Income Taxes

The provision for income taxes for 2014, 2013, and 2012 consists of the following:



	2014			2013			2012
(amounts in thousands)
Domestic and foreign components of income before income taxes are as follows:
Domestic	$	14,885		$	22,313		$	23,028
Foreign	2,053			2,026			2,417
Total income before income taxes	$	16,938		$	24,339		$	25,445
The provision (benefit) for income taxes consists of:
Current tax:
U.S. federal	$	4,023		$	6,133		$	6,778
Foreign	1,505			1,469			1,393
U.S. state and local	831			1,409			993
Total current tax	6,359			9,011			9,164
Deferred tax:
U.S. federal	273			(245		)	55
Foreign	(97		)	(34		)	—
U.S. state and local	53			(72		)	61
Total deferred tax	229			(351		)	116
Total tax	$	6,588		$	8,660		$	9,280
The effective and statutory income tax rate can be reconciled as follows:
Tax at statutory rate of 35% / 34%	$	5,928		$	8,519		$	8,906
State tax, net of federal benefit	578			877			685
Non-taxable income	(520		)	(563		)	(993		)
Non-deductible expenses	803			963			796
Change in estimate primarily related to foreign taxes	134			128			41
Change in estimate primarily related to state taxes and tax reserves	—			(172		)	50
Change in estimate primarily related to U.S. federal taxes	—			—			(157		)
Tax credits	(421		)	(1,117		)	—
Other, net	86			25			(48		)
Total tax	$	6,588		$	8,660		$	9,280
Effective income tax rate	38.9		%	35.6		%	36.5		%

The Company’s effective tax rate (ETR) is calculated based upon the full year's operating results, and various tax related items. The Company’s normal ETR ranges from 38% to 40%. The 2013 ETR was lower than the normal range primarily due to the recording of approximately $0.7 million of tax credits related to research and development activities, and approximately $0.4 million of tax credits related to the Company’s participation in the Work Opportunity Tax Credit (WOTC) program offered by the U.S. federal government to companies who have hired individuals who have traditionally faced barriers to employment. The tax benefit for these two items for both 2013 and 2012 was recorded in 2013 as required under current accounting guidelines, as the legislation extending these tax credits, the American Taxpayer Relief Act of 2012, was not passed by the U.S. federal government until January 2013. The benefit of these tax credits was partially offset by an increase of approximately $0.1 million in the valuation allowance associated with net operating losses incurred by certain foreign subsidiaries. The 2012 ETR was lower than the normal range due to approximately $0.5 million in tax expense related to non-taxable life insurance proceeds received during the year. In addition, in 2012 the Company recorded an additional $0.2 million reduction of state tax expense as a result of the recording of certain favorable provision-to-return adjustments associated with the Company’s 2011 income tax returns.

The expected relationship between foreign income before taxes and the foreign provision for income taxes differs from the actual relationship above as a result of certain foreign losses incurred for which no tax benefit has been recognized. Management has determined that it is unclear whether operations in those jurisdictions will produce taxable income in future years sufficient to realize the benefit of the losses in those jurisdictions. In addition, certain costs deducted for financial statement purposes are not deductible for tax purposes in some foreign jurisdictions, such as various employee benefit costs, resulting in a substantial increase to foreign taxable income.

The Company’s deferred tax assets and liabilities at December 31, 2014 and 2013 consist of the following:



December 31,	2014			2013
(amounts in thousands)
Assets
Deferred compensation	$	8,358		$	8,005
Loss carryforwards	1,240			1,208
Accruals deductible for tax purposes when paid	452			409
Depreciation	56			57
Allowance for doubtful accounts	300			324
State taxes	767			836
Gross deferred tax assets	11,173			10,839
Deferred tax asset valuation allowance	(3,135		)	(2,170		)
Gross deferred tax assets less valuation allowance	8,038			8,669
Liabilities
Depreciation	(470		)	(965		)
Other	(125		)	(197		)
Gross deferred tax liabilities	(595		)	(1,162		)
Net deferred tax assets	$	7,443		$	7,507
Net deferred tax assets and liabilities are recorded as follows:
Net current assets	$	1,079		$	1,113
Net non-current assets	6,364			6,487
Net non-current liabilities	—			(93		)
Net deferred tax assets	$	7,443		$	7,507

In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Factors that may affect the Company’s ability to achieve sufficient forecasted taxable income in future periods may include, but are not limited to, the following: increased competition, a decline in sales or margins, a loss of market share, the availability of qualified professional staff, and a decrease in demand for IT services. Based upon the levels of historical taxable income and projections for future taxable income over the years in which the deferred tax assets are deductible, at December 31, 2014, management believes that it is more likely than not that the Company will realize the benefits, net of the established valuation allowance, of these deferred tax assets in the future.

