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 (SAB 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, 2019, 2018 and 2017 is summarized as follows:



	Year Ended December 31,
	2019		2018			2017
Current provision (benefit) :
Federal	$	197	$	(143	)	$	272
State	76		(412		)	222
	273		(555		)	494
Deferred provision (benefit):
Federal	12,439		(529		)	2,544
State	2,982		(397		)	(504		)
	15,421		(926		)	2,040
Provision (benefit) for income taxes of continuing operations	$	15,694	$	(1,481	)	$	2,534

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



	Year Ended December 31,
	2019			2018			2017
Provision (benefit) for federal income taxes at statutory rates	$	(2,469	)	$	(2,676	)	$	(2,453	)
Provision (benefit) for state income taxes, net of federal benefit	(106		)	(564		)	322
Valuation allowance changes affecting the provision for income taxes	19,002			(147		)	(498		)
Employment tax credits	(210		)	(49		)	(173		)
Nondeductible expenses	122			1,899			401
Stock based compensation expense	80			15			(29		)
Effect of Tax Cuts and Jobs Creation Act	—			—			4,514
Rate actualization	(1,349		)	—			(36		)
Other	624			41			486
Provision (benefit) for income taxes of continuing operations	$	15,694		$	(1,481	)	$	2,534

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,
	2019			2018
Deferred tax assets (liabilities):
Net operating loss and other carryforwards	$	859		$	324
Credit carryforwards	3,118			2,878
Accounts receivable	4,852			4,570
Prepaid expenses	(1,015		)	(1,022		)
Interest rate limitation	971			148
Right-of-use lease	2,351			—
Depreciation	1,863			1,318
Tax goodwill and intangibles	(1,066		)	(1,079		)
Stock-based compensation	183			197
Accrued liabilities	504			896
Accrued rent	380			1,914
Kentucky and Kansas acquisition costs	—			3
Impairment of long-lived assets	176			191
Interest rate swap	(4		)	(152		)
Hedge Ineffectiveness	(155		)	(168		)
Noncurrent self-insurance liabilities	6,363			5,997
Restitution	2,445			—
Other	30			64
	21,855			16,079
Less valuation allowance	(21,855		)	(228		)
	$	—		$	15,851

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, 2019, the Company has a cumulative pre-tax loss from continuing operations of $31,739, which includes $11,780 of loss attributable to the year ended December 31, 2019. 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 the analysis. In 2019 and 2018 combined, the Company recognized a total expense of $9.5 million related to the CID settlement. Additionally, in 2017 it recorded an additional $5.5 million of income tax expense related to the revaluation of deferred tax assets in accordance with the Tax Cuts and Jobs Act. Because of these items and other financial results, the Company entered a cumulative loss for the 36 preceding months ended June 30, 2019 and 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 its federal deferred tax assets and its net operating loss and other carryforwards and credits.

The Company also identified several pieces of positive evidence that were considered and weighed in the analysis performed regarding the valuation of deferred tax assets. The evidence included the termination of operations for 10 nursing facilities in Kentucky completed in the third quarter of 2019, the related corporate and regional restructuring and other cost saving initiatives already in process. The evidence also included consideration of participation in revenue incentive programs that are expected to generate additional revenue, the long-term expiration dates of a majority of the net operating losses and credits, and the Company’s history of not having carryforwards or credits expire unutilized.

In performing the analysis, the Company contemplated utilization of the recorded deferred tax assets under multiple scenarios. After consideration of these factors, the Company determined that a full valuation allowance of $20.0 million was necessary as of June 30, 2019. As of December 31, 2019, the Company has a valuation allowance in the amount of $21.9 million. The Company will continue to periodically assess the realizability of its future deferred tax assets.

At December 31, 2019, the Company had $8,655 of federal net operating losses, which expire at various dates beginning in 2020. 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 $3,336. 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.

Under the Work Opportunity Tax Credit ("WOTC") program, the Company recorded $210, $64 and $210 in Work Opportunity Tax Credits during 2019, 2018 and 2017, respectively.

The Company is not currently under examination by any major income tax jurisdiction. During 2019, the statutes of limitations lapsed on the Company's 2015 Federal tax year and certain 2014 and 2015 state tax years. The Company does not believe the Federal or state statute lapses or any other event will significantly impact the balance of unrecognized tax benefits in the next twelve months.