Income Taxes

Income before income taxes consists of the following (in thousands):



	Year Ended December 31,
	2014		2013		2012
United States	$	25,152	$	91,318	$	102,159
International	5,609		1,664		27,123
Total	$	30,761	$	92,982	$	129,282



	Year Ended December 31,
	2014			2013			2012
Current:
U.S. Federal	$	29,089		$	30,989		$	34,666
State	2,873			3,751			4,555
Foreign	10,930			11,224			6,097
	42,892			45,964			45,318
Deferred:
U.S. Federal	(20,347		)	(6,741		)	(2,069		)
State	(326		)	(1,164		)	(588		)
Foreign	(246		)	(294		)	82
	(20,919		)	(8,199		)	(2,575		)
Total	$	21,973		$	37,765		$	42,743

Net deferred tax assets consist of the following (in thousands):



	Year Ended December 31,
	2014			2013
Deferred Tax Assets:
Accruals and allowances	$	25,756		$	24,488
Net operating loss carryforwards	6,210			7,069
Stock-based compensation	12,416			11,061
Deferred rent	2,137			1,963
Deferred revenue	1,654			1,535
Tax credit carryforwards	1,769			1,183
Acquired intangibles	21,916			1,791
Other	142			—
Total deferred tax assets	72,000			49,090

Deferred Tax Liabilities:
Depreciation and amortization	(1,245		)	(1,514		)
Other	—			(102		)
Total deferred tax liabilities	(1,245		)	(1,616		)

Valuation Allowance*:	(3,020		)	—

Net deferred tax assets	$	67,735		$	47,474

Current portion	$	29,039		$	27,239
Non-current portion	38,696			20,235
Net deferred tax assets	$	67,735		$	47,474

* Valuation allowance is presented gross. The valuation allowance net of the federal tax effect is ($1,963).

Management's judgment is required in determining the Company's provision for income taxes, its deferred tax assets and any valuation allowance recorded against its deferred tax assets. As of December 31, 2014, a valuation allowance of $3.0 million was placed against California deferred tax assets since the recovery of the assets is uncertain. There was no valuation allowance placed against deferred tax assets as of December 31, 2013. Accordingly, the valuation allowance increased $3.0 million during 2014. In management's judgment it is more likely than not that the remaining deferred tax assets will be realized in the future as of December 31, 2014, and as such no valuation allowance has been recorded against the remaining deferred tax assets.

The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows:



	Year Ended December 31,
	2014		2013		2012
Tax at federal statutory rate	35.0	%	35.0	%	35.0	%
State, net of federal benefit	2.5	%	2.2	%	2.1	%
Impact of international operations	19.8	%	3.9	%	(4.8	)%
Stock-based compensation	5.5	%	1.8	%	0.6	%
Tax credits	(3.8	)%	(1.9	)%	0.1	%
Valuation allowance	3.5	%	—	%	—	%
Goodwill impairment	7.8	%	—	%	—	%
Others	1.1	%	(0.4	)%	0.1	%
Provision for income taxes	71.4	%	40.6	%	33.1	%

Income tax benefits (detriments) in the amount of $(0.5) million, $0.4 million and $1.1 million related to stock options were credited to additional paid-in capital during the years ended December 31, 2014, 2013, and 2012, respectively. As a result of changes in fair value of available for sale securities, income tax benefit of $5,000 and $16,000 and a tax expense of $5,000 was recorded in comprehensive income related to the years ended December 31, 2014, 2013, and 2012, respectively.

As of December 31, 2014, the Company has approximately $17.7 million and $0.1 million of acquired federal and state net operating loss carry forwards as well as $1.4 million of California tax credits carryforwards. All of these losses and $0.1 million of these credits are subject to annual usage limitations under Internal Revenue Code Section 382. The federal losses expire in different years beginning in fiscal 2021. The state loss begins to expire in fiscal 2015. The state tax credit carryforwards have no expiration.

The Company files income tax returns in the U.S. federal jurisdiction and various state, local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations for years before 2009. The Company is no longer subject to foreign income tax examinations before 2004. In 2011, the US federal Internal Revenue Service (IRS) commenced an audit of the Company's 2008 and 2009 tax years. The audit was completed in October 2012, and all issues under examination by the IRS were effectively settled. In November, 2012, the Italian Tax Authority (ITA) commenced an audit of the Company’s 2004 through 2011 tax years, and has subsequently extended audit procedures to include the 2012 tax year. The Company has limited audit activity in various states and other foreign jurisdictions. Due to the uncertain nature of ongoing tax audits, the Company has recorded its liability for uncertain tax positions as part of its long-term liability as payments cannot be anticipated over the next 12 months. The existing tax positions of the Company continue to generate an increase in the liability for uncertain tax positions. The liability for uncertain tax positions may be reduced for liabilities that are settled with taxing authorities or on which the statute of limitations could expire without assessment from tax authorities. The possible reduction in liabilities for uncertain tax positions resulting from the expiration of statutes of limitation in multiple jurisdictions in the next 12 months is approximately $1.1 million, excluding the interest, penalties and the effect of any related deferred tax assets or liabilities.

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



	Federal, State, and Foreign Tax
Gross UTB Balance at December 31, 2011	$	17,335
Additions based on tax positions related to the current year	711
Additions for tax positions of prior years	956
Settlements	(2,620		)
Reductions for tax positions of prior years	(3,590		)
Reductions due to lapse of applicable statutes	(449		)
Adjustments due to foreign exchange rate movement	(4		)
Gross UTB Balance at December 31, 2012	12,339
Additions based on tax positions related to the current year	1,866
Additions for tax positions of prior years	4,106
Settlements	(3,134		)
Reductions for tax positions of prior years	(1,163		)
Reductions due to lapse of applicable statutes	(1,314		)
Adjustments due to foreign exchange rate movement	43
Gross UTB Balance at December 31, 2013	12,743
Additions based on tax positions related to the current year	1,894
Additions for tax positions of prior years	1,722
Settlements	(503		)
Reductions for tax positions of prior years	(152		)
Reductions due to lapse of applicable statutes	(1,838		)
Adjustments due to foreign exchange rate movement	(502		)
Gross UTB Balance at December 31, 2014	$	13,364

The total amount of net UTB that, if recognized would affect the effective tax rate as of December 31, 2014 is $12.3 million. The ending net UTB results from adjusting the gross balance at December 31, 2014 for items such as U.S. federal and state deferred tax, foreign tax credits, interest, and deductible taxes. The net UTB is included as a component of non-current income taxes payable within the consolidated balance sheet.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2014, 2013, and 2012, total interest and penalties expensed were $1.1 million, $0.4 million and $74,000, respectively. As of December 31, 2014 and 2013, accrued interest and penalties on a gross basis was $3.0 million and $2.1 million, respectively. Included in accrued interest are amounts related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.

With the exception of those foreign sales subsidiaries for which deferred tax has been provided, the Company intends to indefinitely reinvest foreign earnings. These earnings were approximately $78.3 million and $60.5 million as of December 31, 2014 and December 31, 2013, respectively. Because of the availability of U.S. foreign tax credits, it is not practicable to determine the income tax liability that would be payable if such earnings were not indefinitely reinvested.