11. INCOME TAXES

Income tax expense is summarized as follows:

	Years Ended January 31,
	2014		2013			2012
	(in thousands)
Current:
Federal	$	303	$	684		$	1,669
State		33		25			376
Foreign		2,703		2,569			3,231
Subtotal		3,039		3,278			5,276
Deferred:
Federal		20		942			889
State		306		220			21
Foreign		297		(929	)		(175	)
Subtotal		623		233			735
Equity adjustment		104		140			5
Total	$	3,766	$	3,651		$	6,016

Actual income tax expense differs from that obtained by applying the statutory federal income tax rate of 34% to income before income taxes as follows:

	Years Ended January 31,
	2014			2013			2012
	(in thousands)
Computed expected tax expense	$	3,452		$	3,499		$	5,712
State income taxes, net of federal income tax expense		330			208			580
Incremental tax benefit from foreign operations		(2,676	)		(1,355	)		(1,945	)
Non-deductible equity compensation		1,176			913			898
Foreign withholding taxes		1,171			928			981
Net change in valuation allowance		(108	)		(826	)		(336	)
Net change in contingency reserve		45			(68	)		147
Non-deductible expenses		1,084			296			354
Benefit of tax credits		(1,624	)		(446	)		(1,437	)
Subpart F income		198			313			784
Rate change impact		(88	)		164			(61	)
Other		806			25			339
	$	3,766		$	3,651		$	6,016

Consolidated U.S. (loss) income before income taxes was ($1.2) million, $2.3 million, and $4.4 million for the fiscal years ended January 31, 2014, 2013 and 2012, respectively. The corresponding income before income taxes for foreign operations was $11.4 million, $8.0 million and $12.4 million for the fiscal years ended January 31, 2014, 2013 and 2012, respectively.

The Company files U.S. federal, state, and foreign tax returns that are subject to audit by various tax authorities. The Company is currently under audit in:

India for fiscal years ended March 31, 1998, 1999, 2008, 2009, 2010, 2011 and 2012

France for fiscal years ended 2011, 2012 and 2013

California for fiscal years ended 2004 and 2005

South Africa for fiscal year ended 2008

Thailand for fiscal year ended 2012

City of Wilmington, Delaware for calendar years 2009, 2010, 2011, 2012, 2013

U.S. income and foreign withholding taxes have not been recorded on permanently reinvested earnings of our foreign subsidiaries. These permanently reinvested earnings are approximately $67.0 million at January 31, 2014. It is not practicable for the Company to determine the amount of the related unrecognized deferred income tax liability. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends.

Deferred income taxes reflect the net effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company’s deferred tax assets and liabilities are as follows:

	January 31,
	2014			2013
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts and sales adjustments	$	492		$	689
Accrued vacation		1,923			1,946
Tax credits		7,911			8,417
Deferred revenue		3,467			4,135
Net operating loss carry forwards		10,608			12,011
Accrued expenses - other		2,076			1,906
Section 263(a) interest capitalization		368			385
Equity compensation		4,306			4,856
Other		1,423			1,176
Total deferred tax assets		32,574			35,521
Less valuation allowance		(10,293	)		(10,417	)
Deferred tax assets, net of valuation allowance	$	22,281		$	25,104
Deferred tax liabilities:
Unrecognized capital gain		1,033			944
Depreciation and amortization		654			1,352
Other comprehensive income		295			1,507
Other		378			456
Total deferred tax liabilities		2,360			4,259
Total net deferred tax assets	$	19,921		$	20,845
Recorded as:
Current portion of deferred tax assets		8,242			4,426
Non-current portion of deferred tax assets		13,110			17,301
Current portion of deferred tax liabilities (in current deferred tax assets)		(109	)		(12	)
Non-current portion of deferred tax liabilities (in non-current deferred tax assets)		(1,322	)		(870	)
Total net deferred tax assets	$	19,921		$	20,845

The Company reviews its net deferred tax assets by jurisdiction on a quarterly basis to determine whether a valuation allowance is necessary based on the more-likely-than-not standard. If and when the Company’s operating performance improves on a sustained basis, the conclusion regarding the need for a valuation allowance could change, resulting in the reversal of some or all of the valuation allowance in the future. At January 31, 2014 and 2013, the valuation allowance attributable to deferred tax assets was $10.3 million and $10.4 million, respectively.

Deferred tax assets at January 31, 2014 and 2013 do not include $1.2 million and $1.1 million, respectively, of excess tax benefits from employee stock exercises. During fiscal 2014, the Company was able to recognize $0.1 million of deferred excess tax benefits. Equity will be increased by an additional $1.2 million when such excess tax benefits are ultimately realized.

The Company has gross net operating loss carryforwards of $39.1 million and tax credit carryforwards of $9.9 million as of January 31, 2014. The majority of the Company’s net operating loss carryforwards do not expire, the remaining begin to expire in fiscal year 2015. The majority of the Company’s tax credit carryforwards do not expire, the remaining begin to expire in fiscal year 2019.

During the fiscal year ended January 31, 2014, the Company increased its reserves for uncertain tax positions by $0.1 million. Interest and penalties on accrued but unpaid taxes are classified in the Consolidated Statements of Income and Comprehensive Income as income tax expense. The liability for unrecognized tax benefits that may be recognized in the next twelve months is classified as short-term in the Company’s Consolidated Balance Sheet while the remainder is classified as long-term.

The following table reconciles the gross amounts of unrecognized tax benefits at the beginning and end of the period:

	Years Ended January 31,
	2014		2013
	(in thousands)
Unrecognized tax benefits at beginning of the year	$	2,581	$	2,649
Increases as a result of tax positions taken in a prior period		45		42
Increases as a result of tax positions taken in the current period		—		39
Reduction as a result of a lapse of the statute of limitations		—		(130	)
Decreases as a result of tax settlements		—		(19	)
Unrecognized tax benefit at end of year	$	2,626	$	2,581

All of the unrecognized tax benefits included in the balance sheet at January 31, 2014 would impact the effective tax rate on income from continuing operations, if recognized.

The total amount of interest recognized in the Consolidated Statement of Income and Comprehensive Income for unpaid taxes was $0.1 million for the year ended January 31, 2014. The total amount of interest and penalties recognized in the Consolidated Balance Sheet at January 31, 2014 was $0.2 million.

In the next twelve months, due to a potential tax credit settlement and statute of limitations expiration an estimated $0.8 million of gross unrecognized tax benefits may be recognized.

The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statute of limitations. The years that may be subject to examination will vary by jurisdiction. Below is a list of our material jurisdictions and the years open for audit as of fiscal 2014:

Jurisdiction	Years Open for Audit
U.S. Federal	FY11 and beyond
California	FY10 and beyond
Michigan	FY10 and beyond
New Jersey	FY10 and beyond
Australia	FY10 and beyond
France	FY11 and beyond
India	FY98 and beyond
Ireland	FY10 and beyond
United Kingdom	FY11 and beyond