Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.8
Income Taxes
12 Months Ended
Dec. 31, 2013
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The domestic and foreign components of income (loss) before provision for income taxes were as follows:
 
 
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
 
 
(in thousands)
Domestic
 
$
19,230

 
$
9,151

 
$
(926
)
Foreign
 
1,252

 
251

 
(515
)
Total
 
$
20,482

 
$
9,402

 
$
(1,441
)

Our provision (benefit) for income taxes consisted of the following components:
 
 
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
 
 
(in thousands)
Current:
 
 
 
 
 
 
Federal
 
$

 
$

 
$

State
 
1,886

 
1,568

 
225

Foreign
 
421

 
27

 
70

Total current taxes
 
2,307

 
1,595

 
295

Deferred:
 
 
 
 
 
 
Federal
 
(1,832
)
 
3,192

 
299

State
 
(619
)
 
(574
)
 
(626
)
Foreign
 
(66
)
 
6

 
(178
)
Total deferred taxes
 
(2,517
)
 
2,624

 
(505
)
Total income tax provision (benefit)
 
$
(210
)
 
$
4,219

 
$
(210
)

The reconciliation of our income tax expense (benefit) computed at the U.S. federal statutory tax rate to the actual income tax expense (benefit) is as follows:
 
 
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
 
 
(in thousands)
Expense derived by applying the Federal income tax rate to income (loss) before taxes
 
$
7,169

 
$
3,291

 
$
(504
)
State income tax, net of federal benefit
 
607

 
445

 
146

Foreign income tax
 
(170
)
 
(55
)
 
215

Change in valuation allowance
 
(9,087
)
 

 
(660
)
Benefits of assets not previously recognized
 

 

 
(97
)
Nondeductible expenses
 
644

 
612

 
674

Fair value adjustment on stock acquisition
 
487

 
(251
)
 

Stock-based compensation
 
139

 
171

 
137

Tax credits
 

 

 
53

Changes in tax rates
 

 

 
(138
)
Other
 
1

 
6

 
(36
)
 
 
$
(210
)
 
$
4,219

 
$
(210
)

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:
 
 
 
December 31,
 
 
2013
 
2012
 
 
(in thousands)
Deferred tax assets:
 
 
 
 
Reserves, deferred revenue and accrued liabilities
 
$
6,303

 
$
7,215

Stock-based compensation
 
10,873

 
7,401

Net operating loss carryforwards
 
16,106

 
23,139

Total gross deferred tax assets
 
33,282

 
37,755

Deferred tax asset valuation allowance
 
(43
)
 
(9,216
)
Total deferred tax assets
 
33,239

 
28,539

Deferred tax liabilities:
 
 
 
 
Property, equipment and software
 
(5,408
)
 
(3,820
)
Other
 
(2,055
)
 
(1,711
)
Intangible assets
 
(23,871
)
 
(23,020
)
Total deferred tax liabilities
 
(31,334
)
 
(28,551
)
Net deferred tax assets (liabilities)
 
$
1,905

 
$
(12
)


Our management periodically evaluates the realizability of the deferred tax assets and, if it is determined that it is more likely than not that the deferred tax assets are realizable, adjusts the valuation allowance accordingly. During 2013, we were able to conclude that given our performance, the realization of our deferred tax assets was more likely than not and accordingly reversed valuation allowances of approximately $9.2 million and recorded the reduction in valuation allowances as a tax benefit for the period. The determination of the level of valuation allowance at December 31, 2013 is based on an estimated forecast of future taxable income which includes many judgments and assumptions. Accordingly, it is at least reasonably possible that future changes in one or more assumptions may lead to a change in judgment regarding the level of valuation allowance required in future periods.

The acquisition of the stock of RentSentinel resulted in an additional net deferred tax asset of $0.2 million. This net asset includes a deferred tax liability of $1.8 million related to intangibles that are not amortizable for tax purposes, a deferred tax asset of $2.1 million related to net operating loss carryforwards and other miscellaneous deferred tax liabilities of $0.1 million.

The acquisition of the stock of My Building resulted in an additional net deferred tax liability of $0.8 million. This net liability includes a deferred tax liability of $1.2 million related to intangibles that are not amortizable for tax purposes, a deferred tax asset of $0.3 million related to net operating loss carryforwards and other miscellaneous deferred tax assets of $0.1 million.
Our largest deferred tax assets are our federal and state net operating loss carryforwards of $174.0 million and $6.9 million respectively. The federal net operating losses will begin to expire in 2020 and the state net operating losses will begin to expire in 2014. Of the total net operating loss carryforwards, approximately $136.6 million is attributable to deductions originating from the exercise of non-qualified employee stock options, the benefit of which will be credited to paid-in capital.
In connection with our acquisition of MTS on August 24, 2011, we assumed incentive stock options (“ISOs”) granted from the MTS Plan. No tax benefit is recognized for stock-based compensation attributable to ISOs until there is a disqualifying disposition, if any, for income tax purposes. A portion of our stock-based compensation is attributable to ISO shares; therefore, our effective tax rate is subject to fluctuation.
A cumulative change in ownership among material shareholders, as defined in Section 382 of the Internal Revenue Code, during a three-year period may limit utilization of the federal net operating loss carryforwards. Based on available information, the Company believes it is not currently subject to the Section 382 limitation; however certain net operating losses generated by subsidiaries prior to their acquisition by the Company are subject to the Section 382 limitation. The limitation on these pre-acquisition net operating loss carryforwards will fully expire in 2028.
Our current state tax liability of $1.9 million is comprised of current tax liabilities in jurisdictions where tax is considered an income tax for financial reporting purposes but is assessed on adjusted gross revenue rather than adjusted pre-tax income and where we have current year income for financial reporting purposes that cannot be offset by net operating loss carryforwards until those carryforwards reduce our cash tax liability.
Our subsidiary in Hyderabad, India benefited from a tax holiday granted under the Software Technology Parks of India program upon commencement of business operations in 2008 through March 31, 2011. During this holiday period we were required to pay a minimum alternative tax which was available to reduce our post-holiday tax liability. Effective July 8, 2013, this subsidiary benefits from a tax holiday under the Special Economic Zone program. This benefit applies to a portion of our operations in this location. The expiration of this tax holiday will increase our effective income tax rate.
Our subsidiary in Manila, Philippines currently benefits from income tax holiday incentives in the Philippines pursuant to the registrations with the Philippine Economic Zone Authority, or PEZA. Under such PEZA registrations, the income tax holiday of our PEZA-registered project in the Philippines expires in 2015. The expiration of this tax holiday will increase our effective income tax rate.
No provision has been made for U.S federal and state income taxes on the undistributed earnings of approximately $1.6 million relating to our foreign subsidiaries as such earnings are expected to be reinvested and are considered permanent in duration. If these earnings were ultimately distributed to the U.S. in the form of dividends or otherwise, or if the shares of the subsidiaries were sold or transferred, we would likely be subject to additional U.S. income taxes, net of the impact of any available foreign tax credits. It is not practicable to estimate the additional income taxes related to permanently reinvested earnings in the subsidiaries.
Uncertain Tax Positions
At December 31, 2013 and 2012, we had no unrecognized tax benefits. Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense, and as of December 31, 2013 and 2012, there were no accrued interest and penalties.
We file consolidated and separate tax returns in the U.S. federal jurisdiction, numerous state jurisdictions and two foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations for years before 2010 and are no longer subject to state and local income tax examinations by tax authorities for years before 2009. However, net operating losses from all years continue to be subject to examinations and adjustments for at least three years following the year in which the attributes are used. We are not currently under audit for federal, state or any foreign jurisdictions.