INCOME TAXES

The Company is subject to income taxation in the United States and Canada. However, business is conducted primarily in the United States. The effective income tax rate differs from the statutory rate primarily due to state taxes, non-deductible stock-based compensation, and tax credits. The Company makes estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s plans and estimates. Should the actual amounts differ from these estimates, the amount of the valuation allowance could be materially affected.

Income taxes are computed using the asset and liability method, under which 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 affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Changes in valuation allowances are reflected as a component of provision for income taxes.

Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):



	Year Ended December 31,
	2015			2014
Deferred tax assets:
Net operating losses (federal and state)	$	2,508		$	2,996
Accrued expenses	9,908			9,381
Accrued workers compensation costs	18,823			13,964
Stock-based compensation	4,643			2,508
Tax benefits relating to uncertain positions	29			20
Tax credits (federal and state)	6,272			9,865
Other	113			354
Total	42,296			39,088
Valuation allowance	(5,276		)	(6,945		)
Total deferred tax assets	37,020			32,143
Deferred tax liabilities:
Depreciation and amortization	(3,277		)	(10,643		)
Deferred service revenues	(85,263		)	(77,827		)
Prepaid health plan expenses	(3,121		)	(2,202		)
Total deferred tax liabilities	(91,661		)	(90,672		)
Net non-current deferred tax liabilities	$	(54,641	)	$	(58,529	)

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The Company elected to early adopt and retrospectively apply the provisions of the amendment which resulted in reclassification of the previously reported current deferred tax liability of $65.7 million and noncurrent deferred tax asset of $7.2 million to net against the noncurrent deferred tax liability for a total noncurrent deferred tax liability of $58.5 million for 2014.

The deferred tax assets and liabilities presented above are classified in the accompanying consolidated balance sheets as follows (in thousands):



	Year Ended December 31,
	2015			2014
Net current deferred tax liabilities	$	—		$	—
Net non-current deferred tax liabilities	(54,641		)	(58,529		)
Net current deferred tax assets	—			—
Net non-current deferred tax assets	—			—
Net deferred tax liabilities	$	(54,641	)	$	(58,529	)

The provision for income taxes consists of the following (in thousands):



	Year Ended December 31,
	2015			2014			2013
Current:
Federal	$	9,189		$	(31,111	)	$	11,319
Foreign	378			230			217
State	3,794			4,618			3,081
	13,361			(26,263		)	14,617
Deferred:
Federal	11,528			38,297			(5,659		)
Foreign	(24		)	—			—
State	320			2,951			(1,344		)
Revaluation due to state legislative changes	3,130			2,594			323
	14,954			43,842			(6,680		)
	$	28,315		$	17,579		$	7,937

The U.S. federal statutory income tax rate reconciled to the Company’s effective tax rate is as follows:



	Year Ended December 31,
	2015		2014		2013
U.S. federal statutory tax rate	35.00	%	35.00	%	35.00	%
State income taxes, net of federal benefit	6.6		3.8		3.8
Tax rate change	5.2		7.8		1.5
Nondeductible transaction costs	—		0.9		—
Nondeductible meals, entertainment and penalties	3.3		4.3		4.1
Stock-based compensation	1.3		4.5		(0.1	)
Uncertain tax positions	0.2		0.8		(2.3	)
Tax credits	(2.2	)	(3.6	)	(4.3	)
Other	(2.2	)	(0.3	)	(0.1	)
	47.20	%	53.20	%	37.60	%

Our effective income tax rate decreased from 53.2% for 2014 to 47.2% for 2015. The decrease is primarily due to disqualifying dispositions on previously non-deductible stock-based compensation and tax credits offset in part by increased state taxes of 2.8% due to state legislative changes. Revaluation of deferred taxes due to state legislative changes resulted in discrete tax expense representing 5.2%, 7.8% and 1.5% of the effective tax rate for the years ended December 31, 2015, 2014 and 2013, respectively. The benefit in other tax expense of 2.2% is primarily attributable to adjustments to state net operating losses resulting from state legislative changes.

