NOTE 8: INCOME TAXES

The components of the Company’s income before income taxes are attributable to the following jurisdictions for the years ended December 31 (in thousands):

	2014		2013
United States	$	2,044	$	702
Foreign		7,777		2,107
	$	9,821	$	2,809

The components of the Company’s income tax provision (benefit) for the years ended December 31 are as follows (in thousands):

Current provision:	2014			2013
Federal	$	2,433		$	124
State		43			144
Foreign		2,547			1,434
		5,023			1,702
Deferred provision (benefit):
Federal		(1,792	)		(1,883	)
State		349			—
Foreign		(255	)		(184	)
		(1,698	)		(2,067	)
	$	3,325		$	(365	)

A reconciliation of the Company’s effective income tax rate and the United States federal statutory income tax rate is summarized as follows, for the years ended December 31:

	2014			2013
Federal statutory income taxes		35.0	%		35.0	%
State income taxes, net of federal benefit		3.5			1.3
Difference in foreign and United States tax on foreign operations		(16.1	)		(11.6	)
Effect of changes in valuation allowance for net operating loss carryforwards		14.3			(55.9	)
Effect of change in uncertain tax positions (net)		0.5			(17.0	)
Federal Sub-Part F Income from foreign operations		2.9			11.8
Other		(6.2	)		23.4
		33.9	%		(13.0	)%

For the years ended December 31, 2014 and 2013, the Company’s effective tax rate was 33.9% and (13.0)% respectively. For 2014, the effective tax rate was close to what would have been expected if the federal statutory rate was applied to income before taxes. Items increasing the effective income tax rate included the change in the valuation allowances associated with certain deferred tax assets, U.S. federal tax on deemed foreign dividend distribution, and “subpart F income” resulting from controlled foreign corporation operations. Items decreasing the effective income tax rate included the foreign tax credits. For 2013, the effective income tax rate was lower than what would be expected if the federal statutory income tax rate were applied to income before taxes primarily because of the tax benefit recognized from an IRS tax audit settlement, reversal of valuation allowances against net deferred tax assets and differences from foreign operations.

Deferred income taxes reflect the net tax effects of 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 consisted of the following at December 31 (in thousands):

Deferred tax assets:	2014			2013
Current:
Deferred revenue	$	453		$	(26	)
Inventory capitalization		171			228
Inventory reserves		762			644
Accrued expenses		697			917
Other		127			108
Total current deferred tax assets		2,210			1,871
Noncurrent:
Depreciation and amortization		1,867			1,834
Net operating loss⁽¹⁾		5,842			5,078
Deferred royalty		28			39
Non-cash accounting charges related to stock options and warrants		628			520
Accrued expenses		350			366
Foreign tax credit carryover		3,855			—
Other		506			843
Total noncurrent deferred tax assets		13,076			8,680
Total deferred tax assets		15,286			10,551
Valuation allowance		(9,745	)		(5,264	)
Total deferred tax assets, net of valuation allowance	$	5,541		$	5,287
Deferred tax liabilities:
Current:
Prepaid expenses	$	413		$	396
Deferred Commissions		769			5
Other		10			—
Total current deferred tax liabilities		1,192			401
Noncurrent:
Internally-developed software		11			15
Depreciation and amortization		2			2
Sub-Part F Income Deferred		—			2,163
Other		24			(52	)
Total noncurrent deferred tax liabilities		37			2,128
Total deferred tax liabilities	$	1,229		$	2,529

⁽¹⁾ The Company’s net operating loss will expire as follows (dollar amounts in thousands):

Jurisdiction	Gross NOL		Tax Effected NOL		Expiration Years
Canada	$	—		—		2043
Cyprus		5		1		2019
Denmark		1		—		Indefinite
Mexico		9,000		2,700		2020-2023
Norway		448		121		Indefinite
Singapore		28		5		Indefinite
Sweden		541		119		Indefinite
Switzerland		13,612		1,234		2016-2020
Taiwan		7,152		1,215		2016-2023
Ukraine		678		122		Indefinite
United States (states)		12,996		325		2015-2032

At December 31, 2014 and 2013, the Company’s valuation allowance was $9.7 million and $5.3 million, respectively. The provisions of ASC Topic 740 require a company to record a valuation allowance when the “more likely than not” criterion for realizing a deferred tax asset cannot be met. A company is to use judgment in reviewing both positive and negative evidence of realizing a deferred tax asset. Furthermore, the weight given to the potential effect of such evidence is commensurate with the extent the evidence can be objectively verified.

