Income Taxes

Income before provision for income taxes is as follows (in thousands):



	Year Ended December 31,
	2012		2011		2010
United States	$	40,024	$	15,362	$	25,215
Foreign	134		—		—
Total	$	40,158	$	15,362	$	25,215

The components of the provision for income taxes are as follows (in thousands):



	December 31,
	2012			2011			2010
Federal:
Current	$	14,605		$	5,800		$	5,773
Deferred	(316		)	(3,095		)	2,247
	14,289			2,705			8,020
State:
Current	2,383			1,280			294
Deferred	455			(2,671		)	(226		)
	2,838			(1,391		)	68
Foreign:
Current	118			—			—
Deferred	(85		)	—			—
	33			—			—
Total income tax expense (benefit):
Current	17,106			7,080			6,067
Deferred	54			(5,766		)	2,021
	$	17,160		$	1,314		$	8,088

The Company’s actual tax expense differed from the statutory federal income tax rate, as follows:



	December 31,
	2012		2011		2010
Income tax expense at statutory rate	35.0	%	34.0	%	34.0	%
State income taxes	0.9		(7.7	)	1.7
Stock-based compensation	1.1		(13.5	)	(0.4	)
R&D tax credit	—		(7.2	)	(2.6	)
Acquisition costs	—		3.0		—
Valuation allowance	5.5		—		—
Other	0.2		—		(0.6	)
	42.7	%	8.6	%	32.1	%

At December 31, 2012, the Company had approximately $5.5 million, $45.7 million, and $0.9 million of federal, California and other state jurisdictions net operating loss carryforwards, respectively, to reduce future taxable income. $29.2 million of the California net operating loss carryforwards is associated with windfall tax benefits and will be recorded as additional paid-in capital when realized. These carryforwards will expire beginning in the year 2028 and 2016 for federal and California purposes, respectively, and no sooner than 2031 for the portion related to other state jurisdictions, if not utilized.

Internal Revenue Code limits the use of net operating loss and tax credit carryforwards in the case of an “ownership change” of a corporation. Any ownership changes, as defined, may restrict utilization of carryforwards.

The Company also had research and development credit carryforwards of approximately $4.1 million and $5.7 million for federal and state income tax purposes, respectively, at December 31, 2012, of which $4.1 million and $2.3 million is associated with windfall tax benefits for federal and state income tax purposes, respectively, that will be recorded as additional paid-in capital when realized. The research and development credits may be carried forward over a period of 20 years for federal tax purposes, indefinitely for California tax purposes, and 15 years for Arizona purposes. The research and development tax credit will expire starting in 2027 for federal and 2025 for Arizona.

On January 2, 2013, President Barack Obama signed into law The American Taxpayer Relief Act of 2012, which reinstated the research tax credit retroactive to January 1, 2012 and extended the credit through December 31, 2013. As a result of the new legislation, the Company is expected to recognize a $1.3 million tax benefit relating to the federal research tax credit during the three months ended March 31, 2013.

The components of the net deferred tax assets as of December 31, 2012 and 2011 are as follows (in thousands):



	December 31,
	2012			2011
Deferred tax assets:
Net operating loss carryforwards	$	2,917		$	1,979
Reserves and other tax benefits	22,527			18,457
Tax credits	2,415			3,176
Other	13			15
Deferred tax assets	27,872			23,627
Valuation allowance	(2,203		)	—
Net deferred tax assets	25,669			23,627
Deferred tax liabilities:
Depreciation and amortization	(41,400		)	(33,192		)
Net deferred tax assets / (liabilities)	$	(15,731	)	$	(9,565	)

Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. In November 2012, California passed Proposition 39 mandating a single sales factor apportionment method beginning on or after January 1, 2013. As a result, the Company no longer believes that it is more likely than not that certain California deferred tax assets will be realized as of December 31, 2012. Accordingly, during the year ended December 31, 2012, the Company has recorded a valuation allowance of $2.2 million.

As of December 31, 2012, the Company had $5.4 million of unrecognized tax benefits. A reconciliation of the beginning and ending amounts of unrecognized income tax benefits is as follows (in thousands):



	2012			2011		2010
Balance of unrecognized tax benefits at January 1	$	4,364		$	2,955	$	2,179
Additions for tax positions of prior years	137			—		132
Additions for tax positions related to current year	1,009			1,409		644
Reductions for tax positions of prior years	(65		)	—		—
Balance of unrecognized tax benefits at December 31	$	5,445		$	4,364	$	2,955

If the $5.4 million of unrecognized tax benefits as of December 31, 2012 is recognized, approximately $2.8 million would decrease the effective tax rate in the period in which each of the benefits is recognized. The remaining amount would be offset by the reversal of related deferred tax assets on which a valuation allowance is placed. The Company does not expect any material changes to its unrecognized tax benefits within the next twelve months.

The Company provides for federal income taxes on the earnings of its foreign subsidiaries, as such, earnings are currently recognized as US taxable income.

As of December 31, 2012, the Company is subject to taxation in the United States and Israel. The Company is subject to examination for tax years including and after 2009 for federal, 2008 for California and other state jurisdictions, and 2011 for Israel. Certain tax years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years which have been carried forward and may be audited in subsequent years when utilized.