14. Income Taxes

The Company’s geographical breakdown of its loss before provision for income taxes is as follows (in thousands):


	Years Ended December 31,
	2014			2013			2012
Domestic	$	(55,330	)	$	(28,831	)	$	(9,373	)
Foreign		(2,665	)		3,277			2,026

Loss before provision for taxes	$	(57,995	)	$	(25,554	)	$	(7,347	)

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


	Years Ended December 31,
	2014			2013			2012
Current
Federal	$	—		$	—		$	51
State		66			127			47
Foreign		1,523			700			889

Total current provision		1,589			827			987
Deferred
Federal		109			—			(386	)
State		6			—			(49	)
Foreign		(523	)		(50	)		(7	)

Total deferred provision		(408	)		(50	)		(442	)

Total	$	1,181		$	777		$	545

Reconciliation of the provision for income taxes at the statutory rate to the Company’s provision for income tax is as follows (in thousands):


	Years Ended December 31,
	2014			2013			2012
Tax benefit at federal statutory tax rate	$	(19,718	)	$	(8,688	)	$	(2,497	)
Tax benefit at state statutory tax rate		(1,169	)		(829	)		(282	)
Tax benefit resulting from “Beneficiary Enterprise”		—			—			(95	)
Foreign tax rate differential		(526	)		(705	)		(232	)
Foreign repatriation		—			—			179
Unbenefited loss of consolidated investment		2,366			2,402			1,193
Change in valuation allowance		12,407			7,400			1,373
Meals and entertainment		34			197			162
Stock-based compensation		7,160			810			497
Nondeductible expenses and other		627			190			247

Provision for income taxes	$	1,181		$	777		$	545

Significant components of the Company’s net deferred tax assets are as follows (in thousands):


	As of December 31,
	2014			2013
Deferred tax assets:
Reserves and accruals	$	1,387		$	1,345
Deferred revenue		8,429			4,297
Stock-based compensation		5,776			7,042
Net operating loss carryforwards		25,519			20,361
Loss on OCI		380			—
Other		41			194

Gross deferred tax assets		41,532			33,239
Valuation allowance		(40,488	)		(32,656	)

Total deferred tax assets		1,044			583

Deferred tax liabilities:
Stock-based compensation		(53	)		(166	)
Depreciation and amortization		(1,757	)		(31	)
Gain on OCI		—			(3	)

Total deferred tax liabilities		(1,810	)		(200	)

Net deferred tax assets	$	(766	)	$	383

Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. Based upon the weight of available evidence, which includes the Company’s historical operating performance and the recorded cumulative net losses in all prior fiscal periods, the Company has provided a full valuation allowance against its U.S. deferred tax assets. The Company’s valuation allowance increased by $7.8 million, $8.4 million, and $1.8 million in the years ended December 31, 2014, 2013 and 2012, respectively.

As of December 31, 2014, the Company had U.S. federal and state net operating loss carryforwards of approximately $101.5 million and $69.4 million, respectively. The U.S. federal net operating loss carryforwards will expire at various dates beginning in 2023 through 2034 if not utilized. Most state net operating loss carryforwards will expire at various dates beginning in 2018 through 2034.

The Company uses the “with-and-without” approach to determine the recognition and measurement of excess tax benefits. Accordingly, the Company has elected to recognize excess income tax benefits from stock option exercises in additional paid in capital only if an incremental income tax benefit would be realized after considering all other tax attributes presently available to the Company. As of December 31, 2014, the amount of such excess tax benefits from stock options included in deferred tax assets for federal and state net operating losses were $34.9 million and $20.7 million, respectively. In addition, the Company has elected to account for the indirect effects of stock-based awards on other tax attributes, such as the research and alternative minimum tax credits, through the statement of operations.

Net operating loss carryforwards reflected above may be subject to limitations due to ownership changes as provided in the Internal Revenue Code and similar state provisions.

