Nutrisystem 2010 Annual Report Download - page 61

The significant items comprising the Company’s deferred income tax assets and liabilities are as follows:
December 31,
2010 2009
Deferred tax asset:
Reserves and accruals ........................................... $1,206 $1,710
Goodwill/Intangible assets ........................................ 584 2,456
Net operating loss carryforward ................................... 1,100 661
Property and equipment .......................................... — 240
Stock-based compensation ........................................ 1,048 1,016
Charitable contribution carryforward ............................... 1,977 856
Other ........................................................ 579 398
6,494 7,337
Deferred tax liability:
Property and equipment .......................................... (3,839) —
Net deferred tax asset ................................................ $2,655 $7,337
At December 31, 2010, the net deferred tax asset of $2,655 is comprised of $1,854 included in current assets and
$801 included in other assets in the accompanying consolidated balance sheet. At December 31, 2009, the net
deferred tax asset of $7,337 is comprised of $2,756 included in current assets and $4,581 included in other assets
in the accompanying consolidated balance sheet. At December 31, 2010 and 2009, the Company had net
operating loss carryforwards of approximately $13,716 and $10,163, respectively, for state tax purposes. The
increase is primarily due to the closing of NuKitchen. For state tax purposes, there is a limitation on the amount
of net operating loss carryforwards that can be utilized in a given year to offset state taxable income. Net
operating losses will begin to expire in 2020.
Based on the projected level of future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not that the Company will realize the net deferred tax
assets. In 2008, the Company recorded a valuation allowance of $3,749 related to its impairment of its
investment in Zero Water since the character of the deduction could be a capital item and there was no history of
generating capital gains. In 2009, the Company abandoned its investment in Zero Water (see Note 7) which
provided the Company with a current year income tax deduction for its entire original $14,258 tax basis
investment in Zero Water. This reduced 2009 federal income tax payments by approximately $4,990. This
reduction in ordinary income tax payments resulted in a similar decrease in income tax expense for the year
ended December 31, 2009 including a reversal of a $3,749 valuation allowance established in 2008 for deferred
tax assets related to prior Zero Water losses and impairment charges. These Zero Water losses and impairment
charges were considered realizable during the year ended December 31, 2009 due to the terms of the
abandonment which changed the tax loss from capital to ordinary which the Company believes is more likely
than not to realize.
The total amount of gross unrecognized tax benefits as of December 31, 2010 and 2009 was $2,478 and $1,375,
respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective income
tax rate is approximately $1,611 and $893, respectively. The Company records accrued interest and penalties
related to unrecognized tax benefits as part of interest expense. During 2010, 2009 and 2008, the Company
recognized $99, $70 and $61, respectively, in interest and penalties. The Company’s federal income tax returns
for 2007 through 2010 are open and are subject to examination by the Internal Revenue Service. State tax
jurisdictions that remain open to examination range from 2000 through 2010. The Company does not believe that
that there will be any material changes to unrecognized tax positions over the next 12 months.
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