Income Taxes

Significant components of the Company’s deferred income tax assets and liabilities are as follows at December 31 (in thousands):



	2015			2014
Deferred income tax assets:
Net operating loss carryforward	$	649		$	343
Deferred revenue	6,762			4,141
Deferred compensation	1,252			423
Inventory reserve	956			508
Non-qualified and non-employee stock option expense	3,393			3,094
Capitalized research and development	3,348			4,847
Alternative minimum tax carryforward	—			1,081
Research and development tax credit carryforward	2,386			2,139
Reserves, accruals, and other	1,067			1,897
Total deferred income tax assets	19,813			18,473
Deferred income tax liabilities:
Depreciation	(2,228		)	(1,674		)
Amortization	(1,979		)	(236		)
Other	(187		)	—
Total deferred income tax liabilities	(4,394		)	(1,910		)
Net deferred income tax assets before valuation allowance	15,419			16,563
Valuation allowance	(1,700		)	(500		)
Net deferred income tax assets	$	13,719		$	16,063

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). This standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. The Company elected early adoption of ASU 2015-17 effective December 31, 2015, on a retrospective basis. Adoption of this ASU resulted in a reclassification of net current deferred tax assets to the net noncurrent deferred tax asset in the Consolidated Balance Sheet as of both December 31, 2015 and December 31, 2014. This accounting change had no impact on the Company's consolidated results of operations or comprehensive income.

For the years ended December 31, 2015, 2014 and 2013 the provision for income taxes includes $6.9 million, $8.0 million and $6.8 million, respectively, of tax expense resulting from stock-based compensation tax benefits that have been recorded as increases to additional paid-in capital on the consolidated statement of changes in stockholders’ equity.

The Company has $0.3 million of state net operating losses ("NOLs") which expire at various dates between 2016 and 2031. The Company also has Federal NOLs of $1.3 million which expire between 2031 and 2035, and are subject to limitation under IRC Section 382. The Company has $43,000 of federal research and development ("R&D") credits which expire in 2022 and 2023, and are also subject to limitation under IRC Section 382. The Company has $5.8 million of Arizona R&D credits carrying forward, which expire at various dates between 2018 and 2029, and California R&D credit carry forwards for financial reporting purposes of $0.1 million which do not expire. In the UK, the Company has $1.0 million of NOLs which do not expire.

In preparing the Company’s consolidated financial statements, management has assessed the likelihood that deferred income tax assets will be realized from future taxable income. In evaluating the ability to recover its deferred income tax assets, management considers all available evidence, positive and negative; including the Company’s operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred income tax assets will not be realized. Management exercises significant judgment in determining the Company’s provisions for income taxes, its deferred income tax assets and liabilities and its future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred income tax assets.

Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of each reporting date, management considers new evidence, both positive and negative, that could impact management’s view with regards to future realization of deferred tax assets. As of December 31, 2015, the Company continues to demonstrate three-year cumulative pre-tax income in the U.S. federal and Arizona tax jurisdictions; however, the Arizona R&D Tax Credits start to expire in 2018 with a significant tranche with a gross value of $1.2 million expiring in 2019. Under the Company’s new structure, it appears that long term investments which impact short term profits will likely result in some of the R&D credits expiring before they are utilized. Therefore, management has concluded that it is more likely than not that a portion of the Company’s deferred tax assets will not be realized.

Significant components of the provision for income taxes are as follows for the years ended December 31 (in thousands):



	2015			2014		2013
Current:
Federal	$	13,594		$	7,793	$	7,963
State	996			800		987
Total current	14,590			8,593		8,950
Deferred:
Federal	288			2,656		764
State	984			942		(143		)
Foreign	(278		)	—		—
Total deferred	994			3,598		621
Tax provision recorded as an increase in liability for unrecorded tax benefits	(156		)	202		219
Provision for income taxes	$	15,428		$	12,393	$	9,790

A reconciliation of the Company’s effective income tax rate to the federal statutory rate follows for the years ended December 31 (in thousands):



	2015			2014			2013
Federal income tax at the statutory rate	$	12,347		$	11,236		$	9,812
State income taxes, net of federal benefit	1,061			1,433			1,283
Difference between statutory and foreign tax rates ⁽ⁱ⁾	2,442			—			—
Permanent differences ⁽ⁱⁱ⁾	(205		)	98			(96		)
Research and development	(1,050		)	(452		)	(386		)
Return to provision adjustment	(67		)	28			(361		)
Change in liability for unrecognized tax benefits	(156		)	202			219
Incentive stock option benefit	(144		)	(616		)	(538		)
Change in valuation allowance	1,200			500			—
Other	—			(36		)	(143		)
Provision for income taxes	$	15,428		$	12,393		$	9,790
Effective tax rate	43.6		%	38.4		%	34.9		%


⁽ⁱ⁾	The difference between statutory and foreign tax rates of $2.4 million was largely driven by losses incurred in a newly formed foreign entity for which no tax benefit will be realized, partially reduced by a tax benefit for newly formed foreign entities for which the statutory tax rate is lower than the U.S. statutory tax rate.


⁽ⁱⁱ⁾	Permanent differences include certain expenses that are not deductible for tax purposes including lobbying fees as well as favorable items including the domestic production activities deduction

The Company has completed research and development tax credit studies which identified approximately $12.0 million in tax credits for federal, Arizona and California income tax purposes related to the 2003 through 2015 tax years. Management has made the determination that it is more likely than not that the full benefit of the R&D tax credit will not be sustained on examination and recorded a liability for unrecognized tax benefits of $3.2 million as of December 31, 2015. In addition, management accrued approximately $0.2 million for estimated uncertain tax positions related to certain state income tax liabilities. Should the unrecognized tax benefit of $3.4 million be recognized, the Company’s effective tax rate would be favorably impacted.

The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying Consolidated Statement of Operations. As of December 31, 2015 and 2014, respectively, the Company had accrued interest of $55,000 and $46,000.

The following table presents a roll forward of the Company's liability for unrecognized tax benefits, exclusive of accrued interest, as of December 31 (in thousands):



	2015			2014		2013
Balance, beginning of period	$	3,325		$	3,110	$	2,903
(Decrease) increase in previous year tax positions	(389		)	—		57
Increase in current year tax positions	270			121		144
Decrease due to lapse of statute of limitations	(14		)	—		—
Increase related to adjustment of previous estimates of activity	204			94		6
Balance, end of period	$	3,396		$	3,325	$	3,110

Federal income tax returns for 2004 through 2015 remain open to examination by the U.S. Internal Revenue Service (the “IRS”), while state and local income tax returns for 2004 through 2015 also remain open to examination by state taxing authorities. The 2004 through 2009 income tax returns are only open to the extent that net operating loss or other tax attributes carrying forward from those years were utilized in 2011 through 2015. The foreign tax returns for 2012 through 2015 also remain open to examination. During 2015 the IRS completed its examination of the Company's 2012 tax year. The Company has not been notified by any major state tax jurisdictions that it will be subject to examination.

The Company considers the earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside of the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and the Company's specific plans for reinvestment of those subsidiary earnings. It is not practicable to estimate the amount of the deferred tax liability, if any, related to investments in those foreign subsidiaries. If the Company decides to repatriate the foreign earnings, it would need to adjust its income tax provision in the period it determined that the earnings will no longer be indefinitely invested outside the United States.