The Company has not provided U.S. income tax on certain foreign earnings that are deemed to be indefinitely invested outside the U.S. For fiscal years 2014, 2013, and 2012 the amount of accumulated unremitted earnings from the Company’s foreign subsidiaries is approximately $12.9 million, $9.8 million and $7.2 million, respectively. Determination of the amount of unrecognized deferred U.S. income tax liability is not practical due to the complexities associated with the hypothetical calculation.

As of December 31, 2014 and 2013, the Company had gross unrecognized tax benefits of approximately $672,000 and $353,000, respectively, all of which would impact the effective tax rate if recognized. While it is often difficult to predict the final outcome of any particular uncertain tax position, the Company does not believe that the amount of unrecognized tax benefits will change significantly in the next twelve months.

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in its income tax provision. For the years ended December 31, 2014 and 2013, the Company accrued interest of $43,000 and $22,000 in income tax expense, respectively.

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


	2014			2013			2012
Balance at January 1	$	353		$	239		$	267
Additions based on tax positions taken during the current period		222			134			141
Reductions based on tax positions taken during the prior period		(47	)		(20	)		(169	)
Additions based on tax positions taken during a prior period		144			—			—

Balance at December 31	$	672		$	353		$	239

The Company’s material income tax jurisdictions are the United States (federal), California and Israel. The Israeli Tax Authorities have now settled the audit of income tax returns of the Israeli subsidiary for the tax years 2006 through 2010. As a result of net operating loss carryforwards, the Company is subject to audit for tax years 2002 and forward for federal purposes and 2004 and forward for California purposes. There are tax years which remain subject to examination in various other jurisdictions that are not material to the Company’s financial statements.

The Company’s Israeli subsidiary’s research and development intercompany services have a “Beneficiary Enterprise” status for a separate investment program that was elected by the Israel subsidiary under the Law for Encouragement of Capital Investments, 1959 (the “Investments Law”), which was amended on April 1, 2005. Undistributed Israeli income derived from its “Beneficiary Enterprise” program entitles the Israeli subsidiary to a tax exemption for a period of two years and to a reduced tax rate of 10%—25% for an additional period of five to eight years (depending on the level of non-Israeli investment in the Company). These tax benefits are subject to a limitation of 12 years from activation of the program.

The entitlement to the above benefits is conditional upon the Israeli subsidiary fulfilling the conditions stipulated by the Investments Law and regulations published there under.

Through December 31, 2012, the Israeli subsidiary had $2.4 million of tax exempt income attributed to its Beneficiary Enterprise program (“exempt profits”). If such exempt profits are distributed as dividends, in a merger or a regular distribution or upon complete liquidation of the Israeli subsidiary, it would be taxed at the corporate tax rate applicable to such profits and an income tax liability of up to $0.6 million would be incurred as of December 31, 2012.

According to a temporary provision of the Investment Law, the Israeli subsidiary paid a onetime payment in November 2013 of approximately $0.2 million to the Israeli Tax Authority for the purpose of “releasing” the exempt profits (10% of the exempt profits).

In December 2010 the “Knesset” (Israeli Parliament) passed the Law for Economic Policy for 2011 and 2012 (Amended Legislation), which prescribes, among others, amendments in the Investment Law (the “Amendment”). The Amendment became effective as of January 1, 2011. According to the Amendment, a flat tax rate applies to the Israeli subsidiary’s R&D activities as follows: 2011 and 2012—15%, 2013 and 2014—12.5% and in 2015 and thereafter—12%. The Israeli subsidiary fully adopted the provisions of the Amendment in 2012.

On July 30, 2013, the Knesset approved an amended Economic Plan for 2013-2014 (“Amended Budget Law”) to raise the Israeli corporate tax rate from 25% to 26.5%, in addition to increasing the flat tax rate applicable to the Israeli subsidiary’s R&D activities starting in 2014 to 16%. Activities other than R&D will be taxed at the rate of 26.5%.