| Income Taxes | Note 8—Income Taxes We recognize deferred tax assets and liabilities, at enacted income tax rates, based on the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. We include any effects of changes in income tax rates or tax laws in the provision for income taxes in the period of enactment. When it is more likely than not that a portion or all of a deferred tax asset will not be realized in the future, we provide a corresponding valuation allowance against the deferred tax asset. In 2015 and 2014, we recorded a full valuation allowance against all net deferred tax assets because there was not sufficient evidence to conclude that we would more likely than not realize those assets prior to expiration. As of December 31, 2015 and 2014, we had approximately $3.9 million and $3.6 million of federal net operating loss carryforwards, approximately $25.1 million and $21.7 million of foreign net operating loss carryforwards and approximately $10.2 million and $9.3 million of state net operating loss carryforwards, respectively. The federal loss carryforwards will begin to expire in 2032, the foreign loss carryforwards begin to expire in 2027 and the state net operating loss carryforwards begin to expire in 2024. Our sources of income (loss) and income tax provision (benefit) are as follows (in thousands): Years ended December 31, 2015 2014 Income (loss) before income taxes: U.S. $ 3,552 $ 8,760 Non-U.S. (6,263 ) (1,335 ) Total income (loss) before income taxes $ (2,711 ) $ 7,425 Provision (benefit) for taxes: Current: Federal $ — $ — State 33 58 Non-U.S. — — Total current 33 58 Deferred: Federal — — State (18 ) 2 Non-U.S. — — Total deferred (18 ) 2 Total income tax expense (benefit) $ 15 $ 60 Effective income tax rate (0.6 )% 0.8 As a result of the Merger discussed in Note 1, and the subsequent issuance of 3,000 shares of Legacy Education Alliance, Inc. common stock, as of December 31, 2014, Tigrent Inc. owned slightly less than 80% of the Company. Tigrent Inc. is, therefore, no longer considered part of the affiliated group as defined in IRC §1504 and can no longer be included in the Company’s consolidated income tax returns filed for subsequent tax years. At December 31, 2014, the tax attributes of Tigrent Inc., including its attributable portion of the consolidated net operating loss carryovers determined pursuant to Reg. §1.1502-21, were separate attributes realizable only by Tigrent Inc. The value of these tax attributes and the corresponding valuation allowance were approximately $1.3 million. During the year ended December 31, 2015, we decreased the valuation allowance by $672 thousand. The difference between the tax provision at the statutory federal income tax rate and the tax provision attributable to income (loss) from continuing operations before income taxes is as follows (in thousands): Years ended December 31, 2015 2014 Computed expected federal tax expense $ (949 ) $ 2,599 Decrease in valuation allowance (672 ) (4,320 ) State income net of federal benefit 203 376 Non-U.S. income taxed at different rates 848 172 Uncertain tax positions
expense (27 ) 2 Foreign exchange adjustment 411 360 Foreign tax rate adjustment 180 847 Other 21 24 Income tax expense (benefit) $ 15 $ 60 Deferred income tax assets and liabilities reflect the net tax effects of (i) temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts for income tax purposes and (ii) operating loss carryforwards. The tax effects of significant components of our deferred tax assets and liabilities are as follows (in thousands): As of December 31, 2015 2014 Deferred tax assets: Net
operating losses $ 5,703 $ 4,827 Accrued compensation, bonuses, severance 336 75 Allowance for bad debt 46 36 Intangible amortization 104 152 Impaired assets 240 240 Accrued expenses 29 32 Deferred revenue 2,712 4,308 Depreciation 241 260 Tax credits 97 97 Valuation allowance (7,196 ) (7,868 ) Total deferred tax assets $ 2,312 $ 2,159 Deferred tax liabilities: Deferred course expenses $ (2,312 ) $ (2,159 ) Total deferred tax liabilities (2,312 ) (2,159 ) Net deferred tax asset $ — $ — Deferred tax expense related to the foreign currency translation adjustment for the both years ended December 31, 2015 and 2014 was $0.4 million, and was fully offset by a corresponding decrease in the valuation allowance. These amounts, which net to zero, are reported in other comprehensive income (loss). The deferred tax assets presented above for net operating losses and credits have been reduced by liabilities for unrecognized tax benefits. The Company does not expect to repatriate earnings from its foreign subsidiaries because the cumulative earnings and profits of the foreign subsidiaries as of December 31, 2015 and 2014 are negative. Accordingly, no U.S. federal or state income taxes have been provided thereon. The liability pertaining to uncertain tax positions was $1.7 million at December 31, 2015 and 2014. In accordance with GAAP, we recorded expense that increased the total liability pertaining to uncertain tax positions which was more than offset by a decrease in the total liability attributable to foreign currency fluctuations and tax rate adjustments. A significant portion of the liability pertaining to uncertain tax positions is recorded as a reduction of the value of net operating loss carryovers. We include interest and penalties in the liability for uncertain tax positions. Accrued interest and penalties on uncertain tax positions were approximately $0.1 million at December 31, 2015 and 2014, respectively and is included in other liabilities in the accompanying Consolidated Balance Sheets. There was no penalty and interest expense accrued related to uncertain tax positions for the years ended December 31, 2015 and 2014. If applicable, we recognize interest and
penalties related to uncertain tax positions as tax expense. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits: As of December 31, 2015 2014 Unrecognized tax benefits - January 1 $ 1,744 $ 1,915 Gross increases - tax positions in prior period — 2 Gross decreases - tax positions in prior period (27 ) (173 ) Unrecognized tax benefits - December 31 $ 1,717 $ 1,744 The total liability for unrecognized tax benefits at December 31, 2015 and 2014, is netted against deferred tax assets related to net operating loss carryforwards in the Consolidated Balance Sheets. The total liability for unrecognized tax benefits at December 31, 2015 and 2014, are as follows: As of December 31, 2015 2014 Reduction of net operating loss carryforwards $ 1,656 $ 1,676 Reduction of tax credit carryforwards 5 5 Total reductions of deferred tax assets 1,661 1,681 Noncurrent tax liability (reflected in Other long-term liabilities) 56 63 Total liability for unrecognized tax benefits $ 1,717 $ 1,744 We do not expect any significant changes to unrecognized tax benefits in the next year. At December 31, 2015 and 2014, the Company estimated $0.1 million, of the unrecognized tax benefits, if recognized, would impact the effective tax rate. A substantial portion of our liability for uncertain tax benefits is recorded as a reduction of net operating losses and tax credit carryforwards. During 2015, the Canadian Revenue Agency concluded their audit of the Rich Dad Education Ltd. corporate income tax returns for the years ended December 31, 2010 and 2011. The audit did not result in any changes and the accruals included in our consolidated financial statements are adequate. Our federal income tax returns have been examined and reported upon by the Internal Revenue Service through December 31, 2012, and the years subsequent to 2012 are subject to examination. Our state tax returns for years ranging from 2010 and 2011 are still open and subject to examination. In addition, our Canadian tax returns and United Kingdom tax returns for all years after 2011 are subject to examination. |
