Stamps.com 2006 Annual Report Download - page 57

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STAMPS.COM INC.
NOTES TO FINANCIAL STATEMENTS
8. Income Taxes
The provision for income taxes consists solely of alternative minimum state and federal taxes. The Company’s 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 research 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, 2006 and 2005 are
presented below (in thousands):
Because the Company is uncertain as to when and if it may realize its deferred tax assets, the Company has placed a valuation allowance
against its otherwise recognizable deferred tax assets.
The Company has a net operating loss carryforward of approximately $269 million and $199 million for federal and state income tax
purposes at December 31, 2006, respectively, and approximately $278 million and $215 million for federal and state income tax purposes at
December 31, 2005, respectively, which can be carried forward to offset future taxable income. The Company had available a tax credit
carryforward of approximately $1.1 million and $983,000 at December 31, 2006 and 2005, respectively, which can be carried forward to offset
future taxable liabilities. The Company’s federal net operating losses will begin to expire in 2018; state net operating losses began to expire in
2006. The federal credits begin to expire in 2018 and the state credits began to expire in 2006. The Federal Tax Reform Act of 1986 and similar
state tax laws contain provisions which may limit the net operating losses carryforwards to be used in any given year upon the occurrence of
certain events, including a significant change in ownership interests.
The Company maintains a study to understand the status of net operating losses (NOL or NOLs). Based on that study, the Company
believes that they have not undergone an Internal Revenue Code (IRC) Section 382 change of control that would trigger an impairment of the
use of NOLs since their 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 five-percent shareholders within a three-year period. When a change
of ownership is triggered, the NOLs may be impaired. The Company estimates that, as of December 31, 2006 they were approximately at 30%
compared with the 50% level that would trigger impairment of the NOL asset.
The provision for income taxes is comprised of (in thousands):
F-17
2006
2005
Deferred tax assets (liabilities):
Net operating loss carryforward
$
103,046
$
105,221
Tax credits
1,128
983
Depreciation
(551
)
(285
)
Capitalized start-up costs
485
208
Accruals
1,340
1,570
Total deferred tax assets
105,448
107,697
Valuation allowance
(105,448
)
(107,697
)
Net deferred tax assets
$
—
$
—
2006
2005
2004
Current
Federal
$
123
$
185
$
—
State
61
1
164
246
1
Deferred
—
—
—
Provision for income taxes
$
164
$
246
$
1