Income Taxes

DLH accounts for income taxes in accordance with the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the balance sheet when it is determined that it is more likely than not that the asset will be realized. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized.

DLH recorded a $5.5 million and $4.6 million benefit for income tax for fiscal year ended September 30, 2015 and 2014, respectively.The benefit related principally to the release of a portion of our valuation allowance, to reflect the amount of our deferred tax asset that we expect to realize in future years. For each fiscal year, that release was based upon our estimate of future taxable earnings based on results generated. To project taxable income in the carryforward period, we first estimated revenue for the carryforward period based on the expected performance under current contracts, plus expected changes in the contract base. Using these estimates of revenue, we assumed a proportional level of book income as was generated from the revenues recorded in each fiscal year. We further assumed that tax goodwill amortization would continue through its 15 year life.

Using the taxable income projection, we calculated the amount of NOL utilization that would be achieved within each loss year’s carryforward period. Our estimate of future taxable income will be revised at least annually or more frequently upon the occurrence of an event which warrants a new estimate.

At September 30, 2015 the Company had net operating losses of approximately $36.8 million and $2.4 million for U.S. and state tax return purposes, respectively. The NOLs begin to expire in 2021 and continue to expire through 2033. As a result of our analysis of state net operating losses, we determined that a substantial portion of those losses related to jurisdictions for which a future benefit is not anticipated. Further, we analyzed our unutilized tax credits and determined that it is not likely that we will realize a future benefit from those credits. Accordingly, we reduced our deferred tax assets in the fiscal year ended September 30, 2015 to reflect the expected realization of benefit from these tax attributes.

An analysis of DLH's deferred tax asset and liability is as follows:



	Year Ended
	September 30,
(amounts in thousands)	2015			2014
Current deferred income tax asset:
Net operating loss carryforwards and tax credits	$	391		$	98
Accrued liabilities	753			122
Valuation allowance	(162		)	(136		)
Net current deferred tax asset	$	982		$	84



	Year Ended
	September 30,
(amounts in thousands)	2015			2014
Deferred income tax asset (liability):
Net operating loss carry forwards and tax credits	$	12,524		$	16,556
Stock based compensation	767			646
Fixed and intangible assets	(2,379		)	(2,176		)
Other items, net	5			488
Valuation allowance	(1,592		)	(11,001		)
Net deferred tax asset	$	9,325		$	4,513

The significant components of the expense (benefit) for income taxes from continuing operations are summarized as follows:



	Year Ended
	September 30,
(amounts in thousands)	2015			2014
Current expense (benefit)	$	220		$	7
Deferred expense (benefit)	(5,708		)	(4,604		)
Total expense (benefit)	$	(5,488	)	$	(4,597	)

The following table indicates the significant differences between the federal statutory rate and DLH's effective tax rate for continuing operations:



	Year Ended
	September 30,
(amounts in thousands)	2015			2014
Federal statutory rate	$	1,134		$	258
State taxes, net	155			46
Other permanent items	7			6
Change in valuation allowance	(6,784		)	(4,907		)
	$	(5,488	)	$	(4,597	)

We file income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. We are no longer subject to federal income tax examinations for years before 2013 and to state and local income tax examinations by tax authorities for years before 2011.