13. Income Taxes

The Company’s provision for income tax expense (benefit) is comprised of the following:

 

		Years ended December 31,
(in thousands)		2013				2012				2011
Current:
Federal		$	—			$	—			$	—
State			58				61				16
			58				61				16
Deferred:
Federal			—				7,361				(494)
State			—				1,298				(82)
			—				8,659				(576)
		$	58			$	8,720			$	(560)

 

Variations from the federal statutory rate are as follows:

 

(in thousands)		2013				2012				2011
Expected federal income tax expense (benefit) at statutory rate of 34%		$	(3,882)			$	(13,086)			$	(836)
Effect of permanent goodwill impairment			—				7,898				—
Effect of permanent acquisition-related differences			—				—				461
Effect of permanent other differences			136				94				30
Effect of carryforward state net operating losses			—				—				(72)
Effect of valuation allowance			4,559				16,074				—
Other			(48)				49				(3)
State income tax expense (benefit), net of federal benefit			(707)				(2,309)				(140)
Income tax expense (benefit)		$	58			$	8,720			$	(560)

Deferred income taxes reflect net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the net accumulated deferred income tax assets shown on a gross basis as of December 31, 2013 and 2012 are as follows:

 

(in thousands)		2013				2012
Deferred tax assets (liabilities):
Current:
Provision for doubtful accounts		$	230			$	437
Inventory-related expense			274				469
Accrued liabilities			1,385				1,281
Net operating loss carryforward			—				—
Other			—				—
Total current deferred tax assets		$	1,889			$	2,187
Non-current:
Depreciation and amortization		$	775			$	613
Net operating loss carryforward			20,337				13,243
Other			(5)				31
Total non-current deferred tax assets		$	21,107			$	13,887
Valuation allowance			(22,996)				(16,074)
Total net deferred tax assets		$	—			$	—

At December 31, 2013, RGS had $15.7 million of federal net operating loss carryforwards expiring, if not utilized, beginning in 2020. Additionally, the Company had $4.6 million of state net operating loss carryforwards expiring, it not utilized, beginning in 2019.

Utilization of the net operating loss carry forwards may be subject to annual limitation under applicable federal and state ownership change limitations and, accordingly, net operating losses may expire before utilization. The company completed a Section 382 analysis through December 2013 and determined that an ownership change, as defined under Section 382 of the Internal Revenue Code occurred in prior years. The net operating loss carryforwards above have accounted for any limited and potential loss attributes to such ownership changes.

At December 31, 2013, the Company had no amount of unrecognized tax benefits. The Company does not have any tax positions for which it is reasonably possible the total amount of gross unrecognized benefits will increase or decrease within 12 months of the year ended December 31, 2013.

As a result of the net operating losses, substantially all of its federal, state and local income tax returns are subject to audit.

The Company’s valuation allowance increased by approximately $6.9 million for the year ended December 31, 2013 as a result of its operating loss for the year. The valuation allowance was determined in accordance with the provisions of ASC 740, Income Taxes, which requires an assessment of both negative and positive evidence when measuring the need for a valuation allowance. Based upon the available objective evidence and the Company’s history of losses, management believes it is more likely than not that the net deferred tax assets will not be realized. At December 31, 2013, the Company has a valuation allowance against its deferred tax assets net of the expected income from the reversal of its deferred tax liabilities.

The Company is required, under the terms of its tax sharing agreement with Gaiam, to distribute to Gaiam the tax effect of certain tax loss carryforwards as utilized by the Company in preparing its federal, state and local income tax returns. At December 31, 2013, utilizing an income tax rate of 35%, the Company estimates that the maximum amount of such distributions to Gaiam could aggregate $1.6 million.