Note 7. Income Taxes

For financial reporting purposes, income from continuing operations before income taxes includes the following components (in thousands):

	2016		2015		2014
United States	$	66,848	$	57,665	$	50,385
Foreign (Canada)		158		167		183
Total	$	67,006	$	57,832	$	50,568

Income tax expense included in the accompanying Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014 was as follows (in thousands):

	2016			2015			2014
Continuing operations :
Current:
Federal	$	18,816		$	18,079		$	15,749
Foreign		42			43			47
State and local		2,681			2,694			1,782
Total		21,539			20,816			17,578
Deferred:
Federal		4,148			1,060			952
State and local		712			953			1,624
Total		4,860			2,013			2,576
Total income tax expense from continuing operations		26,399			22,829			20,154
Discontinued operations :
Operations of discontinued operations:
Current		(365	)		(1,263	)		51
Deferred		(10	)		68			(222	)
Total		(375	)		(1,195	)		(171	)
Gain on disposal of discontinued operations:
Current		—			427			34
Deferred		—			(344	)		—
Total		—			83			34
Total income tax expense from discontinued operations		(375	)		(1,112	)		(137	)
Total income tax expense	$	26,024		$	21,717		$	20,017

The provision for income taxes attributable to income from continuing operations differed from the amount obtained by applying the federal statutory income tax rate to income from continuing operations before income taxes, as follows (in thousands, except percentages):

	2016			2015			2014
Tax at statutory rate (35%)	$	23,452		$	20,241		$	17,699
State taxes (net of federal benefit)		2,643			2,899			3,361
Business meals and entertainment — non-deductible		784			779			667
Reserves for uncertain tax positions		(87	)		(324	)		(1,724	)
Net change in tax rate		(64	)		(1,046	)		(214	)
Other, net		(329	)		280			365
Provision for income taxes from continuing operations	$	26,399		$	22,829		$	20,154
Effective income tax rate		39.4	%		39.5	%		39.9	%

The income tax benefits associated with the exercise of non-qualified stock options and restricted stock awards reflected in additional paid-in-capital were $1.1 million, $0.9 million and $0.5 million for the years ended December 31, 2016, December 31, 2015 and December 31, 2014, respectively.

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2016 and 2015, were as follows (in thousands):

	2016			2015
Deferred tax assets:
Net operating loss carryforwards .	$	884		$	952
Allowance for doubtful accounts		4,486			4,569
Employee benefits and compensation		29,166			27,984
Lease costs		2,772			3,318
State tax credit carryforwards		1,489			1,393
Other deferred tax assets		2,951			2,497
Total gross deferred tax assets		41,748			40,713
Less: valuation allowance		(1,314	)		(1,376	)
Total deferred tax assets, net	$	40,434		$	39,337
Deferred tax liabilities:
Accrued interest	$	2,494		$	3,847
Client list intangible assets		2,717			3,273
Goodwill and other intangibles		38,646			32,114
Other deferred tax liabilities		122			209
Total gross deferred tax liabilities	$	43,979		$	39,443
Net deferred tax (liability) asset	$	(3,545	)	$	(106	)

We have established valuation allowances for certain states’ deferred tax assets, primarily related to portions of the state net operating loss (“NOL”) carryforwards and state income tax credit carryforwards at December 31, 2016 and December 31, 2015. The net decrease in the valuation allowance of $0.1 million for the year ended December 31, 2016 related to changes in the valuation allowance for NOL’s. The net increase in the valuation allowance of $0.3 million for the year ended December 31, 2015 primarily related to changes in the valuation allowance for certain state tax credit carryforwards.

In assessing the realization of deferred tax assets, management considers all available positive and negative evidence, including projected future taxable income, scheduled reversal of deferred tax liabilities, historical financial operations and tax planning strategies. Based upon review of these items, management believes it is more-likely-than-not that the Company will realize the benefits of these deferred tax assets, net of the existing valuation allowances.

CBIZ and its subsidiaries file income tax returns in the United States, Canada, and most state jurisdictions. In March 2016, the Internal Revenue Service (“IRS”) completed its audit of the Company’s 2013 and 2014 federal income tax returns. We paid $0.5 million in settlement of this audit which had no impact on the 2016 income tax expense. With limited exceptions, our state and local income tax returns and non-U.S. income tax returns are no longer subject to tax authority examinations for years ending prior to January 1, 2012 and January 1, 2011, respectively.

The availability of NOL’s and state tax credits are reported as deferred tax assets, net of applicable valuation allowances, in the accompanying Consolidated Balance Sheets. At December 31, 2016, we had state net operating loss carryforwards of $23.9 million and state tax credit carryforwards of $1.5 million. The state net operating loss carryforwards expire on various dates between 2017 and 2030 and the state tax credit carryforwards expire on various dates between 2017 and 2036.

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

	2016			2015			2014
Balance at January 1	$	4,287		$	4,591		$	5,508
Additions for tax positions of the current year		110			126			1,107
Additions for tax positions of prior years		—			—			118
Settlements of prior year positions		(11	)		(94	)		(1,343	)
Lapse of statutes of limitation		(296	)		(336	)		(799	)
Balance at December 31	$	4,090		$	4,287		$	4,591

Included in the balance of unrecognized tax benefits at December 31, 2016 are $2.6 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate. We believe it is reasonably possible that certain of these unrecognized tax benefits could change in the next twelve months. We expect reductions in the liability for unrecognized tax benefits of approximately $0.3 million within the next twelve months due to expiration of statutes of limitation. Given the number of years that are currently subject to examination, we are unable to estimate the range of potential adjustments to the remaining balance of unrecognized tax benefits at this time.

We recognize interest expense, and penalties related to unrecognized tax benefits as a component of income tax expense. During 2016, we accrued interest expense of $0.2 million and, as of December 31, 2016, had recognized a liability for interest expense and penalties of $0.4 million and $0.3 million, respectively, relating to unrecognized tax benefits. During 2015, we accrued interest expense of $0.2 million and, as of December 31, 2015, had recognized a liability for interest expense and penalties of $0.3 million and $0.3 million, respectively, relating to unrecognized tax benefits.