The Company accounts for income taxes through recognition of deferred tax assets and liabilities for the expected future income tax consequences of events, which have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

Income tax expense for the years ended December 31, 2014, 2015 and 2016 consisted of the following:

 

The Company's effective tax rate differs from the statutory rate due to the impact of the following (expressed as a percentage of income before income taxes):

 

Temporary differences comprise the deferred tax assets and liabilities in the consolidated balance sheets as follows:

 

 

The Company’s deferred tax assets are related to: accruals not currently deductible, allowance for doubtful accounts and stock option timing differences between book and tax and section 179 carryforwards.  The Company has not established a valuation allowance to reduce deferred tax assets as the Company expects to fully recover these amounts in future periods. The Company’s deferred tax liability is the result of cumulative tax depreciation and amortization expense exceeding book depreciation and amortization and contingent liabilities recorded in 2015 and 2016.  Management reviews and adjusts those estimates annually based upon the most current information available.  However, because the recoverability of deferred taxes is directly dependent upon the future operating results of the Company, actual recoverability of deferred taxes may differ materially from management’s estimates.

In 2015 and 2016, tax benefits associated with the exercise of stock options (increased) reduced taxes payable by approximately $11,000 and ($5,000), respectively, and increased (reduced) equity by the same amount.

The Company is aware of the risk that the recorded deferred tax assets may not be realizable.  However, management believes that the Company will obtain the full benefit of the deferred tax assets on the basis of its evaluation of the Company’s anticipated profitability over the period of years that the temporary differences are expected to become tax deductions.  It believes that sufficient book and taxable income will be generated to realize the benefit of these tax assets.

 

Under professional standards, the Company’s policy is to evaluate the likelihood that its uncertain tax positions will prevail upon examination based on the extent to which those positions have substantial support within the Internal Revenue Code and regulations, revenue rulings, court decisions and other evidence.

At December 31, 2015 and 2016, the Company had no unrecognized tax benefits that would affect the effective tax rate if recognized, and as of December 31, 2015 and 2016, the Company had no accrued interest or penalties related to uncertain tax positions.  The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.  The Company files income tax returns in the U.S. federal jurisdiction and the states of Colorado, Arizona and New Mexico.  The tax years 2012-2016 remain open to examination by the taxing jurisdictions to which the Company is subject.