The valuation allowances presented below (in millions) at December 31, 2014 and 2013, represented a reserve against the Company’s net deferred tax asset the Company believed the “more likely than not” criterion for recognition purposes could not be met. The U.S. valuation allowance increased due to the carryover of foreign tax credits that we do not anticipate to utilize in future years.

Country	2014		2013
Mexico	$	2.7	$	2.7
Norway		0.1		0.2
Sweden		0.1		0.1
Switzerland		1.2		0.2
Taiwan		1.2		1.2
Ukraine		0.1		0.1
United States		4.3		0.8
Total	$	9.7	$	5.3

At December 31, 2014 and 2013, the Company did not record a provision for any United States or foreign withholding taxes on its undistributed earnings related to its foreign subsidiaries because it is the intention of the Company to reinvest its undistributed earnings indefinitely in its foreign operations. Generally, such earnings become subject to United States income tax upon the remittance of dividends and under certain other circumstances. At December 31, 2014, it is not practicable to estimate the amount of deferred tax liability on such undistributed earnings.

Deferred tax assets (liabilities) are classified in the accompanying Consolidated Balance Sheets of December 31 as follows (in thousands):

	2014			2013
Current deferred tax assets	$	1,141		$	1,578
Noncurrent deferred tax assets		3,320			1,303
Current deferred tax liabilities		(123	)		(114	)
Other long-term liabilities		(26	)		(9	)
Net deferred tax assets	$	4,312		$	2,758

On January 1, 2007, the Company adopted FIN 48, which was codified into Topic 740, which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements, uncertain tax positions that it has taken or expects to take on a tax return. Topic 740 requires that a company recognize in its financial statements the impact of tax positions that meet a “more likely than not” threshold, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2014, the Company recorded $0.1 million in current liabilities and $0.7 million in other long-term liabilities related to uncertain income tax positions and income tax reserves associated with various audits. At December 31, 2014, the Company had gross tax-affected unrecognized tax benefits of $0.8 million that, if recognized, would impact the effective tax rate. The Company recognizes penalties and interest charges related to unrecognized tax benefits in current tax expense. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows, for the years ended December 31, 2014 and 2013 (in thousands):

	2014			2013
Balance as of January 1	$	738		$	3,039
Additions for tax positions related to the current year		1			436
Additions for tax positions of prior years		111			292
Reductions of tax positions of prior years		(47	)		(3,029	)
Balance as of December 31	$	803		$	738

The examination of our 2005-2009 tax years by the IRS for U.S. federal tax purposes was settled during the second quarter of 2013. In connection with the audit, the IRS and the Company agreed to a net tax deficiency of $0.8 million and the payment of interest accrued through June 30, 2013 of $0.2 million, without any penalties, which was paid during the third quarter of 2013. In connection with the settlement of the audit, the Company reclassified amounts owed to the IRS and previously recorded as uncertain tax positions as taxes payable, resulting in a $1.0 million tax benefit during the year of 2013.

The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2014, the tax years that remained subject to examination by a major tax jurisdiction for the Company’s most significant subsidiaries were as follows:

Jurisdiction	Open Years
Australia		2010-2014
Canada		2010-2014
Denmark		2011-2014
Japan		2011-2014
Mexico		2010-2014
Norway		2008-2014
Republic of Korea		2009-2014
Singapore		2010-2014
South Africa		2011-2014
Sweden		2009-2014
Switzerland		2009-2014
Taiwan		2009-2014
United Kingdom		2008-2014
United States		2008-2014