INCOME TAXES

Overview

Effective January 1, 2018, the Tax Act reduced the corporate rate from 35% to 21%. The Company has adopted ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraph Pursuant to SEC Staff Accounting Bulletin No. 118, which allows the company to record provisional amounts during the period of enactment. Any change to the provisional amounts are recorded as an adjustment to the provision for income taxes in the period the amounts are determined. During the year ended December 31, 2017, the company recognized a provisional net deferred income tax expense of $5,476 to reflect the revaluation of the Company’s net deferred tax assets based on the U.S. federal tax rate of 21%. In accordance with SAB 118, the Tax Act related income tax effects that were initially reported as provisional estimates were refined as additional analysis was performed.

The provision (benefit) for income taxes on continuing operations for the years ended December 31, 2018, 2017 and 2016 is summarized as follows:



	Year Ended December 31,
	2018			2017			2016
Current provision (benefit) :
Federal	$	(49	)	$	274		$	17
State	(86		)	472			522
	(135		)	746			539
Deferred provision (benefit):
Federal	50			6,585			(1,284		)
State	(665		)	(588		)	(285		)
	(615		)	5,997			(1,569		)
Provision (benefit) for income taxes of continuing operations	$	(750	)	$	6,743		$	(1,030	)

A reconciliation of taxes computed at statutory income tax rates on income (loss) from continuing operations is as follows:



	Year Ended December 31,
	2018			2017			2016
Provision (benefit) for federal income taxes at statutory rates	$	(1,672	)	$	711		$	(889	)
Provision for state income taxes, net of federal benefit	(479		)	421			120
Valuation allowance changes affecting the provision for income taxes	(146		)	(372		)	(45		)
Employment tax credits	(64		)	(217		)	(529		)
Nondeductible expenses	1,919			496			453
Stock based compensation expense	15			(35		)	(62		)
Effect of Tax Cuts and Jobs Creation Act	—			5,476			—
Other	(323		)	263			(78		)
Provision (benefit) for income taxes of continuing operations	$	(750	)	$	6,743		$	(1,030	)

Deferred Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are reduced by a valuation allowance if, based upon the weight of available evidence, it is more likely than not that we will realize only some portion of the deferred tax assets. The net deferred tax assets and liabilities, at the respective income tax rates, are as follows:



	December 31,
	2018			2017
Deferred tax assets (liabilities):
Net operating loss and other carryforwards	$	324		$	495
Credit carryforwards	2,878			3,237
Allowance for doubtful accounts	4,570			3,626
Prepaid expenses	(1,022		)	(731		)
Interest rate limitation	148			—
Deferred lease costs	—			32
Depreciation	1,318			1,190
Tax goodwill and intangibles	(1,079		)	(972		)
Stock-based compensation	197			476
Accrued liabilities	896			773
Accrued rent	1,914			1,892
Kentucky and Kansas acquisition costs	3			4
Impairment of long-lived assets	191			186
Interest rate swap	(152		)	(14		)
Hedge Ineffectiveness	(168		)	(106		)
Noncurrent self-insurance liabilities	5,997			5,443
Other	64			—
	16,079			15,531
Less valuation allowance	(228		)	(377		)
	$	15,851		$	15,154

Deferred Tax Valuation Allowance

The assessment of the amount of value assigned to our deferred tax assets under the applicable accounting standards is highly judgmental. We are required to consider all available positive and negative evidence in evaluating the likelihood that we will be able to realize the benefit of our deferred tax assets in the future. Such evidence includes scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax-planning strategies, and the results of recent operations. Since this evaluation requires consideration of historical and future events, there is significant judgment involved, and our conclusion could be materially different should certain of our expectations not transpire.

When assessing all available evidence, we consider the weight of the evidence, both positive and negative, based on the objectivity of the underlying evidence and the extent to which it can be verified. For the three-year period ended December 31, 2018, the Company has a cumulative pre-tax loss from continuing operations of $8,934, which includes $8,104 of loss attributable to the year ended December 31, 2018. Additionally, the Company recognized governmental and regulatory changes have put downward revenue pressure on the long-term care industry as a piece of negative evidence in our analysis. As a result of this negative evidence, the Company performed a thorough assessment of the available positive and negative evidence in order to ascertain whether it is more-likely-than-not that in future periods the Company will generate sufficient pre-tax income to utilize all of our federal deferred tax assets and our net operating loss and other carryforwards and credits. State deferred tax assets are considered for valuation separately and on a state-by-state basis.

The Company also identified several pieces of objective positive evidence which were considered and weighed in the analysis performed regarding the valuation of deferred tax assets, including, but not limited to the expected accretive strategic acquisitions completed by us during the three-year period, corporate and regional restructuring expected to reduce costs while maintaining revenue levels, the long-term expiration dates of a majority of the net operating losses and credits, our history of not having carryforwards or credits expire unutilized, and the completed divestiture of the centers in Mississippi in 2017 and Ohio in 2016.

In performing the analysis, the Company contemplated utilization of the deferred tax assets under multiple scenarios. After consideration of these factors, the Company determined that it was more likely than not that future taxable income would be sufficient to realize substantially all of the recorded value of the Company's deferred tax assets for federal income tax purposes.

Realization of the deferred tax assets is not assured and future events could result in a change in judgment. If future events result in a conclusion that realization is no longer more likely than not to occur, the Company would be required to establish a valuation allowance on the deferred tax assets at that time, which would result in a charge to income tax expense and a potentially material decrease in net income in the period in which the factors change our judgment.

At December 31, 2018, the Company had $6,028 of net operating losses, which expire at various dates beginning in 2019 and continue through 2021. The use of a portion of these loss carryforwards is limited by change in ownership provisions of the Federal tax code to a maximum of approximately $1,162. The Company has reduced the deferred tax asset and the corresponding valuation allowances for net operating loss deductions permanently lost as a result of the change in ownership provisions.

With respect to state deferred tax assets, the Company reduced the valuation allowance by approximately $147 in 2018, primarily related to the expectation that deferred tax assets for which valuation allowances had previously been applied would more-likely-than-not be utilized as a result of the increase in taxable income during the year ended December 31, 2018. In 2017 and 2016, the Company recorded a deferred tax provision to adjust approximately $357 and $47, respectively, of the valuation allowance on state deferred tax assets. The changes in valuation allowance were based on the Company's assessment of the realization of certain individual tax assets. The Company did not record a valuation allowance as of December 31, 2018.

Under the Work Opportunity Tax Credit ("WOTC") program, the Company recorded $64, $210 and $550 in Work Opportunity Tax Credits during 2018, 2017 and 2016, respectively.

The Company received a notice of an audit by the Internal Revenue Service related to the 2012 tax year, which was closed in 2017. As of December 31, 2018, the Company’s tax years for 2014 forward are subject to examination by tax authorities.