INCOME TAXES

The provision (benefit) for income taxes for the years ended February 2016, 2017, and 2018 consisted of the following:



	2016			2017			2018
Current:
Federal	$	—		$	—		$	(1,209	)
State	(31		)	68			1,611
Total current	(31		)	68			402
Deferred:
Federal	1,793			(152		)	(13,612		)
State	307			(26		)	1,478
Total deferred	2,100			(178		)	(12,134		)
Provision (benefit) for income taxes	$	2,069		$	(110	)	$	(11,732	)

The provision (benefit) for income taxes for the years ended February 2016, 2017 and 2018 differs from that computed at the Federal statutory corporate tax rate as follows:



	2016			2017			2018
Computed income tax provision at 35%	$	618		$	4,588		$	23,855
State income tax	276			42			3,089
Nondeductible stock compensation	296			444			261
Entertainment disallowance	366			366			235
Disposal of goodwill with no tax basis	—			3,533			—
Change in federal valuation allowance	2,376			(7,387		)	(20,373		)
Tax attributed to noncontrolling interest	(1,932		)	(1,698		)	(1,785		)
Federal tax credit	(43		)	(171		)	(85		)
Federal tax reform	—			—			(15,546		)
Reclassification of AMT credit	—			—			(2,162		)
Other	112			173			779
Provision (benefit) for income taxes	$	2,069		$	(110	)	$	(11,732	)

The final determination of our income tax liability may be materially different from our income tax provision. Significant judgment is required in determining our provision for income taxes. Our calculation of the provision for income taxes is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. In addition, our income tax returns are subject to periodic examination by the Internal Revenue Service and other taxing authorities. As of February 28, 2018, the Company had no open income tax examinations. The Company’s tax years ended February 28, 2015 through 2018 remain subject to federal income tax examination. For state and local jurisdictions, the tax years February 28, 2014 through 2018 remain subject to income tax examination. To the extent that net operating losses are utilized, the year of loss is open to examination.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into federal law. The provisions of this major tax reform are generally effective January 1, 2018. The most significant change impacting the Company is the reduction of the corporate federal income tax rate from 35% to 21% effective January 1, 2018. The Company was able to make reasonable estimates in order to remeasure its deferred tax balances and account for the effects of the Tax Act, which have been reflected in the February 28, 2018 financial statements. The adjustment to federal deferred tax balances resulted in a benefit of $15.5 million and the adjustment to state deferred tax balances resulted in an expense of $1.4 million. Any further technical corrections or other forms of guidance addressing the Tax Act, as well as regulatory or governmental actions, could result in adjustments to our accounting for the effects of the Tax Act.

The components of deferred tax assets and deferred tax liabilities at February 28, 2017 and February 28, 2018 are as follows:



	2017			2018
Deferred tax assets:
Net operating loss carryforwards	$	35,365		$	10,977
Intangible assets	22,130			14,072
Compensation relating to stock options	1,942			1,600
Deferred revenue	420			—
Accrued rent	1,892			1,204
Tax credits	3,438			1,464
Investments in subsidiaries	396			143
Other	993			332
Valuation allowance	(60,379		)	(27,099		)
Total deferred tax assets	6,197			2,693
Deferred tax liabilities
Indefinite-lived intangible assets	(43,505		)	(31,383		)
Property and equipment	(814		)	(483		)
Cancellation of debt income	(5,386		)	(1,839		)
Other	(29		)	(391		)
Total deferred tax liabilities	(49,734		)	(34,096		)
Net deferred tax liabilities	$	(43,537	)	$	(31,403	)

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset (“DTA”) will not be realized. The Company historically recorded a full valuation allowance on all U.S. (federal and state) deferred tax assets. The Company does not benefit its deferred tax assets based on the deferred tax liabilities (“DTLs”) related to indefinite-lived intangibles that are not expected to reverse during the carry-forward period. Because these DTLs would not reverse until some future indefinite period when the intangibles are either sold or impaired, any resulting temporary differences cannot be considered a source of future taxable income to support realization of the DTAs.

The Company decreased its valuation allowance by $33.3 million ($32.7 million federal and $0.6 million state), from $60.4 million as of February 28, 2017, to $27.1 million as of February 28, 2018, principally as a result of the sale of KPWR-FM in Los Angeles on August 1, 2017, and the corresponding realization of net operating loss carryforwards.

The Company has considered future taxable income and ongoing prudent and feasible tax-planning strategies in assessing the need for the valuation allowance. The Company will assess quarterly whether it remains more likely than not that the deferred tax assets will not be realized. In the event the Company determines at a future time that it could realize its deferred tax assets in excess of the net amount recorded, the Company will reduce its deferred tax asset valuation allowance and decrease income tax expense in the period when the Company makes such determination.

The Company has federal net operating losses (“NOLs”) of $18 million and state NOLs of $144 million available to offset future taxable income. The federal net operating loss carryforwards begin expiring in 2031, and the state net operating loss carryforwards expire between the years ending February 2019 and February 2037. A valuation allowance has been provided for the net operating loss carryforwards related to states in which the Company no longer has operating results as it is more likely than not that substantially all of these net operating losses will expire unutilized.

The activities of Digonex Technologies, Inc., a C Corporation under the Internal Revenue Code, are consolidated for financial statement purposes, but are not included in the U.S. consolidated income tax return of Emmis. As of February 28, 2018, Digonex has federal NOLs of $47 million and state NOLs of $47 million . If Digonex produces pretax income in the future, it is possible that the utilization of these NOL carryforwards will be limited due to Section 382 of the Internal Revenue Code. The Company is in the process of completing a Section 382 study to determine the applicable limitation, if any. As of February 28, 2018, the Company was able to determine that at least $18 million of federal NOLs and $18 million of state NOLs will be fully available to offset future taxable income. These amounts are included in the above consolidated federal and state NOL totals of $18 million and $144 million, respectively.

The Company had a $1.8 million tax credit at February 28, 2018, including tax credits in Illinois, Texas and a Federal Research Credit, all of which have a full valuation allowance.

Accounting Standards Codification paragraph 740-10 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken within a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest benefit that is greater than 50 percent likely of being realized upon ultimate settlement. As of February 28, 2018, the estimated value of the Company’s net uncertain tax positions is less than $0.1 million, most of which is included in other noncurrent liabilities, as the Company does not expect to settle the items within the next 12 months.

The following is a tabular reconciliation of the total amounts of gross unrecognized tax benefits for the years ending February 28, 2017 and February 28, 2018:



	For the year ending February 28,
	2017			2018
Gross unrecognized tax benefit – opening balance	$	(87	)	$	(60	)
Gross decreases – lapse of applicable statute of limitations	27			22
Gross unrecognized tax benefit – ending balance	$	(60	)	$	(38	)

Included in the balance of unrecognized tax benefits are tax benefits that, if recognized, would reduce the Company’s provision for income taxes by less than $0.1 million as of February 28, 2017 and February 28, 2018. Due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in liabilities that could be different from this estimate. In such case, the Company will record additional tax expense or tax benefit in the tax provision, or reclassify amounts on the accompanying consolidated balance sheets in the period in which such matter is effectively settled with the taxing authority.

The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. Related to the uncertain tax benefits noted above, the Company accrued an immaterial amount of interest during the year ending February 28, 2018 and in total, as of February 28, 2018, has recognized a liability for interest of $6 thousand.