Income Taxes

Each reporting period, we estimate the likelihood that we will be able to recover our deferred tax assets, which represent timing differences in the recognition of revenue and certain tax deductions for accounting and tax purposes. The realization of deferred tax assets is dependent, in part, upon future taxable income. In assessing the need for a valuation allowance, we consider all available evidence, including our historical profitability and projections of future taxable income. If, based on the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, we record a valuation allowance. Such valuation allowance is maintained on our deferred tax assets until sufficient positive evidence exists to support its reversal in future periods. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Significant judgment is required to determine if, and the extent to which, valuation allowances should be recorded against deferred tax assets.

During the three months ended March 31, 2016, there were several pieces of negative evidence that contributed to our conclusion that a valuation allowance is appropriate against all deferred tax assets that rely upon future taxable income for their realization. This new negative evidence includes (1) a significant pre-tax loss during the three months ended March 31, 2016, (2) deterioration in leading indicators, such as applications and new student starts, and projected population during the three months ended March 31, 2016, which negatively impacts projected future operating results, (3) current financial projections that indicate we will be in a 3-year cumulative loss position during 2016 and (4) the continued challenging business and regulatory environment facing for-profit education institutions.

As a result of our assessment, we recorded $27.9 million in income tax expense related to the increase in the valuation allowance within our statements of comprehensive income (loss) in the current period. The amount of the deferred tax assets considered realizable, however, could be adjusted in future periods if estimates of future taxable income during the carryforward period are increased, if objective negative evidence in the form of cumulative losses is no longer present and if additional weight may be given to subjective evidence such as our projections for growth. We will continue to evaluate our valuation allowance in future periods for any change in circumstances that causes a change in judgment about the realizability of the deferred tax assets.

The components of income tax expense are as follows:



	Three Months Ended March 31,					Six Months Ended March 31,
	2016			2015		2016			2015
Current expense (benefit)
United States federal	$	(1,956	)	$	1,152	$	(3,376	)	$	1,101
State	33			259		170			557
Total current expense (benefit)	(1,923		)	1,411		(3,206		)	1,658
Deferred (benefit) expense
United States federal	24,438			162		24,876			2,051
State	3,148			62		3,052			163
Total deferred (benefit) expense	27,586			224		27,928			2,214
Total provision for income taxes	$	25,663		$	1,635	$	24,722		$	3,872

The income tax provision differs from the tax that would result from application of the statutory federal tax rate of 35.0% to pre-tax income for the period. The reasons for the differences are as follows:



	Three Months Ended March 31,					Six Months Ended March 31,
	2016			2015		2016			2015
Income tax expense (benefit) at statutory rate	$	(2,219	)	$	766	$	(3,136	)	$	2,632
State income taxes (benefits), net of federal tax benefit	(150		)	231		(158		)	526
Deferred tax asset write-off related to share based compensation	46			594		51			626
Increase in valuation allowance	27,949			—		27,949			—
Other, net	37			44		16			88
Total income tax expense	$	25,663		$	1,635	$	24,722		$	3,872

Beginning in December 2013, certain stock-based compensation awards granted to employees expired, which required a write-off of the related deferred tax asset through income tax expense as our pro forma windfall pool of available excess tax benefits was no longer sufficient to absorb the shortfall.

The components of the deferred tax assets (liabilities) recorded in the accompanying consolidated balance sheets were as follows:



	March 31,			September 30,
	2016			2015
Gross deferred tax assets:
Deferred compensation	$	1,725		$	1,784
Reserves and accruals	5,646			5,395
Accrued tool sets	1,355			1,460
Deferred revenue	19,690			19,606
Deferred rent liability	1,574			1,939
Net operating loss carryovers	545			83
State tax credit carryforwards	337			310
Valuation allowance	(28,350		)	(401		)
Total gross deferred tax assets	2,522			30,176
Gross deferred tax liabilities:
Amortization of goodwill	(3,140		)	(3,140		)
Depreciation and amortization of property and equipment	(674		)	(421		)
Prepaid and other expenses deductible for tax	(1,849		)	(1,828		)
Total gross deferred tax liabilities	(5,663		)	(5,389		)
Net deferred tax assets (liabilities)	$	(3,141	)	$	24,787

The following table summarizes the activity for the valuation allowance for the six months ended March 31, 2016:



Balance at Beginning of Period		Additions to Income Tax Expense		Write-offs		Balance at End of Period
$	401	$	27,949	$	—	$	28,350