Note 17. Income Taxes

The following is a summary of the Company’s provision for income taxes for the years ended December 31, 2013, 2012 and 2011:


	December 31,
	2013			2012			2011
Current
Federal	$	36		$	253		$	43
State		198			—			—
International		376			1,111			733

Total		610			1,364			776

Deferred:
Federal		1,363			2,529			(4	)
State		335			297			570
International		35			180			106
Valuation allowance		(1,048	)		(2,980	)		(621	)

Total		685			26			51

Income taxes	$	1,295		$	1,390		$	827

United States and foreign income (loss) before income taxes for the years ended December 31, 2013, 2012 and 2011 is as follows:


	Years ended December 31,
	2013		2012		2011
United States	$	4,634	$	6,126	$	155
Foreign		1,420		4,167		616

Total	$	6,054	$	10,293	$	771

The components of net deferred tax assets (liabilities) are as follows:


	December 31,
	2013			2012
Deferred tax assets:
Current deferred tax assets:
Deferred revenues	$	989		$	856
Allowance for doubtful accounts		887			879
Inventory		235			89
Deferred compensation		448			108
Bonus accruals		455			375
Vacation accrual		160			163
Deferred rent		15			52
Warranty accrual		668			869
Installment sale note receivable		9			9
Other		—			57

Total current deferred tax assets		3,866			3,457

Non-current deferred tax assets:
Intangibles		441			274
Acquisition related costs		653			515
Deferred revenues		958			695
Deferred compensation		2,751			2,657
Deferred rent		163			39
Accrued expenses		321			317
Installment sale note receivable		576			577
Foreign tax credit		1,646			1,646
Alternative minimum tax credit		340			308
Tax loss carryforwards and credits		1,397			4,913

Total non-current current deferred tax assets		9,246			11,941

Total deferred tax assets		13,112			15,398

Current deferred tax liabilities:
Accrued expenses		—			(19	)
Unremitted earnings of Japan Subsidiary		—			(2,455	)

Total current deferred tax liabilities		—			(2,474	)

Non-current deferred tax liabilities:
Satellite network and other property		(1,396	)		(158	)
Goodwill		(1,043	)		(397	)

Total non-current current deferred tax liabilities		(2,439	)		(555	)

Total deferred tax liabilities		(2,439	)		(3,029	)

Net deferred tax assets before valuation allowance		10,673			12,369
Less valuation allowance		(11,235	)		(12,204	)

Net deferred tax asset (liabilities)	$	(562	)	$	165

Deferred tax assets, current	$	623		$	164
Deferred tax assets, non-current		1,254			398
Deferred tax liabilities, non-current		(2,439	)		(397	)

Net deferred tax assets (liabilities)	$	(562	)	$	165

Income taxes differs from the amount computed by applying the statutory U.S. Federal income tax rate because of the effect of the following items:


	Years Ended December 31,
	2013			2012			2011
Income tax expense at U.S. statutory rate of 34%	$	2,063		$	3,500		$	262
State income taxes, net of federal benefit		466			196			566
Effect of foreign subsidiaries		7			146			630
Unremitted earnings of Japan subsidiary		—			2,455			—
Foreign tax credit		—			(1,646	)		—
Other permanent items		(193	)		(13	)		(10	)
Permanent items in connection with the purchase of noncontrolling interests in Satcom		—			(268	)		—
Change in valuation allowance		(1,048	)		(2,980	)		(621	)

Income tax	$	1,295		$	1,390		$	827

In 2013, the Company’s provision for income taxes was primarily due to state income tax expense of $198, $645 from goodwill generated from the amortization of tax goodwill from the acquisitions and $452 from income generated from ORBCOMM Japan which operates in a foreign jurisdiction of Japan.

In 2012, the Company’s provision for income taxes was primarily due to an income tax expense of $1,137 from income generated from ORBCOMM Japan and $253 of alternative minimum tax.

As part of the Company’s accounting for the acquisitions, a portion of the purchase price was allocated to goodwill. The acquired goodwill is deductible for tax purposes and amortized over fifteen years for income tax purposes. Under GAAP, the acquired goodwill is not amortized in the Company’s financial statements, as such a deferred income tax expense and a deferred tax liability arise as a result of the tax deductibility for this amount for tax purposes but not for financial statement purposes. The resulting deferred tax liability, which is expected to continue to increase over time will remain on the Company’s balance sheet indefinitely unless there is an impairment of the asset.

As of December 31, 2013 and 2012, the Company maintained a valuation allowance against all of its net deferred tax assets, excluding goodwill, attributable to operations in the United States and all other foreign jurisdictions, except for Japan, as the realization was not considered more likely than not.

The net change in the total valuation allowance for the years ended December 31, 2013, 2012 and 2011 was $1,048, $2,980 and $621 respectively.

The Company recognizes tax benefits associated with the exercise of SARs and stock options and vesting of RSUs directly to stockholders’ equity only when the tax benefit reduces income tax payable on the basis that a cash tax savings has occurred. Accordingly, deferred tax assets are not recognized for net operating loss carryforwards resulting from tax benefits. As of December 31, 2013 and 2012, the Company has not recognized in its deferred tax assets an aggregate of $4,759 and $4,228 of windfall tax benefits associated with the exercise of SARs, stock options and the vesting of RSUs, respectively.

At December 31, 2013 and December 31, 2012, the Company had potentially utilizable federal and state net operating loss tax carryforwards of $7,078 and $15,898 respectively. The net operating loss carryforwards expire at various times through 2032. At December 31, 2013 and December 31, 2012, the Company had potentially utilizable foreign net operating loss carryforwards of $5,944 and $5,650, respectively. The foreign net operating loss carryforwards expire on various dates through 2033.

The utilization of the Company’s net operating losses may be subject to a substantial limitation due to the “change of ownership provisions” under Section 382 of the Internal Revenue Code and similar state provisions. Such limitation may result in the expiration of the net operating loss carryforwards before their utilization.

As of December 31, 2013, the Company has not provided deferred income taxes on the undistributed earnings of its Japan subsidiary. The amount of such earnings was $946. These earnings have been permanently reinvested and the Company does not plan to initiate action that would precipitate the payment of income taxes thereon. It is not practicable to estimate the amount of additional tax that might be payable on the undistributed earnings of its Japan subsidiary.

During the years December 31, 2013, 2012 and 2011, the Company recorded no significant unrecognized tax benefits. Due to the existence of the Company’s valuation allowance, the uncertain tax benefits if recognized would not impact the Company’s effective income tax rate. The Company is subject to U.S. federal and state examinations by tax authorities from 2010. The Company does not expect any significant changes to its unrecognized tax positions during the next twelve months.

No interest and penalties related to uncertain tax positions were accrued at December 31, 2013, 2012 and 2011.

The following table is a reconciliation of the beginning and ending amount of unrecognized tax benefits:


	2013		2012		2011
Balance at January 1,	$	775	$	775	$	775
Additions for tax positions related to prior years		—		—		—
Additions for tax positions		—		—		—
Reductions for tax positions of prior years		—		—		—
Settlements		—		—		—

Balance at December 31,	$	775	$	775	$	775

As of December 31, 2013 and 2012, the unrecognized tax benefits have been recorded as a reduction to the Company’s federal and state net operating loss tax carryforwards in deferred tax assets.