Income Taxes

12 Months Ended

Sep. 30, 2016

9. INCOME TAXES

Federal and state income tax provisions for continuing operations are as follows:

		Years Ended September 30,
		2016		2015		2014
Federal:
	Current	$	762	$	417	$	183
	Deferred		(97,093)		(564)		182
State:
	Current		952		729		554
	Deferred		(1,738)		79		(171)
		$	(97,117)	$	661	$	748

Actual income tax expense differs from income tax expense computed by applying the U.S. federal statutory corporate rate of 35 percent to income (loss) before income taxes as follows:

		Years Ended September 30,
		2016		2015		2014
Provision (benefit) at the statutory rate		$	8,316	$	6,139	$	2,195
Increase resulting from:
	Alternative minimum tax		-		417		-
	Non-deductible expenses		1,557		753		563
	Long-lived assets		-		69		-
	State income taxes, net of federal deduction		1,105		937		544
	Contingent tax liabilities		-		51		-
	Other		-		54		-
Decrease resulting from:
	Change in valuation allowance		(108,987)		(7,034)		(2,547)
	Valuation allowance adjustment - acquisitions		-		(725)		-
	Contingent tax liabilities		(96)		-		(1)
	Other		988		-		(6)
		$	(97,117)	$	661	$	748

Deferred income tax provisions result from temporary differences in the recognition of income and expenses for financial reporting purposes and for income tax purposes. The income tax effects of these temporary differences, representing deferred income tax assets and liabilities, result principally from the following:

		Years Ended September 30,
		2016		2015
Deferred income tax assets:
	Allowance for doubtful accounts	$	280	$	322
	Accrued expenses		10,729		9,186
	Net operating loss carryforward		86,280		99,610
	Various reserves		1,410		1,169
	Equity losses in affiliate		84		200
	Share-based compensation		1,012		573
	Capital loss carryforward		338		222
	Intangible assets		-		413
	Other		3,185		1,744
Subtotal			103,318		113,439
Less valuation allowance			2,224		111,211
Total deferred income tax assets		$	101,094	$	2,228
Deferred income tax liabilities:
	Property and equipment	$	1,517	$	599
	Intangible assets		5,629		1,084
	Other		399		343
Total deferred income tax liabilities			7,545		2,026
Net deferred income tax assets (liabilities)		$	93,549	$	202

In fiscal 2016, the valuation allowance on our deferred tax assets decreased by $108,987, which is included in our consolidated comprehensive income statement.

In 2002, we adopted a tax accounting method change that allowed us to deduct goodwill for income tax purposes that had previously been classified as non-deductible. The accounting method change resulted in additional amortizable tax basis in goodwill. We believe the realization of the additional tax basis in goodwill is not more likely than not and have not recorded a deferred tax asset. Although such a deferred tax asset has not been recorded through September 30, 2016, we have derived a cumulative cash tax reduction of $11,487 from the change in tax accounting method and the subsequent amortization of the additional tax goodwill. In addition, the amortization of the additional tax goodwill has resulted in additional federal net operating loss carry forwards of $142,052 and state net operating loss carry forwards of $11,227. We believe the realization of the additional net operating loss carry forwards is not more likely than not and have not recorded a deferred tax asset. We have zero tax basis in additional tax goodwill that will be amortized during the year ended September 30, 2017.

As of September 30, 2016, we had available approximately $404,032 of federal net tax operating loss carry forward for federal income tax purposes, including $142,052 resulting from the additional amortization of tax goodwill. This carry forward, which may provide future tax benefits, will begin to expire in 2025. On May 12, 2006, we had a change in ownership as defined in Internal Revenue Code Section 382. As such, our utilization after the change date of our net operating loss in existence as of the change of control date was subject to Section 382 limitations for federal income taxes and some state income taxes. The annual limitation under Section 382 on the utilization of federal net operating losses was approximately $20,000 for the first five tax years subsequent to the change in ownership and $16,000 thereafter. Approximately $299,904 of federal net operating losses will not be subject to this limitation. Also, after applying the Section 382 limitation to available state net operating loss carry forwards, we had available approximately $85,929 state net tax operating loss carry forwards, including $11,227 resulting from the additional amortization of tax goodwill which begins to expire as of September 30, 2017. We have provided valuation allowances on all net operating losses where it is determined it is more likely than not that they will expire without being utilized.

