Income Taxes

The components of income before income tax provision for the years ended June 30, 2016, 2015 and 2014 are as follows (in thousands):



	Years Ended June 30,
	2016		2015		2014
United States	$	94,335	$	118,083	$	66,152
Foreign	11,092		27,813		13,442
Income before income tax provision	$	105,427	$	145,896	$	79,594

The income tax provision for the years ended June 30, 2016, 2015 and 2014, consists of the following (in thousands):



	Years Ended June 30,
	2016			2015			2014
Current:
Federal	$	28,556		$	33,496		$	20,102
State	1,954			1,980			624
Foreign	10,843			10,960			5,252
	41,353			46,436			25,978
Deferred:
Federal	(6,890		)	(1,989		)	122
State	(1,080		)	70			(472		)
Foreign	23			(484		)	(191		)
	(7,947		)	(2,403		)	(541		)
Income tax provision	$	33,406		$	44,033		$	25,437

The Company’s net deferred tax assets as of June 30, 2016 and 2015 consist of the following (in thousands):



	June 30,
	2016			2015
Warranty accrual	$	2,213		$	2,493
Marketing fund accrual	1,792			1,163
Inventory valuation	12,214			10,158
Stock-based compensation	5,186			4,800
Accrued vacation and bonus	2,544			1,230
Payable to foreign subsidiaries	1,824			1,716
Deferred revenue	3,221			425
Other	2,514			1,003
Total deferred income tax assets	31,508			22,988
Deferred tax liabilities-depreciation and other	(3,048		)	(628		)
Deferred income tax assets-net	$	28,460		$	22,360

The cumulative undistributed earnings of our foreign subsidiaries of $42,515,000 at June 30, 2016 are considered to be indefinitely reinvested and accordingly, no provisions for federal and state income taxes have been provided thereon. The Company determined that the calculation of the amount of unrecognized deferred tax liability related to these cumulative unremitted earnings was not practicable. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both United States income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries.

The following is a reconciliation for the years ended June 30, 2016, 2015 and 2014, of the statutory rate to the Company’s effective federal tax rate:



	Years Ended June 30,
	2016		2015		2014
Tax at statutory rate	35.0	%	35.0	%	35.0	%
State income tax, net of federal tax benefit	3.3		3.0		3.3
Foreign tax rate differences	0.6		(3.0	)	(2.5	)
Research and development tax credit	(7.2	)	(3.4	)	(4.0	)
Qualified production activity deduction	(2.8	)	(1.3	)	(1.8	)
Stock based compensation	2.3		2.2		4.5
Uncertain tax positions	(1.6	)	(0.7	)	(2.1	)
Subpart F income inclusion	(2.9	)	(2.9	)	(3.9	)
Foreign withholding tax	3.3		3.0		4.1
Federal tax return to provision adjustment	0.4		0.2		(0.7	)
Other	1.3		(1.9	)	0.1
Effective tax rate	31.7	%	30.2	%	32.0	%

As of June 30, 2016, the Company had state research and development tax credit carryforwards of $9,898,000. The state research and development tax credits will carryforward indefinitely to offset future state income taxes. $6,837,000 of the state research and development tax credit carryforwards were attributable to excess tax deductions from stock option exercises, and were not included in the deferred tax assets shown above. The benefit of these carryforwards will be credited to equity when realized.

The following table summarizes the activity related to the unrecognized tax benefits (in thousands):



	Gross* Unrecognized Income Tax Benefits
Balance at June 30, 2013	$	8,089
Gross increases:
For current year’s tax positions	3,120
For prior years’ tax positions	132
Gross decreases:
Settlements and releases due to the lapse of statutes of limitations	(1,726		)
For prior year' tax positions	—
Balance at June 30, 2014	9,615
Gross increases:
For current year’s tax positions	3,855
For prior years’ tax positions	793
Gross decreases:
Settlements and releases due to the lapse of statutes of limitations	(971		)
For prior years’ tax positions	—
Balance at June 30, 2015	13,292
Gross increases:
For current year’s tax positions	6,167
For prior years’ tax positions	2,074
Gross decreases:
Settlements and releases due to the lapse of statutes of limitations	(2,138		)
For prior years’ tax positions	—
Balance at June 30, 2016	$	19,395

__________________________


*	excludes interest, penalties, federal benefit of state reserves

The total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, is $16,723,000 and $10,971,000 as of June 30, 2016 and 2015, respectively.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for taxes in the consolidated statements of operations. As of June 30, 2016 and 2015, the Company had accrued $1,042,000 and $898,000 for the payment of interest and penalties relating to unrecognized tax benefits, respectively. During fiscal years 2016, 2015 and 2014, there was no material change in the total amount of the liability for accrued interest and penalties related to the unrecognized tax benefits.

The Company is subject to United States federal income tax as well as income taxes in many state and foreign jurisdictions. The 2012 and 2013 federal tax returns are currently under the IRS examination. The Company has responded to Information Document Requests ("IDRs"), issued by the Internal Revenue Service ("IRS"). No adjustment has been proposed by the IRS as of June 30, 2016. The Company is also currently under audit in Taiwan. The Taiwan Tax Authority issued income tax assessments for tax years 2013 and 2014 related to the local income tax exemption regime which the Company has participated in. The Company is currently in the process of appeals. While management believes that the Company has adequately provided reserves for all uncertain tax positions, amounts asserted by tax authorities could be greater or less than the Company’s current position. Accordingly, the Company’s provision on federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved.

The federal statute of limitations remain open in general for tax years 2012 through 2015. The state statute of limitations remain open in general for tax years 2011 through 2015. The statute of limitations in major foreign jurisdictions remain open for examination in general for tax years 2009 through 2015. The Company does not expect its unrecognized tax benefits to change materially over the next 12 months.