Income Taxes

Income before provision for income taxes was as follows:



	Year Ended December 31,
	2013		2012		2011
	(in thousands)
United States	$	159,126	$	27,885	$	359,786
Foreign	11,948		2,595		(264		)
Income before income taxes	$	171,074	$	30,480	$	359,522

The components of provision for income taxes for all periods presented were as follows:



	Year Ended December 31,
	2013			2012			2011
	(in thousands)
Current tax provision:
Federal	$	58,558		$	34,387		$	123,406
State	15,154			7,850			28,657
Foreign	7,003			1,162			(70		)
Total current	80,715			43,399			151,993
Deferred tax provision:
Federal	(18,930		)	(26,903		)	(14,008		)
State	(2,751		)	(3,168		)	(4,589		)
Foreign	(363		)	—			—
Total deferred	(22,044		)	(30,071		)	(18,597		)
Provision for income taxes	$	58,671		$	13,328		$	133,396

U.S. income taxes and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries were not provided for on a cumulative total of $9.5 million of undistributed earnings for certain foreign subsidiaries as of December 31, 2013. The Company intends to reinvest these earnings indefinitely in its foreign subsidiaries. If these earnings were distributed to the United States in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes net of available foreign tax credits associated with these earnings. The amount of unrecognized deferred income tax liability related to these earnings is approximately $3.3 million.

Income tax benefits attributable to the exercise of employee stock options of $80.0 million, $4.4 million and $45.5 million for the years ended December 31, 2013, 2012 and 2011, respectively, were recorded directly to additional paid-in-capital.

A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate to income before income taxes is as follows:



	Year Ended December 31,
	2013			2012			2011
	(in thousands)
Expected tax expense at U.S. federal statutory rate of 35%	$	59,878		$	10,667		$	125,833
State income taxes, net of Federal income tax effect	8,053			2,914			15,042
R&D tax credit	(13,841		)	(1,803		)	(8,365		)
Other	4,581			1,550			886
Provision for income taxes	$	58,671		$	13,328		$	133,396

The components of deferred tax assets and liabilities were as follows:



	As of December 31,
	2013			2012
	(in thousands)
Deferred tax assets (liabilities):
Stock-based compensation	$	69,201		$	66,827
Accruals and reserves	13,022			11,155
Depreciation and amortization	(11,159		)	(18,356		)
R&D credits	19,196			8,480
Other	824			(244		)
Total deferred tax assets	91,084			67,862
Valuation allowance	(481		)	—
Net deferred tax assets	$	90,603		$	67,862

Deferred tax assets include $21.5 million and $11.0 million classified as “Other current assets” and $69.1 million and $56.9 million classified as “Other non-current assets” in the Consolidated Balance Sheets as of December 31, 2013 and 2012, respectively. In evaluating its ability to realize the net deferred tax assets, the Company considered all available positive and negative evidence, including its past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. As of December 31, 2013 and 2012, it was considered more likely than not that substantially all deferred tax assets would be realized, and no significant valuation allowance was recorded.

As of December 31, 2013, our federal R&D tax credit and state tax credit carryforwards for tax return purposes were $16.3 million and $29.7 million, respectively. The federal R&D tax credit carryforwards expire in 2033. State tax credit carryforwards of $0.9 million expire in 2023 and the remaining tax credit carryforwards of $28.8 million can be carried forward indefinitely.

On January 2, 2013, the American Taxpayer Relief Act of 2012 (H.R. 8) was signed into law which retroactively extends the Federal research and development credit from January 1, 2012 through December 31, 2013. As a result, the Company recognized the retroactive benefit of the Federal research and development credit of approximately $3.1 million as a discrete item in the first quarter of 2013, the period in which the legislation was enacted.

The Company classifies unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as “Other non-current liabilities” in the Consolidated Balance Sheets. As of December 31, 2013, the total amount of gross unrecognized tax benefits was $68.2 million, of which $57.0 million, if recognized, would favorably impact the Company’s effective tax rate. The aggregate changes in the Company’s total gross amount of unrecognized tax benefits are summarized as follows (in thousands):



Balance as of December 31, 2011	$	28,133
Increases related to tax positions taken during prior periods	8,487
Decreases related to tax positions taken during prior periods	(320		)
Increases related to tax positions taken during the current period	7,037
Balance as of December 31, 2012	$	43,337
Increases related to tax positions taken during prior periods	4
Decreases related to tax positions taken during prior periods	(25		)
Increases related to tax positions taken during the current period	24,915
Balance as of December 31, 2013	$	68,231

The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of December 31, 2013 and December 31, 2012, the total amount of gross interest and penalties accrued was $3.9 million and $3.1 million, respectively, which is classified as “Other non-current liabilities” in the Consolidated Balance Sheets. Interest and penalties included in our provision for income taxes were not material in all the periods presented.

The Company files U.S. federal, state and foreign tax returns. The Company is currently under examination by the IRS for the years 2008 through 2011. The IRS has completed its Field Exam of the 2008 and 2009 federal tax returns and has issued a Revenue Agents Report with a proposed assessment primarily related to our R&D Credits claimed in those years. We have filed a protest against the proposed assessment and are currently awaiting the commencement of the IRS Appeals process. The IRS Field Exam of the 2010 and 2011 federal tax returns is still underway. The year 2012 remains subject to examination by the IRS.

The Company is also currently under examination by the state of California for the years 2006 and 2007. California has completed its Field Exam of the 2006 and 2007 California tax returns and has issued a Notice of Proposed Assessment primarily related to our R&D Credits claimed in those years. We have filed a protest against the proposed assessment and are currently awaiting the commencement of the Protest process with the Franchise Tax Board. The years 1997 through 2005, as well as 2008 through 2012, remain subject to examination by the state of California.

The Company is currently not under examination in any foreign jurisdiction. The years 2011 and 2012 remain subject to examination by foreign jurisdictions.

Given the potential outcome of the current examinations as well as the impact of the current examinations on the potential expiration of the statute of limitations, it is reasonably possible that the balance of unrecognized tax benefits could significantly change within the next twelve months. However, at this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made.