Income Taxes
 12 Months Ended
Dec. 31, 2015
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The domestic and foreign components of income (loss) before income taxes consist of the following (in thousands):
 
 
Year Ended December 31,
 
 
2015
 
2014
 
2013
Domestic
 
$
(139,058
)
 
$
(130,945
)
 
$
202,222

Foreign
 
3,245

 
2,594

 
2,210

Total income (loss) before income taxes
 
$
(135,813
)
 
$
(128,351
)
 
$
204,432


For the years ended December 31, 2015, 2014 and 2013, the Company’s current and deferred income tax expense (benefit) attributable to income (loss) from operations are as follows (in thousands):
 
 
Current
 
Deferred
 
Total
Year Ended December 31, 2013
 
 
 
 
 
 
U.S. Federal
 
$
(5,060
)
 
$
75,737

 
$
70,677

State & Local
 
(330
)
 
3,635

 
3,305

Foreign
 
367

 
—

 
367

 
 
$
(5,023
)
 
$
79,372

 
74,349

Year Ended December 31, 2014
 
 
 
 
 
 
U.S. Federal
 
$
(627
)
 
$
(42,240
)
 
$
(42,867
)
State & Local
 
46

 
(6,363
)
 
(6,317
)
Foreign
 
1,025

 
(572
)
 
453

 
 
$
444

 
$
(49,175
)
 
$
(48,731
)
Year Ended December 31, 2015
 
 
 
 
 
 
U.S. Federal
 
$
68

 
$
(43,199
)
 
$
(43,131
)
State & Local
 
(176
)
 
(8,468
)
 
(8,644
)
Foreign
 
530

 
(312
)
 
218

 
 
$
422

 
$
(51,979
)
 
$
(51,557
)

Reconciliation of the difference between the actual tax rate and the statutory U.S. federal income tax rate is as follows:
 
 
Year Ended December 31,
 
 
2015
 
2014
 
2013
Federal statutory tax rate
 
35
 %
 
35
%

35
%
Increase in income tax rate resulting from:
 
 
 
 
 
 
State and local income taxes, net of federal tax benefits
 
4
 %
 
3
%
 
1
%
Non-deductible executive compensation
 
(1
)%
 
 
 
 
Actual tax rate
 
38
 %
 
38
%
 
36
%

In the three month period ended March 31, 2014, the Company corrected the statutory rate used in one of its state deferred calculations for the year ended December 31, 2013.  The Company discovered this error in the process of preparing its annual and quarterly financial statements for the year ended December 31, 2014, and recorded the amount in the first quarter of 2014. The correction of this error increased tax expense for the year
Note 8. Income Taxes (continued)
ended December 31, 2014 by approximately $2.4 million.  The Company has determined the amount is immaterial for the quarterly and annual periods in 2013 and the year ended December 31, 2014.
The following table sets forth the Company’s net deferred tax assets as of December 31, 2015 and 2014 (in thousands):
 
 
As of December 31,
 
 
2015
 
2014
Deferred Tax assets:
 
 
 
 
Deferred customer billings
 
220,075

 
181,567

Net operating loss carryforwards
 
48,201

 
41,654

Share-based compensation
 
24,995

 
33,895

Accrued bonus
 
2,008

 
3,791

Other reserves
 
606

 
1,019

Alternative minimum tax
 
1,537

 
1,185

Other
 
2,446

 
1,235

Fixed assets
 
435

 
—

R&D credit
 
189

 
711

Charitable contributions
 
534

 
514

Stock warrants
 
101

 
127

Total gross deferred tax assets
 
301,127

 
265,698

Less valuation allowance
 
(302
)
 
(299
)
Net deferred tax assets
 
300,825

 
265,399

Deferred tax liabilities:
 
 
 
