Salem Media Group, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

INCOME TAXES

12 Months Ended

Dec. 31, 2016

NOTE 13. INCOME TAXES

We recognize deferred tax assets and liabilities for future tax consequences attributable to differences between our consolidated financial statement carrying amount of assets and liabilities and their respective tax bases. We measure these deferred tax assets and liabilities using enacted tax rates expected to apply in the years in which these temporary differences are expected to reverse. We recognize the effect on deferred tax assets and liabilities resulting from a change in tax rates in income in the period that includes the date of the change.

For financial reporting purposes, we recorded a valuation allowance of $4.5 million as of December 31, 2016 to offset $4.2 million of the deferred tax assets related to the state net operating loss carryforwards and $0.3 million associated with asset impairments. During the third quarter of 2016, we identified an error in our estimated valuation allowance for certain deferred tax assets. We recorded an out-of-period adjustment to increase our valuation allowance by $1.6 million for a portion of the deferred tax assets related to state net operating loss carryforwards that we determined were not more likely than not to be realized. For financial reporting purposes, we recorded a valuation allowance of $2.8 million as of December 31, 2015 to offset a portion of the deferred tax assets related to the state net operating loss carryforwards.

A summary of changes in the gross amount of unrecognized tax benefits is as follows:

	December 31, 2016
	(Dollars in thousands)
Balance at January 1, 2016	$	100
Additions based on tax positions related to the current year
Additions based on tax positions related to prior years
Reductions related to tax positions of prior years
Decrease due to statute expirations		(73)
Related interest and penalties, net of federal tax benefits		(27)
Balance as of December 31, 2016	$

The consolidated provision for income taxes is as follows:

	December 31,
	2014		2015		2016
	(Dollars in thousands)
Current:
Federal	$		$		$
State		269		249		229
		269		249		229
Deferred:
Federal		3,932		6,234		4,938
State		564		212		(595)
		4,496		6,446		4,343
Provision for income taxes	$	4,765	$	6,695	$	4,572

Consolidated deferred tax assets and liabilities consist of the following:

	December 31,
	2015		2016
	(Dollars in thousands)
Deferred tax assets:
Financial statement accruals not currently deductible	$	9,699	$	9,324
Net operating loss, AMT credit and other carryforwards		71,593		71,215
State taxes		114		87
Other		3,785		3,394
Total deferred tax assets		85,191		84,020
Valuation allowance for deferred tax assets		(2,771)		(4,487)
Net deferred tax assets	$	82,420	$	79,533
Deferred tax liabilities:
Excess of net book value of property and equipment and software for financial reporting purposes over tax basis	$	2,826	$	2,096
Excess of net book value of intangible assets for financial reporting purposes over tax basis		127,078		128,988
Interest rate swap		(315)		(193)
Unrecognized tax benefits		100
Other
Total deferred tax liabilities		129,689		130,891
Net deferred tax liabilities	$	(47,269)	$	(51,358)

The following table reconciles the above net deferred tax liabilities to the financial statements:

	December 31,
	2015		2016
	(Dollars in thousands)
Deferred income tax asset per balance sheet	$	9,813	$	9,411
Deferred income tax liability per balance sheet		(57,082)		(60,769)
	$	(47,269)	$	(51,358)

A reconciliation of the statutory federal income tax rate to the provision for income tax is as follows:

	Year Ended December 31,
	2014		2015		2016

	(Dollars in thousands)
Statutory federal income tax rate (at 35%)	$	3,584	$	6,246	$	4,706
Effect of state taxes, net of federal		292		458		(486)
Permanent items		613		445		266
State rate change		166		23		(1,664)
Valuation allowance		84		(181)		1,763
Other, net		26		(296)		(13)
Provision for income taxes	$	4,765	$	6,695	$	4,572

At December 31, 2016, we had net operating loss carryforwards for federal income tax purposes of approximately $150.7 million that expire in 2020 through 2034 and for state income tax purposes of approximately $1,021.2 million that expire in years 2017 through 2036. For financial reporting purposes at December 31, 2016 we had a valuation allowance of $4.5 million, net of federal benefit, to offset $4.2 million of the deferred tax assets related to the state net operating loss carryforwards and $0.3 million associated with asset impairments. Our evaluation was performed for tax years that remain subject to examination by major tax jurisdictions, which range from 2012 through 2015.

The amortization of our indefinite-lived intangible assets for tax purposes but not for book purposes creates deferred tax liabilities. A reversal of deferred tax liabilities may occur when indefinite-lived intangibles: (1) become impaired; or (2) are sold, which would typically only occur in connection with the sale of the assets of a station or groups of stations or the entire company in a taxable transaction. Due to the amortization for tax purposes and not book purposes of our indefinite-lived intangible assets, we expect to continue to generate deferred tax liabilities in future periods exclusive of any impairment losses in future periods. These deferred tax liabilities and net operating loss carryforwards result in differences between our provision for income tax and cash paid for taxes.