Income Taxes

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are expected to become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The Company includes interest accrued on the underpayment of income taxes in interest expense and penalties, if any, related to unrecognized tax benefits in general and administrative expenses. The Company recorded a valuation allowance against its U.S. deferred tax asset as it considered its cumulative loss in recent years as a significant piece of negative evidence. Since valuation allowances are evaluated on a jurisdiction by jurisdiction basis, we believe that the deferred tax assets related to LivePerson UK, Engage Australia, Kasamba Israel and LivePerson LTD Israel are “more likely than not” to be realized as these jurisdictions have positive cumulative pre-tax book income after adjusting for permanent and onetime items. During the year ended December 31, 2016, the valuation recorded was $12.1 million.

Under Section 382 of the Internal Revenue Code of 1986, as amended, the Company’s use of its federal net operating loss (“NOL”) carryforwards may be limited if the Company experiences an ownership change, as defined in Section 382. Such an annual limitation could result in the expiration of the net operating loss carryforwards before utilization. As of December 31, 2016, the Company had approximately $16.6 million of federal NOL carryforwards available to offset future taxable income. Included in this amount is $5.1 million of federal NOL carryovers from the Company’s acquisition of Proficient. These carryforwards expire in various years through 2027.

The domestic and foreign components of loss before provision for income taxes consist of the following (amounts in thousands):



	Year Ended December 31,
	2016			2015			2014
United States	$	(40,774	)	$	(16,362	)	$	(12,933	)
Israel	15,622			2,257			4,614
United Kingdom	2,345			1,564			1,612
Netherlands	3,104			1,919			1,462
Australia	(2,774		)	(565		)	(513		)
Germany	2,085			327			172
Other ⁽¹⁾	453			230			97
	$	(19,939	)	$	(10,630	)	$	(5,489	)
⁽¹⁾ Includes Japan, Italy, and France

No additional provision has been made for U.S. income taxes on the undistributed earnings of its Israeli subsidiary, LivePerson Ltd. (formerly HumanClick Ltd.), as such earnings have been taxed in the U.S. and accumulated earnings of the Company’s other foreign subsidiaries are immaterial through December 31, 2016.

The provision for income taxes consists of the following (amounts in thousands):



	Year Ended December 31,
	2016		2015			2014
Current income taxes:
U.S. Federal	$	1,829	$	(524	)	$	155
State and local	27		309			186
Foreign	2,226		1,573			3,254
Total current income taxes	4,082		1,358			3,595

Deferred income taxes:
U.S. Federal	841		13,791			(1,194		)
State and local	99		876			41
Foreign	912		(211		)	(583		)
Total deferred income taxes	1,852		14,456			(1,736		)
Total provision for income taxes	$	5,934	$	15,814		$	1,859

The difference between the total income taxes computed at the federal statutory rate and the provision for income taxes consists of the following:



	Year Ended December 31,
	2016		2015		2014
Federal Statutory Rate	34.00	%	34.00	%	34.00	%
State taxes, net of federal benefit	3.24	%	0.35	%	(2.74	)%
Non-deductible expenses – ISO	(1.85	)%	(8.57	)%	(14.68	)%
Non-deductible expenses – Other	(0.88	)%	(2.20	)%	(4.17	)%
Foreign tax rate differential	0.89	%	(12.41	)%	(46.50	)%
Change in valuation allowance	(53.55	)%	(148.24	)%	—	%
Return to provision true-up adjustment	(9.22	)%	—	%	—	%
Other	(2.42	)%	(11.15	)%	0.23	%
Total provision for income taxes	(29.79	)%	(148.22	)%	(33.86	)%

The effects of temporary differences and tax loss carryforwards that give rise to significant portions of federal deferred tax assets and deferred tax liabilities at December 31, 2016 and 2015 are presented below (amounts in thousands):



	Year Ended December 31,
	2016			2015
Deferred tax assets:
Net operating loss carryforwards	$	6,186		$	2,243
Accounts payable and accrued expenses	4,906			5,017
Non-cash compensation	12,541			10,034
Intangibles amortization	6,151			3,826
Allowance for doubtful accounts	447			274
Intangibles related to acquisitions	118			—
Total deferred tax assets	30,349			21,394
Less valuation allowance	(27,881		)	(15,820		)
Deferred tax assets, net of valuation allowance	2,468			5,574
Deferred tax liabilities:
Plant and equipment	(1,695		)	(2,973		)
Intangibles related to acquisitions	—			(1,361		)
Goodwill amortization and contingent earn-out adjustments	(3,332		)	(2,359		)
Total deferred tax liabilities	(5,027		)	(6,693		)
Net deferred (liabilities)/assets	$	(2,559	)	$	(1,119	)

ASC Topic 740-10 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with other provisions contained within this guidance. This topic prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate audit settlement. The Company had unrecognized tax benefits of $4.2 million and $3.5 million as of December 31, 2016 and 2015, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	Year Ended December 31,
	2016			2015
Unrecognized tax benefits balance at January 1	$	3,519		$	2,320
Gross increase for tax positions of prior years	200			—
Gross increase for tax positions of current years	700			1,199
Decrease due to expiration of statue	(179		)	—
Gross unrecognized tax benefits at December 31	$	4,240		$	3,519

The tax years subject to examination by major tax jurisdictions include the years 2011 and forward for U.S states and New York City, the years 2012 and forward for U.S. Federal, and the years 2012 and forward for certain foreign jurisdictions.