For tax purposes, the Company has various U.S. state net operating loss carryforwards which began to expire in 2011, and have approximately $0.1 million remaining. These net operating losses have a carryforward period of 5 to 20 years. The Netherlands net operating loss carryforward is approximately $1.4 million, and began to expire in 2014, while in the United Kingdom and Belgium, the net operating loss carryforwards are approximately $3.6 million and $0.2 million, respectively, and have no expiration date.

At December 31, 2014, the Company has a deferred tax asset before the valuation allowance in the United States resulting from net operating losses in various states of approximately $0.1 million, in the United Kingdom of approximately $0.8 million, in Belgium of approximately $0.1 million, and in the Netherlands of approximately $0.4 million. Management has analyzed each jurisdiction’s tax position, including forecasting potential taxable income in future years, and the expiration of the net operating loss carryforwards as applicable, and determined that it is unclear whether all of the deferred tax asset totaling $1.2 million will be realized at any point in the future. Accordingly, at December 31, 2014, the Company has offset most of the asset with a valuation allowance totaling $1.1 million, resulting in a net deferred tax asset from net operating loss carryforwards of approximately $0.1 million. During 2014, the net increase in the valuation allowance was approximately $1.0 million.

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2010.

A reconciliation of unrecognized tax benefits for 2014 and 2013 is as follows:



(amounts in thousands)
Balance at January 1, 2013	$	173
Additions based on tax positions related to the current year	—
Additions for tax positions of prior years	—
Reductions for lapse of statute of limitations	(24		)
Settlements	(149		)
Balance at December 31, 2013	—
Additions based on tax positions related to the current year	—
Additions for tax positions of prior years	—
Reductions for lapse of statute of limitations	—
Settlements	—
Balance at December 31, 2014	$	—

No significant increase in the total amount of unrecognized tax benefits is expected within the next twelve months. The Company recognizes accrued interest and penalties related to unrecognized tax benefits (if any) in tax expense, as applicable. At December 31, 2014, the Company had no accrual for the payment of interest and penalties.

The Company will establish an unrecognized tax benefit based upon the anticipated outcome of tax positions taken for financial statement purposes compared with positions taken on the Company’s tax returns. The Company records the benefit for unrecognized tax benefits only when it is more likely than not that the position will be sustained upon examination by the taxing authorities. The Company reviews its unrecognized tax benefits on a quarterly basis. Such reviews include consideration of factors such as the cause of the action, the degree of probability of an unfavorable outcome, the Company’s ability to estimate the liability, and the timing of the liability and how it will impact the Company’s other tax attributes. At December 31, 2014, the Company believes it has adequately provided for its tax-related liabilities, and that no reserve for unrecognized tax benefits is necessary.

At December 31, 2014, the undistributed earnings of foreign subsidiaries amounted to approximately $18.4 million. A deferred tax liability for the taxes related to these unremitted accumulated foreign earnings has not been provided for as the determination of the estimated liability is not practicable and because undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested. Upon distribution of these earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries.

In 2014, 2013, and 2012, a total of 543,000, 87,000, and 461,000 shares of common stock, respectively, were issued through the exercise of non-qualified stock options or through the disqualifying disposition of incentive stock options. The tax benefit to the Company from these transactions, which was credited to capital in excess of par value rather than recognized as a reduction of income tax expense, was $2.0 million, $0.5 million, and $2.2 million in 2014, 2013, and 2012, respectively. These tax benefits have also been recognized in the consolidated balance sheets as a reduction of income taxes payable.

Net income tax payments during 2014, 2013, and 2012 totaled $5.8 million, $7.1 million, and $6.5 million, respectively.