The Company records a valuation allowance to reduce reported deferred tax assets if, based on the weight of available evidence, both positive and negative, for each respective tax jurisdiction, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company recorded a valuation allowance of $0.6 million and $1.9 million as of December 31, 2015 and 2014, respectively, related to certain federal and state net operating loss carryforwards that may not be utilized prior to expiration. The Company has federal and multiple state net operating loss carryforwards of approximately $0.1 million and $60.8 million, respectively, as of December 31, 2015. The federal net operating loss carryforward will begin expiring in 2031 and the state net operating loss carryforward will begin expiring in 2016. The Internal Revenue Code of 1986, as amended, imposes substantial restrictions on the utilization of net operating losses in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses may be limited as prescribed under Internal Revenue Code Section 382 (“IRC Section 382”). Events which may cause limitations in the amount of the net operating losses that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Due to the effects of historical equity issuances, the Company has determined that the future utilization of a portion of its net operating losses is limited annually pursuant to IRC Section 382. As of December 31, 2015, the Company has determined that a portion of its state net operating losses in the amount of $2.7 million, will expire because of the annual limitation.

The Company has excluded excess windfall tax benefits resulting from stock option exercises as components of the Company’s gross deferred tax assets, as tax attributes related to such windfall tax benefits should not be recognized until they result in a reduction of taxes payable. The gross amount of unrealized net operating loss carryforwards for state resulting from stock option exercises was $14.1 million at December 31, 2015. When realized, excess windfall tax benefits are credited to additional paid-in capital. The provision for income taxes for the year ended December 31, 2015 included $20.7 million of excess tax benefit resulting from stock option exercises and net operating loss carryforward utilization. The Company follows the tax law ordering method to determine when such net operating loss carryforwards have been realized.

The Company has $6.5 million (net of federal benefit) state tax credit carryforwards available that will begin expiring in 2021, which are partially offset by a valuation allowance of $4.7 million and $5.0 million as of December 31, 2015 and 2014, respectively. Provision for income taxes for the years ended December 31, 2015 and 2014 included a tax benefit from operating loss carryforwards of $3.9 million and $24.3 million, respectively. The valuation allowance decreased by $1.7 million as of December 31, 2015. The valuation allowance increased by $1.8 million and $3.7 million as of December 31, 2014 and 2013, respectively.

The Company is subject to tax in U.S. federal and various state and local jurisdictions, as well as Canada. The Company is not subject to any material income tax examinations in federal or state jurisdictions for tax years beginning prior to January 1, 2011. The Company paid Notices of Proposed Assessments disallowing employment tax credits totaling $10.5 million in connection with the IRS examination of Gevity HR, Inc. and its subsidiaries, which was acquired by TriNet in June 2009. The Company plans to exhaust all administrative efforts to resolve this matter, however, it is likely that the matter will ultimately be resolved through litigation. With regard to these employment tax credits, the Company believes it is more likely than not that the Company will prevail. Therefore, no reserve has been recognized related to this matter.

As of December 31, 2015 and 2014, the total unrecognized tax benefits related to uncertain income tax positions, which would affect the effective tax rate if recognized, were $3.3 million and $3.2 million, respectively. As of December 31, 2015, the amount of the total unrecognized tax benefits for which it was reasonably possible such benefits could settle within the next year was de minimis.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) is as follows (in thousands):



	Year Ended December 31,
	2015			2014			2013
Unrecognized tax benefits at January 1	$	2,471		$	2,300		$	2,710
Additions for tax positions of prior periods	—			25			—
Additions for tax positions of current period	167			182			286
Reductions for tax positions of prior period:
Settlements with taxing authorities	—			—			(406		)
Lapse of applicable statute of limitations	—			—			(290		)
Adjustments to tax positions	(20		)	(36		)	—
Unrecognized tax benefits at December 31	$	2,618		$	2,471		$	2,300

The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of December 31, 2015 and December 31, 2014, the total amount of gross interest and penalties accrued was $0.8 million and $0.8 million, respectively. In connection with tax matters, the Company recognized de minimis interest and penalty expense related to its uncertain tax positions as a component of income tax expense in the accompanying consolidated statements of operations for the years ended December 31, 2015, 2014 and 2013, respectively.

The Company has not provided for U.S. federal income and foreign withholding taxes on its Canadian subsidiary’s undistributed earnings of $2.6 million as of December 31, 2015, because the Company intends to reinvest such earnings indefinitely. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. income taxes (subject to an adjustment for foreign tax credits). Determining the unrecognized deferred tax liability related to the Company's investment in its Canadian subsidiary that are indefinitely reinvested is not practicable. We currently intend to indefinitely reinvest those earnings and other basis differences in operations outside the U.S.