties, included as a component of "Other long-term liabilities" on the accompanying Consolidated Balance Sheets, totaled $1.0 million and $0.2 million, respectively, as of December 31, 2014. As of December 31, 2013, the accrued interest and penalties were $0.8 million and $0.2 million, respectively.