Note 9. Income Taxes

The components of our gain (loss) before income taxes are as follows (in thousands):

	Year Ended December 31,
	2014			2013		2012
United States	$	(3,412	)	$	10,513	$	(5,975	)
Foreign		556			608		630
Total	$	(2,856	)	$	11,121	$	(5,345	)
Gain from discontinued operations, before income taxes		—			—	$	18
Gain (loss) from continuing operations, before income taxes	$	(2,856	)	$	11,121	$	(5,327	)

The provision for income taxes from continuing operations consisted of the following (in thousands):

	Year Ended December 31,
Current:	2014		2013		2012
Federal	$	—	$	—	$	—
State		34		132		54
Foreign		380		221		94
Total Current	$	414	$	353	$	148
Deferred
Federal	$	265	$	265	$	266
State		19		24		28
Foreign		42		130		(234	)
Total Deferred		326		419		60
Total provision for income taxes	$	740	$	772	$	208

The provision for income taxes is comprised of estimates of current taxes due in domestic and foreign jurisdictions.

The reconciliation of the Federal statutory income tax rate to our effective income tax rate is as follows (in thousands):

	Year Ended December 31,
	2014			2013			2012
Provision at Federal statutory rate	$	(1,000	)	$	3,900		$	(1,865	)
State taxes		53			156			82
Permanent differences/other		633			520			375
Stock-based compensation		2,311			1,113			178
Federal valuation allowance (used) provided		(1,257	)		(4,917	)		1,438
Provision for income taxes	$	740		$	772		$	208

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 our deferred tax assets and liabilities are as follows (in thousands):

	December 31,
	2014			2013
Deferred Tax Assets
Fixed assets	$	165		$	187
Deferred revenue		19			14
Accruals and reserves		649			498
Stock options		1,663			3,570
Net operating loss carryforwards		42,854			43,562
Federal and state credits		3,327			3,169
Foreign credits		185			197
Intangible assets		1,208			986
Gross deferred tax assets		50,070			52,183
Valuation allowance		(49,054	)		(51,726	)
Total deferred tax assets		391			457
Deferred Tax Liabilities:
Intangible assets		(1,302	)		(1,016	)
Total deferred tax liability		(1,302	)		(1,016	)
Net deferred tax liabilities	$	(911	)	$	(559	)

ASC 740, Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not to occur. Based on management’s review of both the positive and negative evidence, which includes our historical operating performance, reported cumulative net losses since inception and difficulty in accurately forecasting its results, the Company has concluded that it is not more likely than not that the Company will be able to realize all of the Company’s U.S. deferred tax assets. Therefore, the Company has provided a full valuation allowance against its U.S. deferred tax assets.

Based on management’s review of both positive and negative evidence, which includes the historical operating performance of our Canadian subsidiary, the Company has concluded that it is more likely than not that the Company will be able to realize a portion of the Company’s Canadian deferred tax assets. Therefore, the Company has a partial valuation allowance on Canadian deferred tax assets. There is no valuation allowance against the Company’s Indian deferred tax assets. The Company reassesses the need for its valuation allowance on a quarterly basis.

Based on management’s review discussed above, the realization of deferred tax assets is dependent on improvements over present levels of consolidated pre-tax income. Until the Company is consistently profitable in the U.S., it will not realize its deferred tax assets. Deferred income taxes have not been provided on the cumulative undistributed earnings of foreign subsidiaries. The amount of such earnings at December 31, 2014 was $1.5 million. These earnings have been permanently reinvested and the Company does not plan to initiate any action that would precipitate the payment of income tax thereon. It is not practicable to estimate the amount of additional tax that might be payable on undistributed foreign earnings.

The net valuation allowance decreased by approximately $2.0 and $5.7 million during the years ended December 31, 2014 and 2013, respectively. As of December 31, 2014, $4.8 million of the valuation allowance against federal and state net operating loss carryfowards relates to the tax benefit of stock option exercises prior to 2006 that, when realized, will be recorded as a credit to additional paid in capital rather than as a reduction of the provision for income taxes. As of December 31, 2014, the Company had Federal and state net operating loss carryforwards of approximately $120.0 million and $64.5 million, respectively. The Federal net operating loss and credit carryforwards will expire at various dates beginning in 2020 through 2034, if not utilized. The state net operating loss carryforwards will expire at various dates beginning in 2015 through 2034, if not utilized.

The Company also had Federal and state research and development credit carryforwards of approximately $2.8 million and $2.4 million, respectively. The federal credits expire in varying amounts between 2020 and 2031. The state research and development credit carryforwards do not have an expiration date.

Utilization of net operating loss carryforwards and credits may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

ASC 740-10 clarifies the accounting for uncertainties in income taxes by prescribing guidance for the recognition, de-recognition and measurement in financial statements of income tax positions taken in previously filed tax returns or tax positions expected to be taken in tax returns, including a decision whether to file or not to file in a particular jurisdiction. ASC 740-10 requires the disclosure of any liability created for unrecognized tax benefits. The application of ASC 740-10 may also affect the tax bases of assets and liabilities and therefore may change or create deferred tax liabilities or assets.

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

	Year Ended December 31,
	2014			2013			2012
Balance at beginning of year	$	2,502		$	3,637		$	3,210
Increase related to prior year tax positions		2			98			507
Decrease related to prior year tax positions		(89	)		(1,349	)		—
Increase related to current year tax positions		181			162			18
Settlements with tax authorities		—			—			—
Decrease related to lapse of statute of limitations		(136	)		(46	)		(98	)
Balance at end of year	$	2,460		$	2,502		$	3,637

The Company’s total amounts of unrecognized tax benefits that, if recognized, that would affect its tax rate are $0.5 million and $0.5 million as of December 31, 2014 and 2013, respectively.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within its provision for (benefit from) income taxes. The Company had $176,000 accrued for payment of interest and penalties related to unrecognized tax benefits as of December 31, 2014. The Company had $111,000 and $80,000 accrued for payment of interest and penalties related to unrecognized tax benefit as of December 31, 2013 and 2012, respectively.

As of December 31, 2014, the amount of recognized tax benefit where it is reasonably possible that a significant change may occur in the next 12 months is approximately $41,000. The change would result from expiration of a statute of limitations in a foreign jurisdiction.

The Company files federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. Due to its net operating loss carryforwards, the Company’s income tax returns generally remain subject to examination by federal and most state authorities. In our foreign jurisdictions, the 2007 through 2013 tax years remain subject to examination by their respective tax authorities.

We are required to make periodic filings in the jurisdictions where we are deemed to have a presence for tax purposes. We have undergone audits in the past and have paid assessments arising from these audits. Our India entity was issued notices of income tax assessment pertaining to the 2004-2009 fiscal years. The notices claimed that the transfer price used in our inter-company agreements resulted in understated income in our Indian entity. During the fourth quarter of 2014, the Company re-evaluated the probability of its tax position and recorded an ASC 740-10 reserve of $269,000 related to India transfer pricing.

We may be subject to other income tax assessments in the future. We evaluate estimated expenses that could arise from those assessments in accordance with ASC 740-10. We consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate on the amount of expenses. We record the estimated liability amount of those assessments that meet the definition of an uncertain tax position under ASC 740-10.