Income Taxes

Income tax benefit (provisions) consisted of the following:



	Year Ended December 31,
	2015			2014			2013
	(In thousands)
Income before provision for income taxes	$	4,449		$	6,319		$	3,672
Benefit (provision) for income taxes	(1,591		)	(2,196		)	36,483
Effective tax rate	35.8		%	34.8		%	(993.5		)%

The 2015 provision for income tax resulted primarily from the Company’s federal and foreign tax recognized at statutory rates, adjusted for the tax impact of nondeductible permanent items including stock-based compensation and foreign withholding taxes. The 2015 provision for income tax also includes non-cash tax expense based on intercompany profit that resulted from the sale of certain IP rights to one of the Company's foreign subsidiaries as part of the Company's reorganization of its international operations during the period, and also includes an increase to the valuation allowance against certain of the Company's deferred tax assets. The 2014 provision for income tax resulted primarily from the decrease in deferred tax assets and foreign withholding tax expense. The 2013 benefit for income tax resulted primarily from the partial release of the Company's valuation allowance.

On July 27, 2015, a U.S. Tax Court opinion (Altera Corporation et. al v. Commissioner) concerning the treatment of stock-based compensation expense in an intercompany cost sharing arrangement was issued. In its opinion, the U.S. Tax Court accepted Altera's position of excluding stock-based compensation from its intercompany cost sharing arrangement. Based on the findings of the U.S. Tax Court, the Company has concluded that it is more likely than not that the Internal Revenue Service will uphold the U.S. Tax Court ruling and accordingly has excluded stock-based compensation from intercompany charges during the period. The Company will continue to monitor ongoing developments and potential impacts to its consolidated financial statements.

The Company reported pre-tax book income of:



	Year Ended December 31,
	2015			2014		2013
	(In thousands)
Domestic	$	21,160		$	5,867	$	3,349
Foreign	(16,711		)	452		323
Total	$	4,449		$	6,319	$	3,672

The benefit (provision) for income taxes consisted of the following:



	Year Ended December 31,
	2015			2014			2013
	(In thousands)
Current:
United States federal	$	(1,426	)	$	(218	)	$	(300	)
State and local	(12		)	(12		)	(12		)
Foreign	(389		)	(75		)	(55		)
Total current	$	(1,827	)	$	(305	)	$	(367	)
Deferred:
United States federal	585			(2,137		)	36,190
State and local	—			—			—
Foreign	(349		)	246			660
Total deferred	236			(1,891		)	36,850
	$	(1,591	)	$	(2,196	)	$	36,483

In 2015, 2014, and 2013 the Company’s income tax payable was not decreased by the tax benefit related to stock options. The Company includes only the direct tax effects of employee stock incentive plans in calculating this benefit, which is recorded to additional paid-in capital.

Deferred tax assets and liabilities are recognized for the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, tax losses, and credit carryforwards. Significant components of the net deferred tax assets and liabilities consisted of:



	December 31,
	2015			2014
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	6,824		$	20,627
State income taxes	1			1
Deferred revenue	2,505			4,723
Research and development and other credits	10,626			8,898
Reserves and accruals recognized in different periods	6,395			4,803
Basis difference in investment	967			968
Capitalized R&D expenses	4,654			1,576
Depreciation and amortization	523			783
Deferred rent	243			83
Other	14			(3		)
Total deferred tax assets	32,752			42,459
Valuation allowance	(8,119		)	(7,663		)
Net deferred tax assets	$	24,633		$	34,796

The Company accounts for deferred taxes under ASC Topic 740, “Income Taxes” (“ASC 740”) which involves weighing positive and negative evidence concerning the realizability of the Company’s deferred tax assets in each jurisdiction. As of December 31, 2015, based on its assessment of the realizability of its deferred tax assets, the Company maintains a partial valuation allowance against certain of its U.S. federal, state, and foreign deferred tax assets in each jurisdiction. The valuation allowance increased by $456,000.

In November 2015, the FASB issued Accounting Standards Update ASU No. 2015-17 “Balance Sheet Classification of Deferred Taxes” that requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. In addition, companies will no longer allocate valuation allowances between current and noncurrent deferred tax assets because those allowances also will be classified as noncurrent. ASU 2015-17 is effective for reporting periods beginning after December 15, 2016 with early adoption permitted for any interim or annual periods that have not been issued. The Company has decided to adopt ASU2015-17 prospectively for the fourth quarter of fiscal year 2015 and as such, previously issued balance sheets were not retrospectively adjusted. The adoption resulted in a $2.9 million classification from current deferred income taxes to noncurrent.

