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Note 8 - Income Taxes
 12 Months Ended
Dec. 31, 2018
Notes to Financial Statements  
Income Tax Disclosure [Text Block]
8.
 
Income Taxes
 
Income tax expense is as follows (
in thousands
):
 
 
 
December 31,
 
 
2018
 
2017
 
2016
Current tax expense:
 
 
 
 
 
 
 
 
 
 
 
 
Federal
 
$
2,965
 
 
$
17,008
 
 
$
16,274
 
State
 
 
(1,433
)
 
 
3,201
 
 
 
2,929
 
Total current tax expense:
 
 
1,532
 
 
 
20,209
 
 
 
19,203
 
Deferred tax expense (benefit):
 
 
 
 
 
 
 
 
 
 
 
 
Federal
 
 
(2,650
)
 
 
(19,425
)
 
 
(7,115
)
State
 
 
(854
)
 
 
(983
)
 
 
(253
)
Total deferred tax benefit:
 
 
(3,504
)
 
 
(20,408
)
 
 
(7,368
)
Total income tax expense (benefit)
 
$
(1,972
)
 
$
(199
)
 
$
11,835
 
  
A reconciliation of the income tax expense calculated using the applicable federal statutory rate to the actual income tax expense is as follows (
in thousands
):
 
 
 
December 31,
 
 
2018
 
%
 
2017
 
%
 
2016
 
%
Computed at federal statutory rate
 
$
11,134
 
 
 
21.0
 
 
$
13,949
 
 
 
35.0
 
 
$
17,315
 
 
 
35.0
 
State and local tax expense, net of federal benefit
 
 
2,367
 
 
 
4.5
 
 
 
2,226
 
 
 
5.6
 
 
 
2,448
 
 
 
5.0
 
Net permanent deduction and credit tax benefits from current year
 
 
(1,143
)
 
 
(2.2
)
 
 
(1,513
)
 
 
(3.8
)
 
 
(1,509
)
 
 
(3.1
)
Net permanent deduction and credit tax benefits from prior years
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
(6,213
)
 
 
(12.6
)
Net uncertain tax positions excluding current permanent deduction and credit benefits
 
 
(3,756
)
 
 
(7.0
)
 
 
(373
)
 
 
(0.9
)
 
 
-
 
 
 
-
 
Subsidiary basis write off
 
 
(3,423
)
 
 
(6.5
)
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Equity compensation net tax windfall
 
 
(2,890
)
 
 
(5.5
)
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
State tax apportionment changes
 
 
(3,737
)
 
 
(7.0
)
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Disallowed executive compensation
 
 
682
 
 
 
1.3
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Tax Reform - revaluation of deferrals
 
 
-
 
 
 
-
 
 
 
(15,130
)
 
 
(38.0
)
 
 
-
 
 
 
-
 
Acquisition adjustments
 
 
(1,226
)
 
 
(2.3
)
 
 
(1,003
)
 
 
(2.5
)
 
 
-
 
 
 
-
 
Acquisition costs
 
 
-
 
 
 
-
 
 
 
697
 
 
 
1.7
 
 
 
203
 
 
 
0.4
 
Other, net
 
 
20
 
 
 
-
 
 
 
948
 
 
 
2.4
 
 
 
(409
)
 
 
(0.8
)
Total income tax expense
 
$
(1,972
)
 
 
(3.7
)
 
$
(199
)
 
 
(0.5
)
 
$
11,835
 
 
 
23.9
 
 
The Company’s effective tax rate decreased to (
3.7%
) for the year ended
December 31, 2018
from (
0.5%
) for the year ended
December 31, 2017,
primarily from favorable tax benefits relating to current year credits, equity compensation, subsidiary basis write-off, prior year state apportionment changes, uncertain tax position releases and acquisition adjustments. The Company has
no
adjustments, to any previously recorded provisional amounts, relating to the Tax Cuts and Jobs Act which was enacted on
December 22, 2017.
During the year ended
December 31, 2018
and in conjunction with the Settlement Agreement in Note
15
to the Consolidated Financial Statements, the Company determined that the common stock of its wholly owned subsidiary, Allied Management Group Special Investigation Unit, Inc. was worthless, resulting in the write off of basis for federal income tax purposes.
 
As a result of an analysis performed during
2016,
the Company determined certain activities it performs qualify for (i) R&D Credits provided in IRC Section
41
and (ii) the Section
199
Deduction provided in IRC Section
199.
As a result, the Company recognized net tax benefits during the year ended
December 31, 2016 
of
$6.2
million for federal and state R&D Credits and the Section
199
Deduction relating to tax years
2012
through
2015.
 
