NOTE J — INCOME TAXES

 

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

 

 

A reconciliation of the federal statutory tax rate to our effective tax rate applicable to continuing operations is as follows:

 

 

The significant components of the net deferred income tax asset are as follows:

 

 

We have $8.9 million and $8.9 million of U.S. federal and $185.3 million and $156.1 million of state net operating loss carryforwards available at December 31, 2016 and 2015, respectively.  These carryforwards will be used to offset future income but may be limited by the change in ownership rules in Section 382 of the Internal Revenue Code.  These net operating loss carryforwards will expire in varying amounts between 2017 and 2036.  U.S. Federal net operating losses generated in 2016 and 2015 were carried back to tax years 2014 and 2013 and, therefore, were not carried forward.

 

As of December 31, 2016, we had approximately $94.2 million in net deferred tax assets (“DTAs”).  These DTAs can be used to offset taxable income in future periods and reduce our income taxes payable in those future periods.  At this time, we consider it more likely than not that we will have sufficient taxable income in the future that will allow us to realize these DTAs.  However, it is possible that some or all of these DTAs may not be realized unless we are able to generate sufficient taxable income from our operations.  If we do not generate sufficient taxable income in the future a substantial valuation allowance to reduce our DTAs may be required, which could materially increase our expenses in the period the allowance is recognized and materially adversely affect our results of operations and statement of financial condition.  As of December 31, 2016, we had a valuation allowance of approximately $6.9 million, related primarily to certain state loss carryforwards, which are expected to expire before utilization.  We monitor our cumulative loss position and other evidence each quarter to determine the appropriateness of our valuation allowance.  Although we believe our estimates are reasonable, the ultimate determination of the appropriate amount of valuation allowance involves significant judgment.

 

The following schedule presents the activity in the valuation allowance:

 

 

A reconciliation of our liability for unrecognized tax benefits is as follows:

 

 

As of December 31, 2016, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is approximately $2.9 million.  We expect the amount of unrecognized tax benefits will change by approximately $3.8 million within the next twelve months due primarily to the lapse of statute limitations.  We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.  As of December 31, 2016, 2015 and 2014, the amount of accrued interest and penalties was approximately $0.4 million, $0.5 million and $0.5 million, respectively.

 

We are subject to income tax in the U.S. federal, state and local jurisdictions.  With few exceptions, we are no longer subject to U.S. Federal income tax examinations for years prior to 2013, as the statute of limitations has lapsed for 2012 and all preceding years.  However, due to acquired net operating losses, tax authorities have the ability to adjust those net operating losses related to closed years.  We are currently under income tax audits in various U.S. jurisdictions for the originally filed tax returns for tax years ended 2013-2015.  Certain of these returns will be amended, and we believe we have adequate accruals for additional taxes and related interest expense which could result.  We believe the ultimate resolution of income tax examinations will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity.

 

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (“Tax Reform”) into legislation. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. In the case of US federal income taxes, the enactment date is the date the bill becomes law (i.e., upon presidential signature).  With respect to this legislation, we expect a one-time increase in tax expense of $25 million to $35 million, due to a re-measurement of deferred tax assets and liabilities resulting from the decrease in the corporate Federal income tax rate from 35% to 21%. We are in the process of analyzing certain other provisions of this legislation, including the repeal of IRC Section 199, which may result in an overall increase to our effective tax rate.  Consistent with the guidance under ASC 740, we will record any impacts from enactment of the Tax Cuts and Jobs Act in the fourth quarter of 2017 subject to Staff Accounting Bulletin (“SAB”) 118 which provides for a measurement period to complete the accounting for certain elements of the tax reform.