Income Taxes

DLH accounts for income taxes in accordance with the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the balance sheet when it is determined that it is more likely than not that the asset will be realized. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized.

DLH recorded $0.9 million and $5.5 million benefits for income tax, net, for fiscal year ended September 30, 2016 and 2015, respectively. The benefits related principally to the release of our valuation allowance, to reflect the amount of our deferred tax asset that we expect to realize in future years. For each fiscal year, that release was based upon our estimate of future taxable earnings based on results generated. To project taxable income in the future periods, we first estimated revenue for the carryforward period based on the expected performance under current contracts, plus expected changes in the contract base. Using these estimates of revenue, we assumed a proportional level of book income as was generated from the revenues recorded in each fiscal year. We further assumed that tax goodwill amortization would continue through its 15 year life and that amortization of intangibles would continue through their respective lives.

Using the taxable income projections, we calculated the amount of net operating loss (NOL) utilization that would be achieved within each loss year’s carryforward period. Due to the acquisition of Danya during the current fiscal year, our projections of future taxable income were revised to include the expected results from the new consolidated filing group. Our estimate of future taxable income will be revised at least annually or more frequently upon the occurrence of an event which warrants a new estimate.

At September 30, 2016 the Company had net operating losses of approximately $36 million and $3.6 million for U.S. and state tax return purposes, respectively. The NOLs begin to expire in 2021 and continue to expire through 2033. We analyzed our deferred tax asset related to stock based compensation and determined that the deferred tax asset should be reduced due to various factors including the future deductibility of stock option exercises. Accordingly, we reduced our deferred tax assets in the fiscal year ended September 30, 2016 to reflect the expected realization of benefit from these tax attributes.

DLH has implemented the updated guidance for classification of deferred tax assets and liabilities, prospectively as of September 30, 2016. Accordingly, all deferred taxes are considered as noncurrent as of that date. An analysis of DLH's deferred tax asset and liability is as follows:



	Year Ended
	September 30,
(amounts in thousands)	2016		2015
Current deferred income tax asset:
Net operating loss carryforwards and tax credits	$	—	$	391
Accrued liabilities	—		753
Valuation allowance	—		(162		)
Net current deferred tax asset	$	—	$	982



	Year Ended
	September 30,
(amounts in thousands)	2016			2015
Deferred income tax asset (liability):
Net operating loss carry forwards and tax credits	$	12,387		$	12,341
AMT credit carryforward	231			183
Stock based compensation	172			767
Fixed and intangible assets	(2,580		)	(2,379		)
Accrued expenses	918			—
Other items, net	287			5
Valuation allowance	—			(1,592		)
Net deferred tax asset	$	11,415		$	9,325

The significant components of the expense (benefit) for income taxes from continuing operations are summarized as follows:



	Year Ended
	September 30,
(amounts in thousands)	2016			2015
Current expense (benefit)	$	170		$	220
Deferred expense (benefit)	(1,108		)	(5,708		)
Total expense (benefit)	$	(938	)	$	(5,488	)

The following table indicates the significant differences between the federal statutory rate and DLH's effective tax rate for continuing operations:



	Year Ended
	September 30,
(amounts in thousands)	2016			2015
Federal statutory rate	$	831		$	1,134
State taxes, net	71			155
Other permanent items	(86		)	7
Change in valuation allowance	(1,754		)	(6,784		)
	$	(938	)	$	(5,488	)

We file income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. We are no longer subject to federal income tax examinations for years before 2013 and to state and local income tax examinations by tax authorities for years before 2012.