Income Taxes

The Company accounts for income taxes in accordance with authoritative guidance, which requires the use of the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based upon the difference between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed.

The following table presents domestic and foreign components of income (loss) before income taxes for the periods presented (in thousands):



	Year Ended December 31,
	2015			2014			2013
Domestic	$	(140,352	)	$	149,453		$	145,421
Foreign	(74,378		)	(118,248		)	(96,193		)
Total	$	(214,730	)	$	31,205		$	49,228

The following table presents the components of the provision (benefit) for income taxes for the periods presented (in thousands):



	Year Ended December 31,
	2015			2014			2013
Current:
Federal	$	7,861		$	99,377		$	35,754
State	2,761			10,343			5,513
Foreign	11,569			11,534			10,358
Total current	22,191			121,254			51,625
Deferred:
Federal	(66,573		)	(67,415		)	(25,469		)
State	(4,270		)	(5,992		)	(2,579		)
Foreign	(1,317		)	(1,322		)	(1,118		)
Total deferred	(72,160		)	(74,729		)	(29,166		)
Total provision (benefit)	$	(49,969	)	$	46,525		$	22,459

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



	Year Ended December 31,
	2015		2014		2013
US federal taxes at statutory rate	35	%	35	%	35	%
State income taxes, net of federal benefit	—		9		4
Foreign rate differential	(15	)	106		36
Permanent differences	—		5		1
Stock-based compensation	(1	)	5		5
Research and development credits	10		(57	)	(56	)
Transaction-related expenses	(6	)	44		23
Other	—		2		(2	)
Total	23	%	149	%	46	%

On December 18, 2015, the President signed into law The Protecting Americans from Tax Hikes (PATH) Act of 2015 (the "2015 Act"). The 2015 act establishes a permanent research tax credit for qualifying amounts paid or incurred after December 31, 2014. As a result of the enacted permanent credit, the Company recognized a tax benefit of $20.4 million in the year ended December 31, 2015 for qualifying amounts incurred in 2015.

On December 19, 2014, the President signed into law The Tax Increase Prevention Act of 2014 (the "2014 Act"). Under prior law, a taxpayer was entitled to a research tax credit for qualifying amounts paid or incurred on or before December 31, 2013. The 2014 Act extended the research credit for one year to December 31, 2014. The extension of the research credit was retroactive and includes amounts paid or incurred after December 31, 2013. As a result of the retroactive extension, the Company recognized a tax benefit of $15.1 million in the year ended December 31, 2014 for qualifying amounts incurred in 2014.

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. The following table presents the significant components of the Company’s deferred tax assets and liabilities for the periods presented (in thousands):



	December 31,
	2015			2014
Deferred tax assets:
Accruals and reserves	$	105,411		$	83,805
Net operating loss carryforwards	78,489			4,083
Tax credit carryforwards	80,462			38,411
Stock-based compensation	60,570			33,194
Other	15,645			11,352
Total deferred tax assets	340,577			170,845
Less: valuation allowance	(102,123		)	(43,671		)
Net deferred tax assets	238,454			127,174
Deferred tax liability:
Prepaid expenses	(4,651		)	(3,891		)
Intangible assets	(110,089		)	(17,863		)
Depreciation	(51,933		)	(20,740		)
Other	(1,909		)	(2,123		)
Total deferred tax liabilities	(168,582		)	(44,617		)
Total net deferred tax assets	$	69,872		$	82,557

Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. Due to the history of losses the Company has generated in the past in certain jurisdictions, the Company believes that it is more likely than not that California and certain international deferred tax assets will not be realized as of December 31, 2015. Accordingly, the Company has recorded a valuation allowance on such deferred tax assets. The valuation allowance increased by $58.5 million and $16.4 million during the year ended December 31, 2015 and 2014, respectively. The increase in valuation allowance for 2015 is primarily related to California research and development credits as well as establishment of valuation allowance on certain foreign deferred tax assets.

