Information Services Group Inc. - 10-K filing on 2016-03-10

INCOME TAXES

12 Months Ended

Dec. 31, 2015

NOTE 15—INCOME TAXES

The components of income before income taxes for the years ended December 31, 2015, 2014 and 2013 consists of the following:


	Years Ended December 31,
	2015		2014		2013
Domestic	$	1,331	$	5,208	$	3,913
Foreign		6,812		5,260		5,130
Total income before income taxes	$	8,143	$	10,468	$	9,043

The components of the 2015, 2014 and 2013 income tax provision are as follows:


	Years Ended December 31,
	2015		2014		2013
Current:
Federal	$	2,934	$	3,535	$	3,917
State		728		478		339
Foreign		1,485		1,940		1,825
Total current provision		5,147		5,953		6,081
Deferred:
Federal		(1,851)		(1,477)		(1,609)
State		(120)		(102)		(86)
Foreign		13		(210)		(119)
Total deferred benefit		(1,958)		(1,789)		(1,814)
Total	$	3,189	$	4,164	$	4,267

The differences between the effective tax rates reflected in the total provision for income taxes and the U.S. federal statutory rate of 35% for the year ended December 31, 2015, 2014 and 2013 were as follows:


	Years Ended December 31,
	2015			2014			2013
Tax provision computed at 35%	$	2,850		$	3,664		$	3,165
Nondeductible expenses		565			406			541
State income taxes, net of federal benefit		291			258			145
Tax impact of foreign operations		283			(138)			518
Release of uncertain tax positions (1)		(704)			(242)			(14)
Other		(96)			216			(88)
Income tax provision	$	3,189		$	4,164		$	4,267
Effective income tax rates		39.2	%		39.8	%		47.2	%

⁽¹⁾

During the year ended December 31, 2015, the Company reversed an unrealized tax benefit liability of $0.8 million established at the time of the acquisition of Compass. An associated tax indemnity receivable was also reversed and recorded in selling, general and administrative expenses.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities were as follows:


	December 31,		December 31,
	2015		2014
Current deferred tax asset
Compensation related expenses	$	2,097	$	1,266
Valuation allowance for deferred tax assets		(512)		(461)
Accruals and reserves		812		639
Total current deferred tax asset		2,397		1,444
Current deferred tax liability
Prepaids		(288)		(306)
Total current deferred tax liability		(288)		(306)
Net current deferred tax asset	$	2,109	$	1,138
Noncurrent deferred tax asset
Compensation related expenses	$	505	$	907
Foreign currency translation		3,731		2,629
Foreign tax credit carryovers		1,635		1,861
Foreign net operating loss carryovers		4,341		4,442
U.S. net operating loss carryovers		334		368
Other		508		392
Valuation allowance for deferred tax assets		(4,634)		(5,233)
Total noncurrent deferred tax asset		6,420		5,366
Noncurrent deferred tax liability
Depreciable assets		(135)		(165)
Intangible assets		(1,732)		(3,388)
Investment in foreign subsidiaries		(1,203)		(1,182)
Total noncurrent deferred tax liability		(3,070)		(4,735)
Net noncurrent deferred tax asset		3,350		631
Net deferred tax asset	$	5,459	$	1,769

A valuation allowance was established at December 31, 2015 and 2014 due to estimates of future utilization of net operating loss carryovers in the U.S. and certain foreign jurisdictions, derived primarily from acquisitions and recorded through purchase accounting. The valuation allowance at December 31, 2015 and 2014 primarily includes a full valuation for the Company’s foreign tax credit carryovers and foreign taxes on its controlled foreign corporation.

Uncertain tax positions

Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more‑likely‑than‑not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more‑likely‑than‑not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more‑likely‑than‑not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. It is the Company’s policy to accrue for interest and penalties related to its uncertain tax positions within income tax expense.

A tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period is as follows:


	December 31,
	2015		2014		2013
Balance, beginning of year	$	2,192	$	2,288	$	2,470
Reductions as a result of tax positions taken during a prior period		—		—		(139)
Additions as a result of tax positions taken during the current period		205		146		110
Additions as a result of tax positions taken during a prior period		270		—		—
Reductions as a result of settlement with tax authorities		—		—		(139)
Reductions as a result of lapse of statute		(887)		(242)		(14)
Balance, end of year	$	1,780	$	2,192	$	2,288

We do not expect our unrecognized tax benefits to significantly change in the next twelve months.

The Company has recognized through income tax expense approximately $0.5 million of interest and penalties related to uncertain tax positions. The amount of unrecognized tax benefit, if recognized, that would impact the effective tax rate is $1.8 million. With few exceptions, the Company is no longer subject to U.S. federal, state, local, or non‑U.S. income tax examinations by tax authorities for years before 2009.