Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, under which deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and their respective tax bases.

The provision for income taxes consisted of the following components for the years ended December 31, 2015, 2014 and 2013 (in thousands):



	Year Ended December 31,
	2015		2014			2013
Current income tax expense:
Federal	$	—	$	237		$	(1,803	)
State	324		197			(316		)
Foreign	5,021		4,071			2,216
Total current income tax expense	5,345		4,505			97
Deferred income tax expense:
Federal	3,811		87			2,824
State	499		3			449
Foreign	3,010		(2,282		)	(3,926		)
Total deferred income tax expense (benefit)	7,320		(2,192		)	(653		)
Income tax expense (benefit)	$	12,665	$	2,313		$	(556	)

The provision for income taxes for the years ended December 31, 2015, 2014 and 2013 differs from the amount computed by applying the U.S. federal income tax rate of 35% to pretax income (loss) because of the effect of the following items (in thousands):



	Year Ended December 31,
	2015		2014		2013
Tax expense at U.S. federal income tax rate	(6,886	)	16,371		(3,226	)
State income taxes, net of federal income tax effect	541		1,465		205
Effect of non-US operations	(306	)	(1,632	)	(644	)
Nontaxable contingent liability fair value changes and goodwill impairment	13,083		(14,334	)	3,828
Research and development credit	(422	)	(376	)	(1,046	)
Change in valuation allowances	5,173		850		607
Prior year provision to return adjustment	372		(172	)	—
Write-off of deferred taxes and tax receivables	858		—		—
Nondeductible expense and other	252		141		(280	)
Income tax expense (benefit)	12,665		2,313		(556	)

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 return reporting purposes. At December 31, 2015 and 2014, the Company’s deferred tax assets and liabilities consisted of the following (in thousands):



	December 31,
	2015			2014
Current deferred tax assets:
Reserves and allowances not currently deductible	$	—		$	1,858
Other	—			77
Total current deferred tax assets	—			1,935
Noncurrent deferred tax assets:
Inventory reserve	838			—
Other reserves and allowances	2,993			—
Income tax basis in excess of financial statement basis in intangible assets	4,267			5,235
Deductible stock-based compensation	4,615			4,740
Net operating loss carryforward	8,667			10,984
Tax credit carryforwards	2,099			1,338
	23,479			22,297
Valuation allowance	(6,500		)	(1,604		)
Total noncurrent deferred tax assets	16,979			20,693
Total deferred tax assets	16,979			22,628

Total current deferred tax liability:
Prepaid & other expenses	—			(116		)
Total current deferred tax liability	—			(116		)
Noncurrent deferred tax liabilities:
Prepaid & other expenses	(867		)	—
Fixed assets	(6,013		)	(4,931		)
Intangible assets	(22,411		)	(21,825		)
Total noncurrent deferred tax liabilities	(29,291		)	(26,756		)
Total deferred tax liabilities	(29,291		)	(26,872		)

Net deferred tax liability	$	(12,312	)	$	(4,244	)

Net current deferred tax asset	$	—		$	1,819
Net noncurrent deferred tax liability	(12,312		)	(6,063		)
Net deferred tax liability	$	(12,312	)	$	(4,244	)

As discussed in Note 2, the Company adopted ASU 2015-17 on a prospective basis as of December 31, 2015, and the deferred tax assets and deferred tax liabilities in the table above have been reclassified as noncurrent deferred taxes on the consolidated balance sheet. Since the Company adopted the ASU on a prospective basis, the 2014 balances above have not been restated.

The realizability of deferred income tax assets is based on a more likely than not standard. If it is determined that it is more likely than not that deferred income tax assets will not be realized, a valuation allowance must be established against the deferred income tax assets. Realization of deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance the Company considers historical, as well as future projected, taxable income along with other positive and negative evidence in assessing the realizability of its deferred tax assets.

For the years ended December 31, 2015 and 2014, the Company recorded net increases in its valuation allowances of $5.2 million and $0.8 million, respectively.

As of December 31, 2015, the Company has gross federal and state net operating loss (“NOLs”) carryforwards of $14.9 million and $14.0 million, respectively. The federal carryovers begin to expire in 2023, and the state carryovers begin to expire in 2022. Section 382 of the Internal Revenue Code imposes an annual limitation on the utilization of net operating loss carryforwards related to acquired corporations based on a statutory rate of return (usually the “applicable federal funds rate” as defined in the Internal Revenue Code) and the value of the corporation at the time of a “change in ownership” as defined by Section 382. The Company’s total federal NOL as of December 31, 2015 includes $0.6 million of NOLs from acquired corporations. These acquired NOLs have an annual limitation under Section 382 of the Internal Revenue Code of $0.2 million.

As of December 31, 2015, the Company had gross NOLs in France, Italy, Chile and Switzerland of $16.4 million, $1.6 million, $2.8 million and $1.5 million, respectively, which have an indefinite carryover period.

As of December 31, 2015, the Company had gross federal and state research and development credit carryforwards of approximately $1.6 million and $0.5 million, respectively. The federal carryovers begin to expire in 2031, and the state carryovers begin to expire in 2015.

As a result of certain realization requirements of ASC 718, Stock-Based Compensation, the Company has not recorded certain deferred tax assets that arose directly from tax deductions related to equity compensation that are greater than the compensation recognized for financial reporting. As of December 31, 2015, the Company has $13.8 million and $11.3 million in federal and state tax deductions, respectively, related to these stock option exercises which have not been recorded but are available to reduce taxable income in future periods. These deductions will be recorded to additional paid in capital in the period in which they are realized.

The Company's intention is to indefinitely reinvest all undistributed earnings of its foreign subsidiaries in accordance with ASC 740. Deferred income taxes were not calculated on undistributed earnings of foreign subsidiaries, which were $26.1 million and $8.9 million at December 31, 2015 and 2014, respectively. Determination of the amount of unrecognized deferred tax liability on the undistributed earnings considered indefinitely reinvested is not practicable. If the undistributed earnings were to be remitted to the Company, foreign tax credits would be available to reduce any U.S. tax due upon repatriation.

The Company's income (loss) before taxes on foreign operations was $(29.5) million, $15.4 million and $(13.8) million for the years ended December 31, 2015, 2014 and 2013, respectively.