Note 13. Income Taxes

We are subject to federal and state income taxes in the United States and in Canada. For the years ended December 31, 2015, 2014 and 2013, we did not have a material amount of reportable taxable income and, therefore, no related tax liability or expense has been recorded in the consolidated financial statements. We recorded an income tax benefit of $4.6 million for the year ended December 31, 2015 primarily due to a deferred tax liability generated in connection with Zillow Group’s August 20, 2015 acquisition of DotLoop that can be used to realize certain deferred tax assets for which we had previously provided a full allowance. We recorded an income tax benefit of $4.1 million for the year ended December 31, 2013 due to a deferred tax liability generated in connection with Zillow’s August 26, 2013 acquisition of StreetEasy, Inc. that can be used to realize certain deferred tax assets for which we had previously provided a full valuation allowance.

The following table summarizes the components of our income tax benefit for the periods presented (in thousands):


	Year Ended December 31,
	2015		2014		2013
Federal	$	2,838	$	—	$	3,783
State		1,807		—		328

Deferred income tax benefit	$	4,645	$	—	$	4,111

The following table presents a reconciliation of the federal statutory rate and our effective tax rate for the periods presented:


	Year Ended December 31,
	2015			2014			2013
Tax expense at federal statutory rate		(35.0	)%		(34.0	)%		(34.0	)%
State income taxes, net of federal tax benefit		(2.3	)%		(1.5	)%		(5.8	)%
Nondeductible expenses		2.8	%		15.3	%		3.1	%
Share-based compensation		1.2	%		0.7	%		0.2	%
Research and development credits		(4.1	)%		(3.2	)%		(23.3	)%
Divestiture of businesses		2.3	%		—			—
Other		(1.0	)%		—			—
Valuation allowance		33.1	%		22.7	%		35.0	%

Effective tax rate		(3.0	)%		0.0	%		(24.8	)%

Deferred federal, state and foreign income taxes reflect the net tax impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes. The following table presents the significant components of our deferred tax assets and liabilities as of the dates presented (in thousands):


	December 31,
	2015			2014
Deferred tax assets:
Federal and state net operating loss carryforwards	$	162,521		$	25,665
Share-based compensation		45,969			12,680
Goodwill		825			1,355
Depreciation and amortization		3,090			—
Start-up and organizational costs		369			430
Research and development credits		21,157			6,493
Other tax credits		1,358			—
Accruals and reserves		3,338			2,339
Deferred rent		5,228			4,248
Other deferred tax assets		550			167

Total deferred tax assets		244,405			53,377
Deferred tax liabilities:
Website and software development costs		(13,851	)		(7,263	)
Intangibles		(200,082	)		(6,052	)
Other deferred tax liabilities		(52	)		—
Depreciation and amortization		—			(2,838	)

Net deferred tax assets before valuation allowance		30,420			37,224
Less: valuation allowance		(162,715	)		(37,224	)

Net deferred tax assets (liabilities)	$	(132,295	)	$	—

Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. We have provided a full valuation allowance against the net deferred tax assets as of December 31, 2015 and 2014 because, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized. The valuation allowance increased by $125.5 million and $9.9 million, respectively, during the years ended December 31, 2015 and 2014.

We have accumulated federal tax losses of approximately $735.2 million and $358.6 million, respectively, as of December 31, 2015 and 2014, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $11.6 million and $7.2 million (tax effected), respectively, as of December 31, 2015 and 2014. As of December 31, 2015, approximately $304.0 million of our net operating loss carryforwards relate to tax deductible share-based compensation in excess of amounts recognized for financial reporting purposes. To the extent that net operating loss carryforwards, if realized, relate to share-based compensation, the resulting tax benefits will be recorded to shareholders’ equity rather than to the statement of operations. Additionally, we have net research and development credit carryforwards of $17.2 million and $6.5 million, respectively, as of December 31, 2015 and 2014, which are available to reduce future tax liabilities. The tax loss and research and development credit carryforwards begin to expire in 2025. Under Sections 382 and 383 of the Internal Revenue Code, if a corporation undergoes an ownership change, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income or income tax liability may be limited. In connection with our August 2013 public offering of our Class A Common stock, we experienced an ownership change that triggered Sections 382 and 383, which may limit our ability to utilize net operating loss and tax credit carryforwards. In connection with Zillow Group’s February 2015 acquisition of Trulia, Trulia experienced an ownership change that triggered Section 382 and 383, which may limit Zillow Group’s ability to utilize Trulia’s net operating loss and tax credit carryforwards.

We are currently not under audit in any tax jurisdiction. Tax years from 2012 through 2015 are currently open for audit by federal and state taxing authorities.

Changes for unrecognized tax benefits for the periods presented are as follows (in thousands):


Balance at January 1, 2013	$	1,255
Gross increases—prior and current period tax positions		3,868

Balance at December 31, 2013	$	5,123

Gross increases—current period tax positions		1,946
Gross decreases—prior period tax positions		(576	)

Balance at December 31, 2014	$	6,493

Gross increases—prior and current period tax positions		3,577
Gross increases—assumed in connection with February 2015 acquisition of Trulia		3,910

Balance at December 31, 2015	$	13,980

At December 31, 2015, the total amount of unrecognized tax benefits of $14.0 million is recorded as a reduction to the deferred tax asset. We do not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. Accrued interest and penalties related to unrecognized tax benefits are recorded as income tax expense and are zero.