In assessing the realizability of deferred tax assets at September 30, 2016, we considered whether it was more likely than not that some portion or all of the deferred tax assets will not be realized. Our realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. Over the ten-year period from 2004 through 2013, the Company reported net losses each year, returning to profitability in the year ended September 30, 2014. Because of this substantial history of losses, a substantial amount of positive evidence regarding current and future earnings is required to outweigh the significant negative evidence associated with our historical losses. During the year ended September 30, 2016, we completed four acquisitions, and as of the end of the fourth quarter 2016, all four 2016 acquisitions have been integrated, and are contributing to the Company’s profitability. These newly acquired businesses, along with improving results at all of the Company’s existing operations, have led to an increase in both current year actual and forecast earnings. These 2016 developments, combined with the wind-down over the past few years of several underperforming branches closed in our 2011 restructuring, which generated significant historical losses, have led us to conclude that the more recent positive evidence now outweighs the historical negative evidence, and it is more likely than not that we will generate sufficient taxable income to utilize certain of our net operating loss carryforwards. As such, we have released $108,987 of valuation allowance in 2016, of which approximately $16,000 related to 2016 activity. As of September 30, 2016, we have provided $326 valuation allowances for federal deferred tax assets and $1,898 for certain state deferred tax assets. We believe that $7,157 and $388 of federal and state deferred tax assets, respectively, will be realized by offsetting reversing deferred tax liabilities. In addition, we have $550 of net state deferred tax assets that we expect will be realized, and therefore valuation allowances were not provided for these assets. As a result, we have recorded a net deferred tax asset of $93,549 on our consolidated balance sheets. We will continue to evaluate the appropriateness of our remaining deferred tax assets and need for valuation allowances on a quarterly basis. Further, any future reduction in the federal statutory tax rate could result in a charge to reduce the book value of the net deferred tax assets recorded on our consolidated balance sheet.

As a result of the reorganization and related adjustment to the book basis in goodwill, we have tax basis in excess of book basis in amortizable goodwill of approximately $24,190. The tax basis in amortizable goodwill in excess of book basis is not reflected as a deferred tax asset. To the extent the amortization of the excess tax basis results in a cash tax benefit, the benefit will first go to reduce goodwill, then other long-term intangible assets, and then tax expense.

GAAP requires financial statement reporting of the expected future tax consequences of uncertain tax return reporting positions on the presumption that all relevant tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but it prohibits discounting of any of the related tax effects for the time value of money. The evaluation of a tax position is a two-step process. The first step is the recognition process to determine if it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority, based on the technical merits of the position. The second step is a measurement process whereby a tax position that meets the more likely than not recognition threshold is calculated to determine the amount of benefit/expense to recognize in the financial statements. The tax position is measured at the largest amount of benefit/expense that is more likely than not of being realized upon ultimate settlement.

A reconciliation of the beginning and ending balances of unrecognized tax benefit is as follows:

	Years Ended September 30,
	2016		2015
Balance at October 1,	$	55,963	$	56,079
Additions for position related to current year		-		98
Additions for positions of prior years		-		1
Reduction resulting from the lapse of the applicable statutes of limitations		27		198
Reduction resulting from positions of prior years		69		-
Reduction resulting from settlement of positions of prior years		-		17
Balance at September 30,	$	55,867	$	55,963

As of September 30, 2016 and 2015, $55,867 and $55,963, respectively, of unrecognized tax benefits would result in a decrease in the provision for income tax expense, of which $50,581 for each of those years, respectively, relates to net operating loss from additional goodwill resulting from the tax accounting method change discussed above. We believe the realization of the net operating losses resulting from the tax accounting method change is not more likely than not and have not recorded a deferred tax asset. However, if we are partially or fully successful in defending our tax accounting method change we may realize a portion or all of the deferred tax asset related to this net operating loss, offset by an increase in the valuation allowance. We anticipate that approximately $3,745 in liabilities for unrecognized tax benefits, including accrued interest, may be reversed in the next twelve months. The reversal is predominately due to the expiration of the statutes of limitation for unrecognized tax benefits.

We had approximately $11 and $18 accrued for the payment of interest and penalties at September 30, 2016 and 2015, respectively. We recognize interest and penalties related to unrecognized tax benefits as part of the provision for income taxes.

We are currently not under federal audit by the Internal Revenue Service. The tax years ended September 30, 2013 and forward are subject to federal audit as are tax years prior to September 30, 2013, to the extent of unutilized net operating losses generated in those years. The tax years ended September 30, 2012 and forward are subject to state audits as are tax years prior to September 30, 2012, to the extent of unutilized net operating losses generated in those years.