Note 5. Income Taxes

We are subject to income taxes in the U.S. (federal and state) and foreign jurisdictions. In 2016, 2015 and 2014, we recorded tax provisions of $168,000, $166,000 and $96,000, respectively, driven by the amortization of tax goodwill that is not available to be offset by the valuation allowance and income tax expense related to foreign operations. Deferred federal, state and foreign income taxes reflect the net tax impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes. The following table presents the detail of income tax expense as of the periods presented:

	YEAR ENDED DECEMBER 31,
	2016			2015			2014
	(in thousands)
Current:
US - Federal	$	—		$	—		$	—
US - State		(15	)		(56	)		—
Foreign		(63	)		(22	)		(5	)
		(78	)		(78	)		(5	)
Deferred:
US - Federal		(91	)		(88	)		(91	)
US - State		1			—			—
Foreign		—			—			—
		(90	)		(88	)		(91	)
Total income tax expense	$	(168	)	$	(166	)	$	(96	)

We have not provided for U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries of $371,000 as of December 31, 2016 as we intend to permanently reinvest such earnings outside the U.S. If these earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any foreign taxes previously paid on these earnings. The amount of unrecognized deferred tax liability related to these temporary differences is estimated to be approximately $74,000.

The following table presents a reconciliation of the federal statutory rate and our effective tax rate for the periods presented:

	YEAR ENDED DECEMBER 31,
	2016			2015			2014
U.S. Statutory Rate		34.0	%		34.0	%		34.0	%
Change in valuation allowance		(11.8	)		9.9			8.9
State taxes (net of federal benefit)		(4.4	)		3.8			(33.6	)
Federal research and development credit		67.4			(60.8	)		(136.0	)
Incentive stock options		(46.2	)		19.5			83.6
Unrecognized tax benefits		(47.1	)		28.8			34.0
Preferred stock warrant revaluation		12.6			(22.4	)		34.4
Other, net		(15.5	)		2.9			(1.0	)
Effective income tax rate		(11.0)	%		15.7	%		24.3	%

The effective tax rate decreased from prior year solely due to the fluctuation in pre-tax book income. Similar to prior years, we continue to be in a full valuation allowance in the US but recognize deferred income tax expense in the US solely based on the amortization of goodwill intangibles. We also record current tax expense for certain state margin taxes that are based on income and on earnings in foreign jurisdictions.

The following table presents the significant components of our deferred tax assets and liabilities as of the dates presented:

	DECEMBER 31,
	2016			2015
	(in thousands)
Net operating loss carryforwards ^{(1) (2)}	$	34,287		$	33,783
Credit carryforwards ⁽²⁾		6,492			5,693
Depreciation and amortization		—			594
Capitalized research and development		6,992			8,164
Deferred rent		1,825			223
Allowances		767			261
Deferred compensation		1,209			760
Deferred revenue		331			253
Stock compensation ⁽¹⁾		220			323
Deferred tax assets		52,123			50,054
Less: Valuation Allowance		(50,959	)		(50,054	)
Net deferred tax assets	$	1,164		$	—
Deferred Tax Liability:
Goodwill		(766	)		(676	)
Depreciation and Amortization		(1,164	)		—
Deferred tax liabilities		(1,930	)		(676	)
Net deferred tax liability	$	(766	)	$	(676	)
____________
⁽¹⁾ During the current period, we recorded an increase to the NOL and an increase to the valuation allowance of $727,000 as a result of the adoption of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting."
⁽²⁾ Carryforwards are presented net of associated tax contingencies

Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. We have provided a full valuation allowance against the net deferred tax assets as of December 31, 2016 and 2015 because, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized. The valuation allowance increased by $905,000 and $106,000, respectively, during the years ended December 31, 2016 and 2015.

We have accumulated federal tax losses of approximately $100.0 million and $97.0 million, respectively, as of December 31, 2016 and 2015, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $779,000 and $794,000 (tax effected), respectively, as of December 31, 2016 and 2015. We did not record a tax benefit related to our stock options during the years ended December 31, 2016 and 2015 due to the full valuation allowance for our deferred tax assets. However, due to the adoption of ASU 2016-09, we recorded an increase to the federal net operating loss of $727,000 and a corresponding increase in the valuation allowance. Additionally, we have net research and development credit carryforwards of $8.5 million and $7.5 million, respectively, as of December 31, 2016 and 2015, which are available to reduce future tax liabilities. The tax loss and research and development credit carryforwards begin to expire in 2023. Under Sections 382 and 383 of the Internal Revenue Code, if a corporation undergoes an ownership change, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income or income tax liability may be limited.

We are currently not under audit in any tax jurisdiction. Tax years from 2000 through 2016 are currently open for audit by federal and state taxing authorities.

We establish reserves for tax positions based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when we believe that positions might be challenged by taxing authorities despite our belief that our tax return positions are fully supportable.

The following table presents the total balance of unrecognized tax benefits as of the dates presented:

	YEAR ENDED DECEMBER 31,
	2016		2015		2014
	(in thousands)
Unrecognized tax benefits at beginning of the period	$	1,878	$	1,732	$	1,599
Gross increases to tax positions in prior periods		210		—		—
Gross increases to tax positions in current periods		509		146		133
Unrecognized tax benefits at end of the period	$	2,597	$	1,878	$	1,732

At December 31, 2016, the total amount of unrecognized tax benefits of $2.6 million is recorded as a reduction to the deferred tax asset. We do not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. Accrued interest and penalties related to unrecognized tax benefits are recorded as income tax expense and are zero.