8. INCOME TAXES

Components of income before income taxes and the income tax provision are as follows:

Income (loss) before income taxes


	Year ended December 31,
	2011		2010		2009
	(in thousands)
U.S.	$	51,618	$	28,799	$	(9,595	)
Foreign		3,015		241		(35	)

Total	$	54,633	$	29,040	$	(9,630	)

Income taxes


	Year ended December 31,
	2011		2010			2009
	(in thousands)
Current
U.S.	$	177	$	(79	)	$	—
State		2,777		—			—
Foreign		173		8			—

Total current income tax expense (benefit)		3,127		(71	)		—

Deferred
U.S.		13,223		—			—
State		224		—			—
Foreign		—		—			—

Total deferred income tax expense		13,447		—			—

Total income tax expense (benefit)	$	16,574	$	(71	)	$	—

The reconciliation of income tax computed at the federal statutory rate to income before taxes is as follows:


	Year ended December 31,
	2011			2010			2009
U.S. Federal statutory rate		35.0	%		34.0	%		(34.0	)%
State taxes net of federal benefit		5.2			5.3			(4.8	)
Permanent differences		(0.6	)		0.3			0.1
Foreign rate differential and transactional tax		(1.4	)		3.2			—
Valuation allowance		(5.9	)		(41.4	)		39.5
Other		(2.0	)		(1.6	)		(0.8	)

		30.3	%		(0.2	)%		—	%

Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company's net deferred income taxes are as follows at December 31:


	2011			2010
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts	$	156		$	75
Inventory reserves		400			359
Accrued liabilities		260			113
Warrant interest expense		283			267
Charitable contributions		10			—
Stock compensation expense		2,083			1,183
State net operating loss—net of tax		984			—
Net operating loss carryforward		—			9,366
Tax credits		206			104

Total deferred tax assets		4,382			11,467
Less valuation allowance		—			(3,244	)

Net deferred tax assets		4,382			8,223
Deferred tax liability:
Depreciation		(16,310	)		(8,103	)
Restricted stock compensation expense		—			(1	)
Prepaid expenses		(115	)		(119	)

Net deferred tax liability	$	(12,043	)	$	—

The Company's deferred income tax assets and liabilities were reported on the consolidated balance sheets as follows.


	2011			2010
	(in thousands)
Current deferred income tax assets	$	3,078		$	—
Long term deferred income tax liabilities		(15,121	)		—

Net deferred tax liability	$	(12,043	)	$	—

A valuation allowance to reduce the deferred tax assets is reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. During the twelve months ended December 31, 2011, the Company concluded that based on the current level of sustainable profitability that generates taxable income, that it is more likely than not that the Company's deferred tax assets will be realizable. The Company on June 30, 2011, recognized a tax benefit of $3.3 million to record current and long-term deferred tax assets and with the release of the valuation allowance began recording federal and certain state and non-U.S. income taxes attributable to the fiscal year's pre-tax income. At December 31, 2011, the Company had separate federal and Illinois net operating loss carryforwards of $22.0 million and $42.0 million, respectively which begin to expire in 2026 and 2019, respectively. The Illinois State Legislature has suspended the use of net operating loss carryforwards for taxable years ending after December 31, 2010 and before December 31, 2014.

The Company has completed an analysis of the utilization of net operating losses subject to limits based upon certain ownership changes. The results of this analysis indicated an ownership change limiting the utilization of net operating losses and tax credits. However, the unused prior year limitations allowed the Company to fully utilize the net operating losses ("NOL") and tax credits in the current year. Additionally, the Company has not recorded a deferred tax asset NOL attributable to stock option exercises in the amount of $22.0 million for federal purposes and $26.0 million for state purposes because the Company cannot record these excess tax benefit stock option deductions until the benefit has been realized by actually reducing taxes payable.

The Company prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. The following is a reconciliation of the unrecognized tax benefits taken or expected to be taken in a tax return that have been recorded on the Company's financial statements for the years ended December 31, 2011.


	2011
	(in thousands)
Balance at the beginning of the year	$	—
Tax positions related to current year		159
Tax positions related to prior year		204

Balance at end of the year	$	363

For the year ended December 31, 2011 the Company accrued $11,000 for potential penalties related to income taxes. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the years ended December 31, 2010 and 2009.

The Company files income tax returns in the United States federal jurisdiction and in a state jurisdiction. During 2009, the Company began foreign operations in Malaysia and Japan and is subject to local income taxes in both jurisdictions. The Company is exempt from Malaysian income tax for a ten year period beginning in 2009. The impact of this tax holiday decreased foreign taxes for the years ended December 31, 2011 and 2010 by approximately $535,000 and $54,000, respectively. The benefit of the tax holiday on net income per share (diluted) was $0.02 and $0.00 for 2011 and 2010, respectively.

The Company's federal tax return for the periods ended December 31, 2008 and 2007 have been audited by the Internal Revenue Service (IRS) with no changes made to the Company's taxable losses for those years. The Company's federal tax return for the period ended December 31, 2010 is currently under audit by the IRS. The Company is not currently subject to any state tax examinations. Due to the existence of net operating loss carryforwards, all tax years except December 31, 2007 are open to examination by tax authorities.

U.S. income and foreign withholding taxes have not been provided on approximately $3.2 million of cumulative undistributed earnings of foreign subsidiaries. We intend to reinvest these earnings for the foreseeable future. If these amounts were distributed to the U.S., in the form of dividends or otherwise, we would be subject to additional U.S. income taxes, which could be material. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, is dependent on circumstances existing, if and when remittance occurs.