15. Income Taxes

Our provision for income tax expense is comprised of the following:

 

		For the Years Ended December 31,
(in thousands)		2015				2014				2013
Current:
Federal		$	1,148			$	887			$	536
State			14				157				(68	)
International			57				175				223
			1,219				1,219				691
Deferred:
Federal			—				—				22,418
State			—				—				1,538
International			—				—				73
			—				—				24,029
Total income tax expense		$	1,219			$	1,219			$	24,720

Because our eco-travel subsidiary is not part of the consolidated tax group, the provision includes Federal taxes associated with its income. The state provision consists of the taxes due for subsidiaries of Gaiam which file taxes on a separate basis, and are not able to utilize combined group net operating losses.

 

The components of our income taxes consisted of the following:

 

(in thousands)		2015				2014				2013
Income tax expense from continuing operations		$	1,219			$	1,369			$	25,974
Income tax (benefit) expense from discontinued operations			—				(150	)			209
Income tax benefit from loss on disposal of discontinued operations			—				—				(1,463	)
Total income tax expense		$	1,219			$	1,219				24,720

Variations from the federal statutory rate are as follows:

 

(in thousands)		2015				2014				2013
Expected federal income tax expense (benefit) at statutory rate of 34%		$	785			$	(2,631	)		$	898
Effect of 2008 State NOL’s and option forfeitures			—				—				49
Effect of permanent other differences			103				37				213
Effect of repatriation and nondeductible foreign losses			422				—				—
State income tax (benefit) expense, net of federal benefit			—				(150	)			24
Establishment of valuation allowance on net deferred tax assets			(103	)			4,071				23,153
Other			14				(70	)			278
Effect of differences between U.S. taxation and foreign taxation			(2	)			(38	)			105
Total income tax expense		$	1,219			$	1,219				24,720

Deferred income taxes reflect net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the net accumulated deferred income tax assets as of December 31, 2015 and 2014 are as follows:

 

		December 31,
(in thousands)		2015				2014
Deferred tax assets (liabilities):
Current:
Provision for doubtful accounts		$	318			$	1,211
Inventory-related expense			573				483
Accrued liabilities			714				1,420
Nonqualified stock options			1,723				1,221
Worthless stock deduction			207				206
Other			597				263
Exit activity accruals			803				—
Total current deferred tax assets			4,935				4,804
Valuation allowance			(4,935	)			(4,804	)
Total current deferred tax assets, net of valuation allowance		$	—			$	—
Non-current:
Depreciation and amortization		$	(1,896	)		$	(1,506	)
Section 181 qualified production expense			(3,563	)			(2,770	)
Net operating loss carryforward			30,727				26,966
Charitable carryforward			1,899				1,414
Loss from change in financial statement carrying value of investment, net			48				48
Gain from foreign business acquisition			(103	)			(347	)
Impairment of intangibles			367				367
Spin-off and capitalized legal costs			587				—
Tax credits			922				921
Other			(3	)			(3	)
Total non-current deferred tax assets			28,985				25,090
Valuation allowance			(28,985	)			(25,090	)
Total non-current deferred tax assets, net of valuation allowance			—				—
Total net deferred tax assets		$	—			$	—

 

As of December 31, 2015, our gross net operating losses were $79.3 million and $16.6 million for federal and state, respectively. The sources of income (loss) before income taxes are as follows:

 

(in thousands)		2015				2014				2013
Domestic		$	2,109			$	(4,947	)		$	5,503
International			201				686				373
		$	2,310			$	(4,261	)		$	5,876

Certain of our subsidiaries, namely those for which we own less than 80% of their shares and voting rights and/or are foreign entities, file tax returns separately from Gaiam’s consolidated tax group. At December 31, 2015, we had made a provision for U.S. federal and state income taxes on approximately $0.2 million of undistributed foreign earnings, which are not expected to remain outside of the U.S. indefinitely. Deferred tax liabilities have been established for future taxes on distribution of foreign earnings in the form of dividends or otherwise, in order to derive, for financial statement purposes, the U.S. income taxes (net of tax on foreign tax credits), state income taxes, and withholding taxes payable to the various foreign countries.

Periodically, we perform assessments of the realization of our net deferred tax assets considering all available evidence, both positive and negative. On the basis of this assessment, we recorded a charge of $23.2 million to income tax expense to record a full valuation allowance against our deferred tax assets as of December 31, 2013. A significant piece of evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2013. Because the valuation allowance will remain in place until we return to profitability, we did not record any tax benefit in 2015 associated with our net loss or other deferred tax assets.

We realized $0.1 million and $1.3 million in tax benefits recorded to additional paid-in capital as a result of the exercise of stock options during 2015 and 2014, respectively. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. We measure the tax benefits recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to our subjective assumptions and judgments which can materially affect amounts recognized in our consolidated balance sheets and consolidated statements of operations. The result of our assessment of our uncertain tax positions did not have a material impact on our consolidated financial statements. Our federal and state tax returns for all years after 2010 are subject to future examination by tax authorities for all our tax jurisdictions. We recognize interest and penalties related to income tax matters in interest and other income (expense) and corporate, general and administration expenses, respectively.

As specified by our Tax Sharing Agreement with RGSE, to the extent RGSE becomes entitled to utilize certain loss carryforwards relating to periods prior to its initial public offering, it will distribute to us the tax effect (estimated to be 34% for federal income tax purposes) of the amount of such tax loss carryforwards so utilized. These net operating loss carryforwards expire beginning in 2018 if not utilized, and are subject to IRS limitations. These tax assets have a full valuation allowance based on RGSE’s current financial performance. As of December 31, 2015, $4.4 million of these net operating loss carryforwards remained available for current and future utilization, meaning that RGSE’s potential future payments to us, which would be made over a period of several years, could therefore aggregate to approximately $1.6 million based on current tax rates.