11. Income Taxes

Income Tax Expense

Income before income taxes consists of the following (in thousands):


	2015		2014		2013
Domestic	$	5,701	$	8,350	$	23,004
Foreign		167		353		288
Income before income taxes	$	5,868	$	8,703	$	23,292

Income tax expense consists of the following (in thousands):


	2015		2014		2013
Current:
Federal	$	231	$	898	$	6,304
State		142		211		396
Foreign		160		99		96
		533		1,208		6,796
Deferred:
Federal		1,011		127		1,142
State		319		46		(818)
		1,330		173		324
Income tax expense	$	1,863	$	1,381	$	7,120

The Company’s income tax expense in 2015, 2014, and 2013 included the Company’s federal, state, and foreign tax obligations. The Company’s effective income tax rate was approximately 32%, 16%, and 31% for the years ended December 31, 2015, 2014, and 2013, respectively. The Company’s income tax rate for the twelve months ended December 31, 2015 was favorably affected by the reversal of $869,000 in uncertain tax positions, primarily related to research and development tax credits for which the statute of limitations has expired, partially offset by the expiration of certain state net operating losses and other permanent differences. The Company’s income tax rate for the twelve months ended December 31, 2014 was favorably affected by the reduction in uncertain tax positions, nontaxable gains recorded as change in stock basis of subsidiary, and favorable deductions taken on the Company’s 2013 federal tax return, which was filed in 2014. The Company’s income tax rate for the twelve months ended December 31, 2013 was favorably affected by adjustments to valuation allowances on certain of the Company’s state net operating loss carryforwards, based on revised estimates of utilization of these carryforwards, and by the 2012 research and development tax credit, which was enacted in January 2013 and, therefore, reduced the Company’s tax expense during 2013.

The income tax expense amounts differ from the amounts computed by applying the U.S. federal statutory income tax rate of 34% for the years ended December 31, 2015 and 2014 and 35% for the year ended December 31, 2013 to pretax income as a result of the following (in thousands):


	2015		2014		2013
Tax expense at statutory rate	$	1,995	$	2,959	$	8,152
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal benefit		499		220		183
Non-deductible entertainment expenses		184		218		207
Equity compensation		144		63		(29)
Provision to return adjustments		122		(321)		(344)
Foreign income taxes		118		69		96
Other		57		(98)		165
Non-deductible change in stock basis of subsidiary		--		(641)		--
Net change in uncertain tax positions		(869)		(781)		104
Research and development credit		(281)		(237)		(252)
Domestic production activities deduction		(87)		(153)		(402)
State valuation allowance adjustment		(19)		83		(760)
Total Income tax expense	$	1,863	$	1,381	$	7,120

Deferred Taxes

The Company generates deferred tax assets primarily as a result of write-downs of inventory and deferred preservation costs; accruals for product and tissue processing liability claims; investment and asset impairments; and, in prior periods, due to operating losses. The Company acquired significant deferred tax assets, primarily net operating loss carryforwards, from its acquisitions of Hemosphere and Cardiogenesis in the second quarters of 2012 and 2011, respectively.

The tax effects of temporary differences which give rise to deferred tax assets and liabilities at December 31 are as follows (in thousands):


	2015		2014
Deferred tax assets:
Allowance for bad debts	$	142	$	853
Inventory and deferred preservation costs write-downs		536		873
Investment in equity securities		58		1,913
Property		2,987		2,934
Intangible assets		591		400
Accrued expenses		3,276		3,864
Loss carryforwards		12,262		14,141
Credit carryforwards		616		635
Stock compensation		2,546		2,367
Transaction Costs		1,048		--
Other		1,448		1,402
Less valuation allowance		(2,109)		(2,145)
Total deferred tax assets		23,401		27,237

Deferred tax liabilities:
Prepaid items		(471)		(420)
Intangible assets		(4,401)		(4,652)
Other		(341)		(296)
Total deferred tax liabilities		(5,213)		(5,368)

Total net deferred tax assets	$	18,188	$	21,869

As of December 31, 2015 the Company maintained a total of $2.1 million in valuation allowances against deferred tax assets, related to state net operating loss carryforwards, and a net deferred tax asset of $18.2 million. As of December 31, 2014 the Company maintained a total of $2.1 million in valuation allowances against deferred tax assets, related to state net operating loss carryforwards, and a net deferred tax asset of $21.9 million.

As of December 31, 2015 the Company had approximately $9.5 million tax-effected federal net operating loss carryforwards related to the acquisitions of Cardiogenesis and Hemosphere that will begin to expire in 2017, $2.7 million of tax-effected state net operating loss carryforwards that began to expire in 2015, $445,000 in research and development tax credit carryforwards that will begin to expire in 2022, and $154,000 in credits from the state of Texas that will fully expire by 2027.

Uncertain Tax Positions

A reconciliation of the beginning and ending balances of the Company’s uncertain tax position liability, excluding interest and penalties, is as follows (in thousands):


	2015		2014		2013
Beginning balance	$	1,437	$	2,100	$	2,004
Increases related to current year tax positions		103		92		281
Increases related to prior year tax positions		403		--		--
Decreases related to prior year tax positions		(70)		(265)		(185)
Decreases due to the lapsing of statutes of limitations		(904)		(490)		--
Ending balance	$	969	$	1,437	$	2,100

A reconciliation of the beginning and ending balances of the Company’s liability for interest and penalties on uncertain tax positions is as follows (in thousands):


	2015		2014		2013
Beginning balance	$	366	$	422	$	489
Accrual of interest and penalties		50		91		66
Decreases related to prior year tax positions		(206)		(147)		(133)
Ending balance	$	210	$	366	$	422

As of December 31, 2015 the Company’s uncertain tax liability, including interest and penalties of $1.2 million, was recorded as a reduction to deferred tax assets of $104,000, and a non-current liability of $1.1 million on the Company’s Consolidated Balance Sheets, all of which, except for the portion related to interest and penalties, is expected to impact the Company’s tax rate when recognized. The Company believes it is reasonably possible that approximately $227,000 of its uncertain tax liability will be recognized in 2016 due to the lapsing of various federal and state statutes of limitations. As of December 31, 2014 the Company’s total uncertain tax liability, including interest and penalties of $1.8 million, was recorded as a reduction of deferred tax assets of $108,000 and a non-current liability of $1.7 million on the Company’s Consolidated Balance Sheets.

Other

The Company’s tax years 2012 through 2014 generally remain open to examination by the major taxing jurisdictions to which the Company is subject. However, certain returns from years prior to 2012, in which net operating losses and tax credits have arisen, are still open for examination by the tax authorities.