Note 6: Income Taxes

The income tax provision (benefit) attributable to continuing operations during the years ended December 31, 2014, 2013 and 2012 is as follows:

Components of the provision (benefit) for income taxes are as follows:



For the years ended December 31,	2014		2013		2012
(dollars in thousands)
Current provision (benefit)
Federal	$	312	$	85	$	(5,782)
State		298		(6)		(440)

Deferred provision (benefit)
Federal		1,941		(3,205)		13,143
State		598		622		(587)

Provision (benefit) for income taxes	$	3,149	$	(2,504)	$	6,334

A reconciliation of the federal statutory tax rate and our effective tax rate is as follows:



For the years ended December 31,	2014		2013		2012
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
Research and development tax credit	(2.9)		14.6		(3.5)
State government grants, net of federal tax impact	-		4.2		(0.1)
Valuation allowance, state government grants, net of federal impact	8.2		(15.0)		-
Domestic manufacturing deduction	-		-		2.7
State income taxes, net of federal impact	3.7		1.4		(4.0)
Other, net	(0.3)		(2.1)		0.1

Effective income tax rate	43.7	%	38.1	%	30.2	%

On March 31, 2014 new tax legislation was enacted in New York that reduced the New York state income tax rate to zero percent (0%) for qualified manufacturers, such as Universal, for tax years beginning on or after January 1, 2014. Prior to this legislation, our facility in Dunkirk operated in a New York State Empire Zone and qualified to benefit from investments made and employees hired, and as such, we had recorded a deferred tax asset on these investments. As a result of this new legislation, we placed a full valuation allowance on our remaining corresponding deferred tax asset in the amount of $596,000 during 2014. Prior to this tax charge, we had placed a $986,000 valuation allowance on this deferred tax asset in 2013.

The Tax Increase Prevention Act of 2014 extended the tax benefit for research and development tax credits for 2014 resulting in a benefit of approximately $342,000, which was recorded entirely in the fourth quarter of 2014.

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. Significant components of our net deferred taxes related to continuing operations are as follows:



December 31,	2014		2013
(dollars in thousands)
Current deferred tax assets:
Inventory	$	3,136	$	3,454
Federal tax carryforwards		3,249		6,459
Share-based compensation		3,300		2,621
Receivables		29		98
Accrued liabilities		396		633
Other		65		65

Total current deferred tax assets	$	10,175	$	13,330

Noncurrent deferred tax assets:
Federal and state tax carryforwards	$	14,246	$	15,553

Deferred tax liabilities:
Property, plant and equipment (noncurrent)	$	56,354	$	58,085
Other (current)		492		288

	$	56,846	$	58,373

We file a U.S. federal income tax return and various state income tax returns. For federal income tax purposes, we had $41.5 million and $52.5 million of net operating loss carryforwards at December 31, 2014 and 2013, respectively. The net operating loss carryforwards begin to expire in 2031. In addition we have credit carryforwards associated with our research and development activities of $1.7 million and $1.4 million as of December 31, 2014 and 2013, respectively. The research and development credit carryforwards begin to expire in 2030. We also have $597,000 and $334,000 in alternative minimum tax credit carryforwards for the years ended December 31, 2014 and 2013, respectively. The alternative minimum tax credit carryforwards can be carried forward indefinitely.

We have state net operating loss carryforwards of $8.1 million and $8.7 million and state credit carryforwards of $267,000 and $257,000 at December 31, 2014 and 2013, respectively. The state net operating loss carryforwards begin to expire in 2031. The state credit carryforwards begin to expire in 2027.

We are routinely under audit by federal or state authorities. During 2014, the Internal Revenue Service (“IRS”) concluded its audit of our federal income tax returns for the years ended December 31, 2008 through 2011. Our federal tax returns are subject to examination by the IRS for tax years after 2012.

In 2014, we reached a settlement with Pennsylvania on certain expenses which had been deducted for state income tax purposes during the 2005-2008 tax years. As a result of this matter, we incurred $179,000 of additional Pennsylvania income taxes net of the federal tax benefit. We are subject to examination by state tax jurisdictions for tax years after 2011.