As of December 31, 2015, the net operating loss carryforwards for federal and state income tax purposes were approximately $31.9 million and $52.3 million, respectively. The federal net operating losses expire between 2028 and 2033 and the state net operating losses begin to expire in 2028. $9.6 million of the Company’s net operating losses are associated with excess benefits related to stock compensation, when realized the amount will be an increase to additional paid in capital. The Company also has net operating loss carryforwards from Ireland of $3.0 million that can be carried forward indefinitely and do not expire. As of December 31, 2015, the Company had federal and state tax credit carryforwards of approximately $9.8 million and $1.4 million, respectively, available to offset future taxable income. The federal credit carryforwards will expire between 2016 and 2035 and the California tax credits will carryforward indefinitely. In addition, as of December 31, 2015, the Company has Canadian research and development credit carryforwards of $1.6 million, which will expire at various dates through 2035. These operating losses and credit carryforwards have not been reviewed by the relevant tax authorities and could be subject to adjustment upon examinations.

Section 382 of the Internal Revenue Code (“IRC Section 382”) imposes limitations on a corporation’s ability to utilize its net operating losses and credit carryforwards if it experiences an “ownership change” as defined by IRC Section 382. Utilization of a portion of the Company’s federal net operating loss carryforward was limited in accordance with IRC Section 382, due to an ownership change that occurred during 1999. This limitation has fully lapsed as of December 31, 2010. As of December 31, 2015, the Company conducted an IRC Section 382 analysis with respect to its net operating loss and credit carryforwards and determined there was no limitation. There can be no assurance that future issuances of the Company’s securities will not trigger limitations under IRC Section 382 which could limit utilization of these tax attributes.

For purposes of the reconciliation between the benefit (provision) for income taxes at the statutory rate and the effective tax rate, a national U.S. 35% rate is applied as follows:



	2015		2014		2013
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	—	%	—	%	0.1	%
Sale of IP rights to foreign subsidiary	22.5	%	—	%	—	%
Benefit from foreign losses	7.8	%	—	%	—	%
Foreign withholding	0.5	%	3.5	%	8.2	%
Stock compensation expense	5.8	%	3.8	%	2.5	%
Meals & entertainment	0.1	%	0.1	%	0.3	%
Foreign rate differential	(24.0	)%	(1.1	)%	(1.7	)%
Prior year true-up items	1.7	%	(0.2	)%	0.1	%
Tax reserves	3.9	%	0.8	%	1.3	%
Loss on foreign share transfer	5.9	%	—	%	—	%
Credits	(35.5	)%	(5.7	)%	(11.0	)%
Other	3.9	%	(1.4	)%	—	%
Valuation allowance	8.2	%	—	%	(1,028.3	)%
Effective tax rate	35.8	%	34.8	%	(993.5	)%

Undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested and accordingly, no provision for federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries.

The Company maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the best information available, including changes in tax regulations, the outcome of relevant court cases, and other information. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:



	2015			2014			2013
	(In thousands)
Balance at beginning of year	$	1,744		$	1,634		$	628
Gross increases for tax positions of prior years	141			—			896
Gross decreases for tax positions of prior years	(15		)	(4		)	—
Gross increases for tax positions of current year	4,415			114			110
Settlements	—			—			—
Lapse of statute of limitations	—			—			—
Balance at end of year	$	6,285		$	1,744		$	1,634

In July 2013, the FASB ratified ASU 2013-11, “Presenting an Unrecognized Tax Benefit (“UTB”) When a Net Operating Loss Carryforward Exists” (“ASU 2013-11”). ASU 2013-2 provides that an UTB, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. ASU 2013-11 was effective for reporting periods beginning after December 15, 2013, and may be applied retrospectively. The impact was not significant on the Company’s consolidated results of operations and financial condition.

The unrecognized tax benefits relate primarily to federal and state research and development credits and intercompany profit on the transfer of certain IP rights to one of the Company’s foreign subsidiaries as part of the Company’s tax reorganization described above. The Company’s policy is to account for interest and penalties related to uncertain tax positions as a component of income tax expense. As of December 31, 2015, the Company accrued interest or penalties related to uncertain tax positions in the amount of $82,000. The Company expects to release reserves and record a tax benefit in the amount of $282,000 due to the expiration of statutes of limitations during the next 12 months. As of December 31, 2015, the total amount of unrecognized tax benefits that would affect the Company’s effective tax rate, if recognized, is $2.3 million.

Because the Company has net operating loss and credit carryforwards, there are open statutes of limitations in which federal, state and foreign taxing authorities may examine the Company’s tax returns for all years from 1998 through the current period.