11. Income Taxes

Effective Income Tax Rate – Three and Nine Months Ended September 30, 2016

The Company’s effective income tax rate for the three months ended September 30, 2016 of 44.1% resulted in income tax expense of $6,270. The Company’s tax rate differs from the federal statutory tax rate of 35% primarily due to a valuation allowance on foreign net operating losses and state and local income taxes.

The Company’s effective income tax rate for the nine months ended September 30, 2016 of 49.7% resulted in income tax expense of $23,375. The Company’s tax rate differs from the federal statutory tax rate of 35% primarily to due to a valuation allowance on foreign net operating losses, the non-deductibility of the expense associated with the acceleration of the buyout of the remaining minority interest in our European business in May 2016 and state and local taxes.

Effective Income Tax Rate – Three and Nine Months Ended September 30, 2015

The Company’s effective income tax rate for the three and nine months ended September 30, 2015 of 41.1% and 41.4%, respectively, resulted in income tax expense of $16,245 and $41,969, respectively. The Company’s tax rate differs from the federal statutory tax rate of 35% primarily due to state and local income taxes and a valuation allowance on the Company’s foreign net operating losses.

Net Operating Losses – U.S.

The Company’s pre-tax federal net operating losses for tax purposes (“NOLs”) at September 30, 2016 was $4,195. The Company is limited as to the amount of NOLs it may use in any given year due to a change in ownership that occurred in a prior year, as defined by Section 382 under the Internal Revenue Code. As of July 1, 2016, the Company no longer has any NOLs related to vested stock-based compensation awards that were previously unrecognized under GAAP. Such NOLs were utilized during the quarter ended June 30, 2016 to reduce the Company’s tax liability with a corresponding credit to additional paid-in capital.

Net Operating Losses – Foreign

The Company’s foreign subsidiaries generated NOLs outside the U.S. The following table summarizes the activity for these NOLs for the nine months ended September 30, 2016:


NOL - December 31, 2015 (pre-tax)	$	(10,746	)
Foreign subsidiaries loss		(7,800	)

NOL - September 30, 2016 (pre-tax)		(18,546	)
Tax Rate - Blended		19.0	%

NOL (tax effected) - September 30, 2016	$	(3,524	)

At September 30, 2016 and December 31, 2015, the Company established a valuation allowance related to these NOLs of $3,524 and $2,051, respectively.

Deferred Tax Assets

A summary of the components of the gross and tax effected deferred tax asset as of September 30, 2016 is as follows:


Stock-based compensation	$	11,793
Deferred rent liability		5,318
NOL – U.S.		4,195
Accrued expenses		6,040
Incentive compensation		(4,442	)
Fixed assets		(5,865	)
Other		(539	)

Total U.S. deferred components		16,500
U.S. income tax rate		38.4	%

U.S. tax effected		6,336

Japan tax effected		326

Total tax effected	$	6,662