Note 7. Income Taxes

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

	2017		2016		2015
United States	$	74,151	$	66,848	$	57,665
Foreign (Canada)		169		158		167
Total	$	74,320	$	67,006	$	57,832

Income tax expense (benefit) included in the accompanying Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015 was as follows (in thousands):

	2017			2016			2015
Continuing operations :
Current:
Federal	$	21,086		$	18,816		$	18,079
Foreign		45			42			43
State and local		2,475			2,681			2,694
Total		23,606			21,539			20,816
Deferred:
Federal		(1,086	)		4,148			1,060
State and local		768			712			953
Total		(318	)		4,860			2,013
Total income tax expense from continuing operations		23,288			26,399			22,829
Discontinued operations :
Operations of discontinued operations:
Current		(418	)		(365	)		(1,263	)
Deferred		(19	)		(10	)		68
Total		(437	)		(375	)		(1,195	)
Gain on disposal of discontinued operations:
Current		—			—			427
Deferred		—			—			(344	)
Total		—			—			83
Total income tax expense from discontinued operations		(437	)		(375	)		(1,112	)
Total income tax expense	$	22,851		$	26,024		$	21,717

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):

	2017			2016			2015
Tax at statutory rate (35%)	$	26,012		$	23,452		$	20,241
State taxes (net of federal benefit)		2,945			2,643			2,899
Business meals and entertainment — non-deductible		820			784			779
Reserves for uncertain tax positions		(35	)		(87	)		(324	)
Share-based compensation		(3,837	)		—			—
Impact of the Tax Cuts and Jobs Act of 2017		(2,487	)		—			—
Net change in state tax rate		95			(64	)		(1,046	)
Other, net		(225	)		(329	)		280
Provision for income taxes from continuing operations	$	23,288		$	26,399		$	22,829
Effective income tax rate		31.3	%		39.4	%		39.5	%

ASU 2016-09 – Stock Compensation

On January 1, 2017, we adopted ASU 2016-09 and recognized an excess tax benefit of $3.8 million (resulting from an increase in the fair value of an award from grant date to the vesting or exercise date, as applicable), as a reduction to “Income tax expense” in the accompanying Consolidated Statements of Comprehensive Income. Prior to ASU 2016-09, the income tax benefit of $1.1 million in 2016 and $0.9 million in 2015 from share-based compensation was recorded in “Additional paid-in-capital” in the accompanying Consolidated Balance Sheets. Refer to Note 1, Basis of Presentation and Significant Accounting Policies to the accompanying consolidated financial statements for further discussion on new accounting pronouncement adoptions.

Tax Cuts and Jobs Act of 2017 (the “Tax Act”)

On December 22, 2017, the Tax Act was signed into law, which permanently reduces the corporate income tax rate from 35% to 21% beginning in 2018. We recognized an income tax benefit of $2.5 million in 2017, due to the revaluation of our deferred tax liabilities. Our effective tax rate was 31.3% in 2017, compared to 39.4% in 2016. Collectively, ASU 2016-09 and the Tax Act reduced our 2017 effective tax rate by 8.5%.

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016, were as follows (in thousands):

	2017			2016
Deferred tax assets:
Net operating loss carryforwards	$	1,229		$	884
Allowance for doubtful accounts		3,022			4,486
Employee benefits and compensation		21,155			29,166
Lease costs		3,611			2,772
State tax credit carryforwards		1,385			1,489
Other deferred tax assets		1,161			2,951
Total gross deferred tax assets		31,563			41,748
Less: valuation allowance		(1,657	)		(1,314	)
Total deferred tax assets, net	$	29,906		$	40,434
Deferred tax liabilities:
Accrued interest	$	819		$	2,494
Client list intangible assets		1,513			2,717
Goodwill and other intangibles		30,913			38,646
Other deferred tax liabilities		-			122
Total gross deferred tax liabilities	$	33,245		$	43,979
Net deferred tax liability	$	(3,339	)	$	(3,545	)

We have established valuation allowances for deferred tax assets related to certain employee benefits and compensation, state net operating loss (“NOL”) carryforwards and state income tax credit carryforwards at December 31, 2017 and certain NOL carryforwards and state income tax credit carryforwards at December 31, 2016. The net increase in the valuation allowance of $0.3 million for the year ended December 31, 2017 primarily related to changes in the valuation allowance as a result of the Tax Act. The net decrease in the valuation allowance of $0.1 million for the year ended December 31, 2016 related to changes in the valuation allowance for NOL’s.

In assessing the realization 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.

We file income tax returns in the United States, Canada, and most state jurisdictions. In March 2016, the Internal Revenue Service completed its audit of our 2013 and 2014 federal income tax returns. We paid $0.5 million in settlement of this audit which had no impact on the 2016 income tax expense. With limited exceptions, our 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, 2013 and January 1, 2012, 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, 2017, we had state net operating loss carryforwards of $28 million and state tax credit carryforwards of $1.4 million. The state net operating loss carryforwards expire on various dates between 2018 and 2037 and the state tax credit carryforwards expire on various dates between 2018 and 2028.

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

	2017			2016			2015
Balance at January 1	$	4,090		$	4,287		$	4,591
Additions for tax positions of the current year		123			110			126
Settlements of prior year positions		—			(11	)		(94	)
Lapse of statutes of limitation		(331	)		(296	)		(336	)
Balance at December 31		3,882			4,090			4,287

Included in the balance of unrecognized tax benefits at December 31, 2017 are $2.9 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate. We believe it is reasonably possible that certain of these unrecognized tax benefits could change in the next twelve months. We expect reductions in the liability for unrecognized tax benefits of approximately $1.2 million within the next twelve months due to expiration of statutes of limitation. Given the number of years that are currently subject to examination, we are unable to estimate the range of potential adjustments to the remaining balance of unrecognized tax benefits at this time.

We recognize interest expense, and penalties related to unrecognized tax benefits as a component of income tax expense. During 2017, we accrued interest expense of $0.2 million and, as of December 31, 2017, had recognized a liability for interest expense and penalties of $0.6 million and $0.3 million, respectively, relating to unrecognized tax benefits. During 2016, we accrued interest expense of $0.2 million and, as of December 31, 2016, had recognized a liability for interest expense and penalties of $0.4 million and $0.3 million, respectively, relating to unrecognized tax benefits.