OMEGA PROTEIN CORP - 10-K filing on 2014-03-10

Note 14 - Income Taxes

12 Months Ended

Dec. 31, 2013

NOTE 14. INCOME TAXES

The Company’s provision for income taxes consisted of the following:

		Years Ended December 31,
	2013		2012		2011
			(in thousands)
Current:
State	$	1,265	$	453	$	276
U.S.		11,031		4,288		10,924
Deferred:
State		227		294		920
U.S.		2,941		1,860		5,608
Provision (benefit) for income taxes	$	15,464	$	6,895	$	17,728

For federal income tax purposes, the Company’s previous net operating losses and alternative minimum tax credit carryforward were fully utilized as of December 31, 2011.

As of December 31, 2013, for state income tax purposes, the Company had $10.3 million in net operating losses expiring in 2015 through 2029.

Our income tax return for the 2011 tax year is currently under examination by the IRS. We do not expect that the results of this examination will have a material effect on our financial condition or results of operations.

The following table reconciles the income tax provisions computed using the U.S. statutory rate of 35% for 2013, 2012 and 2011 to the provisions reflected in the financial statements.

		Years Ended December 31,
		2013			2012			2011
				(in thousands)
Taxes at statutory rate	$	16,097		$	3,835		$	18,159
Other non-deductible expenses		145			163			189
Qualified production activities deduction		(1,334	)		(193	)		(1,305	)
Charges related to U.S. Attorney investigation		—			2,625			—
State taxes, net of federal benefit		969			485			778
Excess executive compensation		—			—			128
Impact of federal tax credits (1)		(85	)		—			490
Change in deferred tax asset valuation allowance (2)		(77	)		(55	)		(1,120	)
Impact of federal tax rate adjustment to 35%		—			—			491
Other		(251	)		35			(82	)
Provision (benefit) for income taxes	$	15,464		$	6,895		$	17,728

(1) As a result of recognizing certain tax credits in 2011, the Company realized a $490,000 income tax expense.

(2) During the fourth quarter of 2011, the Company reversed a deferred tax valuation allowance of $1,025,000 related to wage credits and $95,000 related to state net operating losses.

The American Jobs Creation Act of 2004 (the “Act”) provides a deduction for income from qualified domestic production activities, which was phased in from 2005 through 2010. In return, the Act also provides for a two-year phase-out of the existing extra-territorial income exclusion (ETI) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union.

Under the guidance in FASB ASC 740-10-55 to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, the deduction is treated as a “special deduction”. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction is reported in the period in which the deduction is claimed on the Company’s tax return.

Temporary differences and tax credit carryforwards that gave rise to significant portions of deferred tax assets and liabilities as of December 31, 2013 and 2012 are as follows:

	2013			2012
	(in thousands)
Deferred tax assets:
Assets and accruals not yet deductible	$	4,369		$	3,639
Equity based compensation		3,429			3,243
Equity in loss of unconsolidated affiliates		125			125
Tax credit carryforward		225			225
Pension liability		3,716			5,636
State income tax		492			404
Valuation allowance		(584	)		(661	)
Total deferred tax assets		11,772			12,611

Deferred tax liabilities:
Property and equipment		(21,844	)		(20,814	)
Intangible assets		(590	)		(187	)
Pension and other retirement benefits		(1,350	)		(1,272	)
Assets currently deductible		(6,277	)		(4,967	)
Total deferred tax liabilities		(30,061	)		(27,240	)
Net deferred tax liability	$	(18,289	)	$	(14,629	)

Deferred income tax asset (liability) current	$	1,062		$	1,165
Deferred income tax asset (liability) non-current		(19,351	)		(15,794	)
Net deferred tax liability	$	(18,289	)	$	(14,629	)

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states. With a few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2001.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, as presented in “Other long-term liabilities” on the balance sheet, is as follows:

	2013		2012			2011
	(in thousands)
Balance at January 1,	$	1,514	$	1,513		$	896
Additions for tax positions of prior years		58		37			451
Reductions for tax positions of prior years		—		(36	)		—
Additions based on tax positions related to the current year		—		—			166
Balance at December 31,	$	1,572	$	1,514		$	1,513

Included in the balances at December 31, 2013, 2012 and 2011 are $1.6 million, $1.5 million, and $1.5 million, respectively, of tax positions for which the ultimate deductibility is uncertain. The final settlement of these uncertain positions could positively or negatively impact the effective tax rate in the period settled. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not materially affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company recorded an accrual for payment of $81,000 in interest and $26,000 in penalties at December 31, 2013. The Company recorded an accrual for payment of $53,000 in interest and a reversal of $2,000 in penalties at December 31, 2012. The Company recorded an accrual for payment of $33,000 in interest and $166,000 in penalties at December 31, 2011.