Stamps.com 2012 Annual Report Download - page 70

STAMPS.COM INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our policy is to recognize interest and penalties expense, if any, related to unrecognized tax benefits as a component of income tax expense. As
of December 31, 2012, we have not recorded any interest and penalty expense.
We remain subject to examination by the relevant tax authorities. These include the 2009 through 2011 tax years for federal purposes and the
2010 through 2011 tax years for California purposes.
Our effective tax rate differs from the statutory federal income tax rate primarily as a result of the establishment of a valuation allowance for the
future benefits to be received from the deferred tax assets including net operating loss carryforwards and tax credit carryforwards. The tax effect
of temporary differences that give rise to a significant portion of the deferred tax assets and liabilities at December 31, 2012 and 2011 are
presented below (in thousands):
We have NOL carryforwards of approximately $210 million and $100 million for federal and state income tax purposes, respectively, at
December 31, 2012 which can be carried forward to offset future taxable income. We have available tax credit carryforwards of approximately
$5.3 million and $3.1 million for federal and state income tax purposes, respectively at December 31, 2012, which can be carried forward to
offset future taxable liabilities. Our federal NOLs will begin to expire in 2020, and our state NOLs will begin to expire in 2013. The federal tax
credits begin to expire in 2018. Under California law, California tax credits do not have an expiration date.
We recognize excess tax benefits associated with the exercise of stock options directly to stockholders’
equity only when realized. Accordingly,
deferred tax assets are not recognized for NOL resulting from excess tax benefits. As of December 31, 2012, deferred tax assets do not include
approximately $9.1 million of these excess tax benefits from employee stock option exercises that are a component of our NOL carryforwards.
Accordingly, additional paid-in capital will increase up to an additional $9.1 million if and when such excess tax benefits are realized.
The Federal Tax Reform Act of 1986 and similar state tax laws contain provisions that may limit the NOL carryforwards to be used in any given
year upon the occurrence of certain events, including a significant change in ownership interests.
We maintain a study to understand the status of net operating losses. Based on that study, we believe that we have not undergone an Internal
Revenue Code (IRC) Section 382 change of ownership that would trigger an impairment of the use of our NOLs since our secondary offering in
December 1999. Under IRC Section 382 rules, a change in ownership can occur whenever there is a shift in ownership by more than 50
percentage points by one or more “5% shareholders” within a three-
year period. When a change of ownership is triggered, the NOLs may be
impaired. We estimate that, as of December 31, 2012 we were at approximately 22% level compared with the 50% level that would trigger
impairment of our NOLs.
Table of Contents
2012
2011
Deferred tax assets (liabilities):
Net operating loss carryforward
$
63,830
$
77,737
Tax credits
5,467
4,161
Depreciation
(139
)
84
Amortization
494
775
Accruals
2,214
2,540
Total deferred tax assets
71,866
85,297
Valuation allowance
(41,317
)
(69,172
)
Net deferred tax assets
$
30,549
$
16,125
F
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