Note 13. Income Taxes

Consolidated income (loss) before provision for income taxes includes non-U.S. income of approximately $22.0 million, $14.5 million and $3.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. We recorded a current tax provision of $2.8 million, $2.3 million and $471,000 for the years ended December 31, 2011, 2010 and 2009, respectively. The components of the provision (benefit) for income taxes are summarized below (in thousands):

	Years Ended December 31,
	2011		2010		2009
Current:
Federal	$	-	$	-	$	(68	)
State		259		130		(38	)
Foreign		2,536		2,193		577
Total current		2,795		2,323		471
Deferred:
Federal		-		-		-
State		-		-		-
Total deferred		-		-		-
Total net provision for income taxes	$	2,795	$	2,323	$	471

A reconciliation of the effective income tax rates and the U.S. statutory federal income tax rate is summarized below:

	Years Ended December 31,
	2011			2010			2009
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal tax benefits		0.6			0.4			2.4
Change in valuation allowance		(11.5	)		(13.3	)		(61.5	)
Stock compensation		0.3			(0.4	)		(13.8	)
Foreign rate differences		(17.1	)		(12.3	)		56.9
Dividend from PRC investee		3.2			-			(86.7	)
Net loss from privately-held PRC investments		(0.7	)		(0.4	)		16.4
Other		-			1.2			5.7
Effective tax rate		9.8	%		10.2	%		(45.6	)%

Deferred tax assets and liabilities are summarized below (in thousands):

	As of December 31,
	2011			2010
Deferred tax assets:
Net operating loss	$	43,583		$	47,357
Accruals and reserves not yet deductible		4,494			4,240
Credits		1,488			1,488
		49,565			53,085
Deferred tax liabilities:
Unrepatriated foreign earnings		-			-
		-			-
Net deferred tax assets		49,565			53,085
Valuation allowance		(49,565	)		(53,085	)
Net deferred tax assets	$	-		$	-

As of December 31, 2011, we have federal and state net operating loss carryforwards of approximately $128.8 million and $43.1 million, respectively, which will expire beginning in 2022 and 2017, respectively. In addition, we have federal tax credit carryforwards of approximately $1.5 million, which will expire beginning in 2019.

The deferred tax assets valuation allowance as of December 31, 2011 is attributed to U.S. federal, and state deferred tax assets, which result primarily from future deductible accruals, reserves and tax depreciation expense, net operating loss carryforwards, and tax credit carryforwards. We believe that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance has been recorded. These factors include our history of losses, and the lack of carryback capacity to realize deferred tax assets. The valuation allowance decreased by $3.5 million and $1.6 million for the years ended December 31, 2011 and 2010, respectively.

Our consolidated subsidiaries in China have enjoyed various tax holidays since 2000, some of which expired as of December 31, 2007. Benefits under the tax holidays vary by jurisdiction.

In accordance with Section 382 of the Internal Revenue Code, the amounts of and benefits from net operating loss and tax credit carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses or credits that we may utilize in any one year include, but are not limited to, a cumulative ownership change of more that 50% as defined, over a three year period.

As a result of the implementation of Interpretation 48, we recognized $16.4 million of liability for unrecognized tax benefits. Of this amount, none was accounted for as a reduction to the January 1, 2007 balance of retained earnings. The amount decreased tax loss carryforwards in the U.S., which are fully offset by a valuation allowance.

We recognize interest and penalties related to uncertain tax positions in income tax expense. Income tax expense for the year ended December 31, 2011 includes no interest and penalties. As of December 31, 2011, we have no accrued interest and penalties related to uncertain tax positions.

We file income tax returns in the U.S. federal, various states and foreign jurisdictions. We have substantially concluded all U.S. federal and state income tax matters through December 31, 2010.

A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows (in thousands):

Gross unrecognized tax benefits balance as of December 31, 2010	$	16,403
Add:
Additions based on tax positions related to the current year		-
Additions for tax positions of prior years		-
Gross unrecognized tax benefits balance as of December 31, 2011	$	16,403

Excluding the effects of recorded valuation allowances for deferred tax assets, $16.4 million of the unrecognized tax benefit would favorably impact the effective tax rate in future periods if recognized.