 
Goodwill and fixed assets
 
—

 
(817
)
Total deferred tax liability
 
—

 
(817
)
Net deferred tax asset
 
$
300,825

 
$
264,582


At December 31, 2015, the Company had cumulative U.S. federal net operating loss carryforwards of approximately $123.0 million which are available to offset U.S. federal taxable income in future periods through 2035.
At December 31, 2015, the Company has cumulative state net operating carryforwards of approximately $130.0 million which are available to offset state taxable income in future periods through 2035. A valuation allowance is required to be established when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The guidance on accounting for income taxes provides important factors in determining whether a deferred tax asset will be realized, including whether there has been sufficient taxable income in recent years and whether sufficient income can reasonably be expected in future years in order to utilize the deferred tax asset.
Consideration is given to the weight of all available evidence, both positive and negative. Generally, a cumulative loss in recent years is negative evidence in determining the need for a deferred tax asset valuation allowance. However, the recent cumulative losses in book income are primarily the result of a delay in revenue recognition on contracts that have been in place for a number of years. Under the Restatement, revenue is being deferred by the Company until a future event occurs and the revenue becomes fixed, per the terms of each contract. The Company believes that the deferred revenue from contracts that the Company has previously entered into will be recognized in the future. The majority of the deferred revenue amounts have already been reported on income tax returns filed in accordance with a previously established and approved method of accounting for federal and state
Note 8. Income Taxes (continued)
income tax reporting. The significant positive evidence related to the projected realization of the deferred customer billings from existing contracts and projected taxable income outweighs the negative evidence from the cumulative losses incurred in recent years based on the Restatement. Accordingly, the Company believes that it is more likely than not that the remaining deferred tax assets will be realized, except there is a possibility that approximately $1.5 million of the deferred tax asset recorded at December 31, 2015 for costs related to the exploration of strategic alternatives with Ascension Health ("Ascension") may not be realized.
The Company has recorded valuation allowances at December 31, 2015 and 2014 of $0.3 million and $0.3 million, respectively, based on our assessment that it is more likely than not that a portion of the Company’s separate state income tax net operating loss will not be realized.
The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign subsidiaries that arose in 2015 or 2014 because the Company considers such earnings to be indefinitely reinvested outside of the United States. As of December 31, 2015 and 2014, the undistributed earnings of such subsidiaries were $9.0 million and $6.8 million, respectively. It is not practicable to estimate the amount of recognized deferred tax liabilities, if any, for these undistributed foreign earnings.
The 2015, 2014 and 2013 current tax provision includes $0.5 million, $1.0 million and $0.4 million, respectively, for income taxes arising from the pre-tax income of the Company’s India subsidiaries. The tax provisions are net of the impact of a tax holiday in India. The Company’s benefits from this tax holiday were $0.7 million for the year ended December 31, 2015, $0.5 million for the year ended December 31, 2014 and $0.4 million for the year ended December 31, 2013. The tax holiday is set to expire on March 31, 2021.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company’s unrecognized tax benefits as of December 31, 2015, 2014 and 2013 totaled $1.2 million, $1.1 million and $1.3 million, respectively.
Note 8. Income Taxes (continued)
The following table summarizes the activity related to the unrecognized tax benefits (in thousands):
 
 
 
 
 
Tax Benefit
Unrecognized tax benefits at
December 31, 2012
$
2,411

Increases in positions taken in a current period
67

Increases in positions taken in prior period
—

Decreases due to lapse of statute of limitations
(1,176
)
 
 
 
Unrecognized tax benefits at
December 31, 2013
$
1,302

Increases in positions taken in a current period
66

Increases in positions taken in prior period
94

Decreases in positions taken in a prior period
(51
)
Decreases due to lapse of statute of limitations
(313
)
 
 
 
Unrecognized tax benefits at
December 31, 2014
$
1,098

Increases in positions taken in a current period
134

Increases in position taken in prior period
597

Decreases in positions taken in prior period
—

Decreases due to lapse of statute of limitations
(587
)
Unrecognized tax benefits at
December 31, 2015
$
1,242

 
 
 
As of December 31, 2015, approximately $1.2 million of the total gross unrecognized tax benefits represented the amount that, if recognized, would result in an adjustment to the effective income tax rate in future periods. The Company recognizes interest and penalties related to income tax matters as part of income tax expense. The Company recorded adjustments to interest and potential penalties related to these unrecognized tax benefits during 2015, and in total, as of December 31, 2015, the Company has recorded a liability for interest and potential penalties of $0.4 million. The Company anticipates changes to the reserves within the next 12 months to be primarily related to interest. The Company believes it has sufficient accruals for contingent tax liabilities.
In connection with tax return examinations, contingencies can arise that generally result from different interpretations of tax laws and regulations as they pertain to the amount, timing or inclusion of revenues and expenses in taxable income, or the ability to utilize tax credits to reduce income taxes payable. While it is probable, based on the potential outcome of the Company’s federal and state tax examinations or the expiration of the statute of limitations for specific jurisdictions, that the liability for unrecognized tax benefits may increase or decrease within the next 12 months, the Company does not expect any such change would have a material effect on our financial condition, results of operations or cash flow.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. U.S. federal income tax returns for 2014, 2013, 2012 and 2011 are currently open for examination. The 2013, 2012 and 2011 U.S. federal income tax returns are currently under examination. State jurisdictions vary for open tax years. The statute of limitations for most states ranges from three to six years. Local tax authorities have completed their income tax examinations of the Company’s subsidiary in India for fiscal years 2009 and 2010. The proposed adjustments in India have been appealed, and the Company believes the ultimate outcome of these appeals will not result in a material adjustment to its tax liability.
Note 8. Income Taxes (continued)
Pursuant to the acquisition of a business in May 2006, the sellers, certain of which are employees of the Company, are obligated to indemnify the Company for federal and state income taxes, including 50% of any interest and penalties incurred, related to periods up to and including the date of the acquisition. The potential amount due to the Company related to this indemnity was $1.3 million as of December 31, 2014 and 2013. As of December 31, 2015, the Company released $1.3 million due to the lapse of the statute of limitations.  The amount due from the related party was secured by the fair value of shares and cost held by the Company in escrow. The escrow agreement expired on June 15, 2015. The cost and fair value of the shares were $0.8 million and $1.0 million at December 31, 2014 and 2013, respectively. Given that the fair value of the shares was less than the amount due from the related party in 2014 and 2013, the Company recorded a reserve of $0.5 million and $0.3 million, respectively, to reflect the difference between the fair value of the shares and the receivable they securitized.  Subsequent to the expiration of the escrow agreement in 2015, the shares held as security by the Company were released to the former sellers.