Income Taxes

Pre-tax income was attributed to the following jurisdictions:



	Year Ended December 31,
(In thousands)	2014			2013		2012
Domestic operations	$	(2,793	)	$	2,425	$	(2,203	)
Foreign operations	43,244			26,611		26,841
Total	$	40,451		$	29,036	$	24,638

The provision for income taxes charged to operations were as follows:



	Year Ended December 31,
(In thousands)	2014			2013			2012
Current tax expense:
U.S. federal	$	47		$	971		$	(891	)
State and local	49			254			(75		)
Foreign	8,127			6,426			6,464
Total current	8,223			7,651			5,498
Deferred tax (benefit) expense:
U.S. federal	(687		)	(101		)	(882		)
State and local	74			(67		)	3,630
Foreign	307			(1,410		)	(161		)
Total deferred	(306		)	(1,578		)	2,587
Total provision for income taxes	$	7,917		$	6,073		$	8,085

Net deferred tax assets were comprised of the following:



	December 31,
(In thousands)	2014			2013
Deferred tax assets:
Inventory reserves	$	904		$	1,582
Capitalized research costs	79			97
Capitalized inventory costs	684			920
Net operating losses	1,151			1,101
Acquired intangible assets	143			49
Accrued liabilities	4,168			4,215
Income tax credits	8,568			5,982
Stock-based compensation	1,749			2,260
Total deferred tax assets	17,446			16,206
Deferred tax liabilities:
Depreciation	(4,402		)	(4,679		)
Allowance for doubtful accounts	(180		)	(80		)
Amortization of intangible assets	(2,154		)	(2,583		)
Other	(2,256		)	(1,600		)
Total deferred tax liabilities	(8,992		)	(8,942		)
Net deferred tax assets before valuation allowance	8,454			7,264
Less: Valuation allowance	(5,716		)	(4,832		)
Net deferred tax assets	$	2,738		$	2,432

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pre-tax income from operations as a result of the following:



	Year Ended December 31,
(In thousands)	2014			2013			2012
Tax provision at statutory U.S. rate	$	13,753		$	9,872		$	8,377
Increase (decrease) in tax provision resulting from:
State and local taxes, net	(580		)	(397		)	(246		)
Foreign tax rate differential	(7,150		)	(3,804		)	(3,488		)
Nondeductible items	1,093			989			388
Federal research and development credits	(842		)	(1,149		)	(369		)
Change in deductibility of social insurance	688			214			617
Valuation allowance	661			520			2,592
Other	294			(172		)	214
Tax provision	$	7,917		$	6,073		$	8,085

At December 31, 2014, we had federal and state Research and Experimentation ("R&E") income tax credit carryforwards of approximately $1.8 million and $7.3 million, respectively. The federal R&E credits begin to expire in 2032. The state R&E income tax credits do not have an expiration date.

At December 31, 2014, we had federal, state and foreign net operating losses of approximately $2.4 million, $6.0 million and $0.1 million, respectively. Included in the Company's U.S. net operating loss deferred tax assets above is approximately $7.9 million of unrealized gross deferred tax assets attributable to excess tax benefits associated with stock-based compensation that will impact stockholders' equity if and when such excess benefits are ultimately realized. Of the federal and state net operating losses above, $2.3 million and $3.8 million, respectively, were acquired as part of our 2004 acquisition of SimpleDevices. The federal, state, and foreign net operating loss carryforwards begin to expire during 2024, 2018, and 2022, respectively.

Internal Revenue Code Section 382 places certain limitations on the annual amount of net operating loss carryforwards that may be utilized if certain changes to a company’s ownership occur. Our 2004 acquisition of SimpleDevices was a change in ownership pursuant to Section 382 of the Internal Revenue Code, and the federal and state net operating loss carryforwards of SimpleDevices are limited but considered realizable in future periods. The annual federal limitation is approximately $0.6 million for 2014 and thereafter.

