Income Taxes

12 Months Ended

Dec. 31, 2019

Income tax expense is as follows (in thousands):


	December 31,
	2019		2018		2017
Current tax expense (benefit):
Federal	$	6,167	$	2,965	$	17,008
State	3,678		(1,433)		3,201
Total current tax expense:	9,845		1,532		20,209
Deferred tax expense (benefit):
Federal	6,219		(2,650)		(19,425)
State	1,074		(854)		(983)
Total deferred tax expense (benefit):	7,293		(3,504)		(20,408)
Total income tax expense (benefit)	$	17,138	$	(1,972)	$	(199)

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,
	2019		%	2018		%	2017		%
Computed at federal statutory rate	$	21,916	21.0	$	11,134	21.0	$	13,949	35.0
State and local tax expense, net of federal benefit	3,625		3.4	2,367		4.5	2,226		5.6
Net permanent deduction and credit tax benefits from current year	(1,166)		(1.1)	(1,143)		(2.2)	(1,513)		(3.8)

Net uncertain tax positions excluding current permanent deduction and credit benefits	(937)		(0.8)	(3,756)		(7.0)	(373)		(0.9)
Subsidiary basis write off	—		—	(3,423)		(6.5)	—		—
Equity compensation net tax windfall	(8,634)		(8.3)	(2,890)		(5.5)	—		—
State tax apportionment changes	—		—	(3,737)		(7.0)	—		—
Disallowed executive compensation	1,750		1.6	682		1.3	—		—
Tax Reform - revaluation of deferrals	—		—	—		—	(15,130)		(38.0)
Acquisition adjustments	—		—	(1,226)		(2.3)	(1,003)		(2.5)
Acquisition costs	245		0.3	—		—	697		1.7
Other, net	339		0.3	20		—	948		2.4
Total income tax expense	$	17,138	16.4	$	(1,972)	(3.7)	$	(199)	(0.5)

The Company has current period foreign income tax expense and includes global intangible low-taxed income as current period income tax expense, both of which are not material to the overall financial statements.

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,
			2019		2018
Deferred tax assets:
Stock-based compensation	$	8,056	$	9,545
Goodwill and intangible assets	5,516		5,874
Accounts receivable, net	4,442		3,537
Deferred rent	—		696
Tenant improvements	—		569
Liability for appeals	931		5,632
Net operating loss carry-forwards	2,644		1,527
Tax credit carry-forwards	1,815		4,076
Property and equipment	139		49
Accrued expenses and other	5,054		7,839
ROU Liability	5,799		—
Total deferred tax assets	34,396		39,344
Deferred tax liabilities:
Goodwill and intangible assets	42,894		43,400
Section 481(a) adjustment	2,551		5,073
Prepaid expenses	734		668
Capitalized software cost	9,068		8,688
ROU Asset	4,736		—
Total deferred tax liabilities	59,983		57,829
Total net deferred tax liabilities	$	25,587	$	18,485

Included in Other Liabilities on the Consolidated Balance Sheets, are the total amount of unrecognized tax benefits of approximately $4.2 million and $4.8 million as of December 31, 2019 and 2018, 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 $0.7 million as of December 31, 2019 and 2018, 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, 2019, 2018, and 2017 was $0.04 million, $0.1 million and $0.02 million, respectively. The Company believes it is reasonably possible the amount of unrecognized tax benefits may decrease by $1.7 million during 2020, 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):


	2019		2018
Unrecognized tax benefits at January 1	$	4,839	$	8,234
Additions for tax positions taken during prior periods	543		399
Additions for tax positions taken during current period including amended prior years	409		360
Reductions relating to settlements with taxing authorities	—		(2,227)
Reductions related to the expiration of statutes of limitations	(1,542)		(1,927)
Unrecognized tax benefits at December 31	$	4,249	$	4,839

The Company increased the provision for unrecognized tax benefits by $0.4 million during the year ended December 31, 2019, related to tax benefits recognized for current period U.S. Research and Experimentation Tax Credits pursuant to IRC Section 41. At December 31, 2019, HMS had federal and state pre-tax net operating loss and tax credit carryforwards of approximately $30.3 million and $1.8 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 2028, respectively. The Company files income tax returns with the U.S. Federal government and various state and local jurisdictions and will file income tax returns in certain foreign jurisdictions as a result of its acquisition of VitreosHealth. HMS is generally no longer subject to U.S. Federal income tax examinations for years before 2013. HMS operates in a number of state, foreign and local jurisdictions. Accordingly, HMS is subject to state, local, and foreign income tax examinations based on 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.