Income Taxes

12 Months Ended

Sep. 30, 2018

9. INCOME TAXES

Federal and state income tax provisions are as follows:

		Year Ended September 30,
		2018		2017		2016
Federal:
	Current	$	(2,345)	$	(3,092)	$	762
	Deferred		38,744		6,384		(97,093)
State:
	Current		1,536		1,432		952
	Deferred		216		487		(1,738)
	Total provision for income taxes	$	38,151	$	5,211	$	(97,117)

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

		Year Ended September 30,
		2018		2017		2016
Provision at the statutory rate ⁽¹⁾		$	5,973	$	6,582	$	8,316
Increase resulting from:
	Non-deductible expenses		1,003		966		1,557
	State income taxes, net of federal deduction		1,193		1,003		1,105
	Change in valuation allowance		1,761		142		-
	Rate change		31,333		-		-
	Other		183		17		-
Decrease resulting from:
	Change in valuation allowance		-		-		(108,987)
	Contingent tax liabilities		(1,908)		(3,499)		(96)
	State deferred true up		(1,387)		-		-
	Other		-		-		988
	Total provision for income taxes	$	38,151	$	5,211	$	(97,117)

	(1) A statutory rate of 24.53% was used in 2018 and 35% in both 2017 and 2016. The lower effective tax rate used in 2018 is related to the enactment of Tax Cuts and Jobs Act enacted on December 22, 2017.

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:

		Year Ended September 30,
		2018		2017
Deferred income tax assets:
	Allowance for doubtful accounts	$	207	$	243
	Accrued expenses		8,054		12,915
	Net operating loss carryforward		46,881		77,497
	Various reserves		1,172		1,807
	Equity losses in affiliate		119		82
	Share-based compensation		665		1,570
	Capital loss carryforward		94		337
	Other		712		3,195
Subtotal			57,904		97,646
Less valuation allowance			4,127		2,366
Total deferred income tax assets		$	53,777	$	95,280
Deferred income tax liabilities:
	Property and equipment	$	1,122	$	2,019
	Intangible assets		5,499		6,548
	Other		576		502
Total deferred income tax liabilities			7,197		9,069
Net deferred income tax assets		$	46,580	$	86,211

In fiscal 2018 and 2017, the valuation allowance on our deferred tax assets increased by $1,761 and $142, respectively, which is included in “Provision (benefits) for income taxes” 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 a deferred tax asset has not been recorded through September 30, 2018, 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. We have a tax basis of $1,448 in additional tax goodwill from current year acquisitions.

As of September 30, 2018, we had available approximately $355,302 of federal net tax operating loss carry forward for federal income tax purposes, of which $133,291 resulting from the additional amortization of tax goodwill has not been recorded as a deferred tax asset. This carry forward, which may provide future tax benefits, will begin to expire in 2026. 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 in control 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 $300,400 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 $100,772 state net tax operating loss carry forwards, including $8,806 resulting from the additional amortization of tax goodwill which begins to expire as of September 30, 2019. 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, 2018, 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. We believe that $4,247 and $696 of federal and state deferred tax assets, respectively, will be realized by offsetting reversing deferred tax liabilities. In addition, we have $681 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 $46,580 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 $23,735. 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:

	Year Ended September 30,
	2018		2017
Balance at October 1,	$	51,968	$	55,867
Additions for position related to current year		13		207
Additions for positions of prior years		272		-
Reduction resulting from the lapse of the applicable statutes of limitations		3,361		3,707
Reduction resulting from rate change		18,636		-
Reduction resulting from positions of prior years		-		399
Reduction resulting from settlement of positions of prior years		-		-
Balance at September 30,	$	30,256	$	51,968

As of September 30, 2018, and 2017, $30,256 and $51,968, respectively, of unrecognized tax benefits would result in a decrease in the provision for income tax expense, of which $28,453 and $50,180 for each of those years, respectively, relates to net operating loss from additional goodwill resulting from the tax accounting method change discussed above for which a deferred tax asset has not been recorded. We anticipate that approximately $5,754 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 $35 and $14 accrued for the payment of interest and penalties at September 30, 2018, and 2017, respectively. We recognize interest and penalties related to unrecognized tax benefits as part of the provision for income taxes.

We are currently under federal audit by the Internal Revenue Service with respect to the year ended September 30, 2016. The tax years ended September 30, 2015, and forward are subject to federal audit as are tax years prior to September 30, 2015, to the extent of unutilized net operating losses generated in those years. The tax years ended September 30, 2014, and forward are subject to state audits as are tax years prior to September 30, 2014, to the extent of unutilized net operating losses generated in those years.