7. Income Taxes

For financial reporting purposes, income from continuing operations before income taxes includes the following components (in thousands):


	2013		2012		2011
United States	$	41,280	$	36,636	$	31,106
Foreign (Canada)		147		187		177

Total	$	41,427	$	36,823	$	31,283

Income tax expense included in the consolidated statements of comprehensive income for the years ended December 31, 2013, 2012 and 2011 was as follows (in thousands):


	2013			2012			2011
Continuing operations:
Current:
Federal	$	13,695		$	13,124		$	12,788
Foreign		47			47			34
State and local		2,357			2,983			3,095

Total		16,099			16,154			15,917
Deferred:
Federal		(394	)		(1,423	)		(3,261	)
State and local		733			(660	)		(512	)

Total		339			(2,083	)		(3,773	)

Total income tax expense from continuing operations		16,438			14,071			12,144
Discontinued operations:
Operations of discontinued operations:
Current		3,246			4,883			4,999
Deferred		(653	)		361			874

Total		2,593			5,244			5,873
Gain on disposal of discontinued operations:
Current		49,973			52			193
Deferred		(776	)		—			—

Total		49,197			52			193

Total income tax expense from discontinued operations		51,790			5,296			6,066

Total income tax expense	$	68,228		$	19,367		$	18,210

The provision for income taxes attributable to income from continuing operations differed from the amount obtained by applying the federal statutory income tax rate to income from continuing operations before income taxes, as follows (in thousands, except percentages):


	2013			2012			2011
Tax at statutory rate (35%)	$	14,499		$	12,888		$	10,949
State taxes (net of federal benefit)		2,066			1,176			1,343
Business meals and entertainment — non-deductible		624			674			610
Reserves for uncertain tax positions		(531	)		(432	)		(844	)

Other, net		(220	)		(235	)		86

Provision for income taxes from continuing operations	$	16,438		$	14,071		$	12,144

Effective income tax rate		39.7	%		38.2	%		38.8	%

The income tax benefits associated with the exercise of non-qualified stock options and restricted stock awards and reflected in additional paid-in-capital were $0.1 million, $0 and $0.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2013 and 2012, were as follows (in thousands):


	2013			2012
Deferred tax assets:
Net operating loss carryforwards .	$	2,026		$	2,370
Allowance for doubtful accounts		2,663			2,771
Employee benefits and compensation		23,774			23,967
Lease costs		4,398			3,539
State tax credit carryforwards		2,240			2,258
Other deferred tax assets		3,581			2,598

Total gross deferred tax assets		38,682			37,503
Less: valuation allowance		(926	)		(1,138	)

Total deferred tax assets, net	$	37,756		$	36,365

Deferred tax liabilities:
Accrued interest	$	8,584		$	9,633
Client list intangible assets		3,915			6,425
Goodwill and other intangibles		17,876			8,987
Contingent purchase price liabilities		1,977			2,476
Other deferred tax liabilities		222			361

Total gross deferred tax liabilities	$	32,574		$	27,882

Net deferred tax asset	$	5,182		$	8,483

CBIZ has established valuation allowances for certain states’ deferred tax assets, primarily related to portions of the state net operating loss (“NOL”) carryforwards and state income tax credit carryforwards at December 31, 2013 and December 31, 2012. The net decrease in the valuation allowance for the year ended December 31, 2013 of $0.2 million primarily related to changes in the valuation allowance for NOL’s. The net decrease in the valuation allowance for the year ended December 31, 2012 of $1.1 million consisted of $0.6 million related to changes in the valuation allowance for NOL’s and $0.5 million related to changes in the valuation allowance for state income tax credit carryforwards.

In assessing the realizability of deferred tax assets, management considers all available positive and negative evidence, including projected future taxable income, scheduled reversal of deferred tax liabilities, historical financial operations and tax planning strategies. Based upon review of these items, management believes it is more-likely-than-not that the Company will realize the benefits of these deferred tax assets, net of the existing valuation allowances.

CBIZ and its subsidiaries file income tax returns in the United States, Canada, and most state jurisdictions. In October 2013, the Internal Revenue Service completed its audit of the Company’s 2010 federal income tax return. The Company paid a nominal amount related to the settlement of the audit. CBIZ’s federal income tax returns for years ending prior to January 1, 2010 are no longer subject to examination. With limited exceptions, CBIZ’s state and local income tax returns and non-U.S. income tax returns are no longer subject to tax authority examinations for years ending prior to January 1, 2009 and January 1, 2008, respectively.

The availability of NOL’s and state tax credits are reported as deferred tax assets, net of applicable valuation allowances, in the accompanying consolidated balance sheets. At December 31, 2013, the Company has state net operating loss carryforwards of $41.2 million and state tax credit carryforwards of $2.2 million. The state net operating loss carryforwards expire on various dates between 2015 and 2028 and the state tax credit carryforwards expire on various dates between 2018 and 2036.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


	2013			2012			2011
Balance at January 1	$	3,618		$	3,979		$	4,794
Additions for tax positions of the current year		2,647			212			188
Additions for tax positions of prior years		—			323			103
Reductions for tax positions of prior years		—			—			(260	)
Lapse of statutes of limitation		(757	)		(896	)		(846	)

Balance at December 31	$	5,508		$	3,618		$	3,979

Included in the balance of unrecognized tax benefits at December 31, 2013 are $3.2 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate. The Company believes it is reasonably possible that certain of these unrecognized tax benefits could change in the next twelve months. CBIZ expects reductions in the liability for unrecognized tax benefits of approximately $1.1 million within the next twelve months due to expiration of statutes of limitation. Given the number of years that are currently subject to examination, the Company is unable to estimate the range of potential adjustments to the remaining balance of unrecognized tax benefits at this time.

CBIZ recognizes interest income, interest expense, and penalties related to unrecognized tax benefits as a component of income tax expense. During 2013, the Company accrued interest expense of $0.2 million and penalties of $0.2 million and, as of December 31, 2013, had recognized a liability for interest expense and penalties of $0.3 million and $0.3 million, respectively, relating to unrecognized tax benefits. During 2012, the Company accrued interest expense of $0.2 million and, as of December 31, 2012, had recognized a liability for interest expense and penalties of $0.3 million and $0.1 million, respectively, related to unrecognized tax benefits.