Deferred income taxes are recognized for the future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities. The tax effect of temporary differences that give rise to a significant portion of the deferred tax assets and deferred tax liabilities are as follows
(in thousands
):
 
 
 
December 31,
 
 
2018
 
2017
Deferred tax assets:
 
 
 
 
 
 
 
 
Stock-based compensation
 
$
9,545
 
 
$
9,980
 
Goodwill and intangible assets
 
 
5,874
 
 
 
6,524
 
Allowance for doubtful accounts
 
 
3,537
 
 
 
3,822
 
Deferred rent
 
 
696
 
 
 
909
 
Tenant improvements
 
 
569
 
 
 
669
 
Estimated liability for appeals
 
 
5,632
 
 
 
7,775
 
Net operating loss carry-forwards
 
 
1,527
 
 
 
3,358
 
Tax credit carry-forwards
 
 
4,076
 
 
 
3,667
 
Property and equipment
 
 
49
 
 
 
256
 
Accrued expenses and other
 
 
7,839
 
 
 
3,615
 
Total deferred tax assets
 
 
39,344
 
 
 
40,575
 
Deferred tax liabilities:
 
 
 
 
 
 
 
 
Goodwill and intangible assets
 
 
43,400
 
 
 
48,186
 
Section 481(a) adjustment
 
 
5,073
 
 
 
7,413
 
Prepaid expenses
 
 
668
 
 
 
624
 
Capitalized software cost
 
 
8,688
 
 
 
6,341
 
Total deferred tax liabilities
 
 
57,829
 
 
 
62,564
 
Total net deferred tax liabilities
 
$
18,485
 
 
$
21,989
 
 
Included i
n Other liabilities on the Consolidated Balance Sheets, are the total amount of unrecognized tax benefits of approximately
$4.8
million and
$8.2
million as of
December 31, 2018
and
2017,
respectively, net of the federal benefit for state issues that, if recognized, would favorably affect the Company’s future effective tax rate. Also included in Other Liabilities on the Consolidated Balance Sheets, are accrued liabilities for interest expense and penalties related to unrecognized tax benefits of
$0.7
million and
$0.6
million as of
December 31, 2018
and
2017,
respectively. HMS includes interest expense and penalties in the provision for income taxes in the Consolidated Statements of Income. The amount of interest expense, net of federal and state income tax benefits, and penalties in the Consolidated Statements of Income for the years ended
December 31, 2018,
2017,
and
2016
was
$0.1
million,
$0.02
million and
$0.2
million, respectively. The Company believes it is reasonably possible the amount of unrecognized tax benefits
may
decrease by
$1.7
million during
2019,
due to the expiration of the statute of limitations in various jurisdictions.
 
A reconciliation of the beginning and ending amounts of unrecognized tax benefits are as follows (
in thousands
):
 
 
 
2018
 
2017
Unrecognized tax benefits at January 1
 
$
8,234
 
 
$
7,433
 
Additions for tax positions taken during prior periods
 
 
399
 
 
 
599
 
Additions for tax positions taken during current period including amended prior years
 
 
360
 
 
 
1,174
 
Reductions relating to settlements with taxing authorities
 
 
(2,227
)
 
 
-
 
Reductions related to the expiration of statutes of limitations
 
 
(1,927
)
 
 
(972
)
Unrecognized tax benefits at December 31
 
$
4,839
 
 
$
8,234
 
 
The Company increased the provision for unrecognized tax benefits by
$0.4
million during the year ended
December 31, 2018,
related to tax benefits recognized for current period R&D Credits. At
December 31, 2018,
HMS had federal and state pre-tax net operating loss and tax credit carryforwards of approximately
$24.3
million and
$4.1
million, respectively, which will be available to offset future taxable income. If
not
used, these net operating loss and tax credit carryforwards will begin to expire in
2020
and
2019,
respectively. The Company files income tax returns with the U.S. Federal government and various state, territory, and local jurisdictions. HMS is
no
longer subject to U.S. Federal income tax examinations for years before
2013.
The Company settled an audit by the Internal Revenue Service for years
2013
and
2014
which resulted in immaterial assessments and recognition of prior unrecognized tax benefits. HMS operates in a number of state, territory and local jurisdictions. Accordingly, HMS is subject to state, territory and local income tax examinations based upon the various statutes of limitations in each jurisdiction. Previously recognized Texas refund claims were examined by the state and resulted in a favorable apportionment method change for all open tax years.