INCOME TAXES

The provision (benefit) for income taxes of continuing operations is composed of the following components:



	Year Ended December 31,
	2012			2011		2010
Current provision (benefit) :
Federal	$	(349,000	)	$	55,000	$	(257,000	)
State	13,000			171,000		(82,000		)
	(336,000		)	226,000		(339,000		)
Deferred provision (benefit):
Federal	(1,170,000		)	199,000		1,851,000
State	(241,000		)	12,000		190,000
	(1,411,000		)	211,000		2,041,000
Provision (benefit) for income taxes of continuing operations
	$	(1,747,000	)	$	437,000	$	1,702,000

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



	Year Ended December 31,
	2012			2011			2010
Provision (benefit) for federal income taxes at statutory rates	$	(1,687,000	)	$	552,000		$	1,813,000
Provision (benefit) for state income taxes, net of federal benefit	(175,000		)	128,000			89,000
Resolution with tax authorities	—			(79,000		)	—
Valuation allowance changes affecting the provision for income taxes	(7,000		)	(8,000		)	(2,000		)
Employment tax credits	(130,000		)	(1,000,000		)	(580,000		)
Nondeductible expenses	254,000			437,000			357,000
Stock based compensation expense	13,000			410,000			—
Other	(15,000		)	(3,000		)	25,000
Provision (benefit) for income taxes of continuing operations	$	(1,747,000	)	$	437,000		$	1,702,000

The net deferred tax assets and liabilities, at the respective income tax rates, are as follows:



	December 31,
	2012			2011
Current deferred tax assets:
Credit carryforwards	$	251,000		$	1,288,000
Net operating loss and other carryforwards	352,000			—
Allowance for doubtful accounts	1,447,000			1,066,000
Accrued liabilities	4,236,000			4,961,000
	6,286,000			7,315,000
Less valuation allowance	(242,000		)	(298,000		)
	6,044,000			7,017,000
Current deferred tax liabilities:
Prepaid expenses	(739,000		)	(976,000		)
	$	5,305,000		$	6,041,000



	December 31,
	2012			2011
Noncurrent deferred tax assets:
Net operating loss and other carryforwards	$	1,365,000		$	1,720,000
Credit carryforwards	964,000			—
Deferred lease costs	356,000			416,000
Depreciation	(2,036,000		)	(2,589,000		)
Tax goodwill and intangibles	(739,000		)	(469,000		)
Stock-based compensation	1,238,000			1,242,000
Accrued rent	4,538,000			4,582,000
Impairment of long-lived assets	659,000			656,000
Interest rate swap	564,000			579,000
Noncurrent self-insurance liabilities	6,062,000			4,785,000
	12,971,000			10,922,000
Less valuation allowance	(619,000		)	(570,000		)
	$	12,352,000		$	10,352,000

In 2012, 2011, and 2010, the Company recorded a deferred tax benefit to reverse approximately $7,000, $8,000 and $2,000, respectively, of the valuation allowance on deferred tax assets. The decreases in valuation allowance were based on the Company's assessment of the realization of certain individual tax assets. The Company continues to maintain a valuation allowance of approximately $861,000 to reduce the deferred tax assets by the amount management believes is more likely than not to not be utilized through the turnaround of existing temporary differences, future earnings, or a combination thereof. In future periods, the Company will continue to assess the need for and adequacy of the remaining valuation allowance.

At December 31, 2012, the Company had $9,174,000 of net operating losses, which expire at various dates beginning in 2019 and continue through 2021. The use of these loss carryforwards is limited by change in ownership provisions of the Federal tax code to a maximum of approximately $4,308,000. In 2005, the Company 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.

Stock based compensation increases the Company's effective tax rate to the extent that stock based compensation expense recorded in the Company's financial statements is non-deductible for tax purposes. This primarily occurs for equity grants that have a higher grant date fair value than the income tax deduction the Company receives upon exercise.

During 2011, the Company recorded an estimated $400,000 in employment tax credits under the Hiring Incentives to Restore Employment (HIRE) Act which provided a one-time tax credit. In addition, under the Work Opportunity Tax Credit ("WOTC")program the Company recorded $130,000, $600,000 and $580,000 in Work Opportunity Tax Credits during 2012, 2011 and 2010, respectively. In January 2013, the American Taxpayer Relief Act of 2012 (Act) was signed into law. The Act retroactively reinstated the federal Work Opportunity Tax Credit for qualifying costs paid during 2012. Pursuant to ASC 740-10-25-47 the effect of changes in the tax laws including retroactive changes are recognized in the period the law was enacted. The Company will be eligible to claim the WOTC on its 2012 tax return. The benefit of the credit will be recognized in the financial statements in 2013.

The Company follows the FASB's guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns evaluating the need to recognize or unrecognize uncertain tax positions. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2012			2011		2010
Balance at the beginning of the period	$	86,000		$	84,000	$	76,000
Changes in tax positions for prior years	(86,000		)	2,000		8,000
Balance at the end of the period	$	—		$	86,000	$	84,000

The unrecognized tax benefits are accrued in “other current liabilities.” The net change in the amount of unrecognized tax benefits during the years ended December 31, 2012, 2011 and 2010 was related primarily to the adjustment of the estimated liability. None of the current unrecognized tax benefits are expected to impact the Company's effective tax rates.

The Company has chosen to classify interest and penalties as a component separate from income tax expense in its consolidated statements of income. The tax years 2009 through 2011 remain open to examination by major taxing jurisdictions in which the Company operates. During 2010, the Internal Revenue Service (“IRS”) commenced an examination of the Company's U.S. income tax returns for the years 2008 and 2009. The examination for both years was completed during 2011 and the Company recognized a combined income tax benefit of $79,000 as a result of the examination.