At December 31, 2014, we assessed the realizability of our deferred tax assets by considering whether it is "more likely than not" some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We considered taxable income in carry-back years, the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. Due to uncertainties surrounding the realization of some of the Company’s deferred tax assets, primarily including state R&E income tax credits generated during the prior years and current year, the Company established a valuation allowance against its deferred tax assets. When recognized, the tax benefits relating to any reversal of this valuation allowance will be recorded as a reduction of income tax expense. Accordingly, a valuation allowance of $3.9 million was recorded as of December 31, 2012 related to the state R&E deferred tax asset. The total valuation allowance increased by $0.9 million and $0.8 million as of December 31, 2014 and 2013, respectively.

During the year ended December 31, 2013 we recognized an increase to paid-in capital and a decrease to income taxes payable of $0.9 million, related to the tax benefit from the exercise of non-qualified stock options and vesting of restricted stock under our stock-based incentive plans. During the year ended December 31, 2012 we recognized a decrease to paid-in capital and an increase to income taxes payable of $0.1 million, related to the tax benefit from the exercise of non-qualified stock options and vesting of restricted stock under our stock-based incentive plans.

The undistributed earnings of our foreign subsidiaries are considered to be indefinitely reinvested. Accordingly, no provision for U.S. federal and state income taxes or foreign withholding taxes has been provided on such undistributed earnings. Determination of the potential amount of unrecognized deferred U.S. income tax liability and foreign withholding taxes is not practicable because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credits would be available to reduce some portion of the U.S. liability.

During 2012, China's State Administration of Taxation issued Circular 15 which required us to reevaluate our foreign deferred tax assets relating to our Chinese subsidiaries. These subsidiaries have recorded a deferred tax asset for social insurance and housing funds with the intent of being able to deduct these expenses once such liabilities have been settled. Circular 15 stipulates that payments into the aforementioned funds must be made within five years of recording the initial accrual or the tax deduction for these expenses will be forfeited. At December 31, 2014, we evaluated fund payments made prior to the preceding five years and determined that $0.7 million of our foreign deferred tax assets would not provide a future tax benefit due to the change in Chinese law. In adhering to the new law, we recorded increases to income tax expense of $0.7 million, $0.2 million and $0.6 million for the years ended December 31, 2014, 2013 and 2012, respectively, relating to decreases in the deferred tax assets of our Chinese subsidiaries.

Uncertain Tax Positions

At December 31, 2014 and 2013, we had unrecognized tax benefits of approximately $3.6 million and $3.6 million, including interest and penalties, respectively. In accordance with accounting guidance, we have elected to classify interest and penalties as components of tax expense. Interest and penalties were $0.2 million, $0.1 million, and $0.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. Interest and penalties are included in the unrecognized tax benefits.

Our gross unrecognized tax benefits at December 31, 2014, 2013 and 2012, and the changes during those years then ended, were as follows:



(In thousands)	2014			2013			2012
Beginning balance	$	3,490		$	5,006		$	5,387
Additions as a result of tax provisions taken during the current year	213			357			261
Subtractions as a result of tax provisions taken during the prior year	(150		)	(126		)	(346		)
Foreign currency translation	(8		)	45			—
Lapse in statute of limitations	(59		)	(63		)	(296		)
Settlements	—			(1,729		)	—
Ending balance	$	3,486		$	3,490		$	5,006

Approximately $3.2 million, $3.2 million and $4.7 million of the total amount of gross unrecognized tax benefits at December 31, 2014, 2013 and 2012, respectively, would affect the annual effective tax rate, if recognized. We are unaware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change within the next twelve months. We anticipate a decrease in gross unrecognized tax benefits of approximately $0.5 million within the next twelve months based on federal, state, and foreign statute expirations in various jurisdictions. We have classified uncertain tax positions as non-current income tax liabilities unless expected to be paid within one year.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. At December 31, 2014, the open statutes of limitations for our significant tax jurisdictions are the following: federal are 2011 through 2013, state are 2010 through 2013 and foreign are 2008 through 2013.