Pursuant to authoritative guidance, the benefit of stock options will only be recorded to stockholders’ equity when cash taxes payable is reduced. As of December 31, 2015, the portion of net operating loss carryforwards and credit carryforwards related to stock options is approximately $463.6 million tax-effected. This amount will be credited to stockholders' equity when it is realized on the tax return.

The Company regularly assesses the realizability of its deferred tax assets and establishes a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. The Company weighs all available positive and negative evidence, including earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Assumptions used to forecast future taxable income often require significant judgment. More weight is given to objectively verifiable evidence. In the event the Company determines that it would not be able to realize all or part of its net deferred tax assets in the future, a valuation allowance will be established against deferred tax assets in the period in which the Company makes such determination. The need to establish a valuation allowance against deferred tax assets may cause greater volatility in the effective tax rate. It is reasonably possible that any such adjustment would materially change in the next 12 months.

As of December 31, 2015, the Company had net operating loss carryforwards for federal income tax return purposes of approximately $1,217.5 million, which expire at various dates beginning in the year 2023, if not utilized. The Company had net operating loss carryforwards of approximately $572.5 million for California income tax return purposes and approximately $1,234.0 million for other state income tax return purposes which expire at various dates beginning in the year 2023, if not utilized.

As of December 31, 2015, the Company had research and development credit carryforwards for federal income tax return purposes of approximately $113.8 million, which expire at various dates beginning in the year 2023, if not utilized. The Company had research and development credit carryforwards for state income tax return purposes of approximately $107.8 million, which can be carried forward indefinitely.

Utilization of the net operating loss carryforwards and credits may be subject to a 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. The Company believes an ownership change, as defined under Section 382 of the Internal Revenue Code, existed in prior years, and has reduced its net operating loss carryforwards to reflect the limitation.

As of December 31, 2015, the Company had approximately $81.0 million in total unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	Year Ended December 31,
	2015			2014
Unrecognized tax benefits balance at January 1	$	66,508		$	43,735
Gross increase for tax positions of prior years	2,268			2,116
Gross decrease for tax positions of prior years	(1,297		)	(264		)
Gross increase for tax positions of current year	19,470			20,921
Settlements	(5,949		)	—
Gross unrecognized tax benefits at December 31	$	81,000		$	66,508

If the $81.0 million of unrecognized tax benefits as of December 31, 2015 is recognized, approximately $43.2 million would decrease the effective tax rate in the period in which each of the benefits is recognized. If the $66.5 million of unrecognized tax benefits as of December 31, 2014 is recognized, approximately $38.1 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 in place.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2015 and 2014, penalties and interest were immaterial.

The Company files income tax returns in the US federal jurisdiction as well as many US states and foreign jurisdictions. The tax years 2003 to 2014 remain open to examination by the various jurisdictions in which the Company is subject to tax. Fiscal 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.

The Company is subject to the continuous examination of income tax returns by various tax authorities. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of the provision for income taxes. The Company believes that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations and does not anticipate a significant impact to the gross unrecognized tax benefits within the next 12 months related to these years. In October 2015, the Company signed a closing agreement with the Internal Revenue Service (“IRS”) for certain transfer pricing tax positions in years 2010 through 2012. As a result, the Company paid cash tax $0.4 million and recognized a benefit of $5.9 million.

On December 1, 2015, in Altera Corp. v. Commissioner, the US Tax Court formally entered its decision related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. At this time, the US Department of the Treasury has not withdrawn the requirement to include stock-based compensation from its regulations. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decision being overturned upon appeal, we have not recorded any impact as of December 31, 2015. We will continue to monitor ongoing developments and potential impacts to our financial statements.

The Company attributes net revenue, costs and expenses to domestic and foreign components based on the terms of its agreements with its subsidiaries. The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiaries, as such earnings are to be reinvested offshore indefinitely. The income tax liability would be insignificant if these earnings were to be repatriated.