Income Taxes

The geographical breakdown of income before provision for income taxes is as follows (in thousands):



	Year Ended December 31,
	2016		2015		2014
Domestic	$	196,202	$	129,240	$	120,838
Foreign	46,023		16,769		670
Income before provision for income taxes	$	242,225	$	146,009	$	121,508

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



	Year Ended December 31,
	2016			2015			2014
Current provision for income taxes:
Federal	$	67,253		$	43,706		$	34,314
State	10,529			5,500			4,493
Foreign	2,016			1,588			3,306
Total current	79,798			50,794			42,113
Deferred tax benefit:
Federal	(18,579		)	(23,896		)	(7,105		)
State	(3,564		)	(2,300		)	230
Foreign	381			309			(580		)
Total deferred	(21,762		)	(25,887		)	(7,455		)
Total provision for income taxes	$	58,036		$	24,907		$	34,658

The reconciliation of the statutory federal income tax and our effective income tax is as follows:



	Year Ended December 31,
	2016		2015		2014
U.S. federal statutory income tax	35.00	%	35.00	%	35.00	%
State tax, net of federal benefit	(0.03	)	(1.35	)	1.19
Foreign tax differential	(3.24	)	(2.16	)	0.68
Tax credits	(4.24	)	(6.72	)	(5.26	)
Change in valuation allowance	1.71		2.84		1.92
Permanent items	(1.02	)	(1.32	)	(0.86	)
Uncertain tax positions and associated interest	(1.46	)	(3.95	)	0.37
Stock-based compensation	(2.81	)	(5.29	)	(4.01	)
Other, net	0.05		0.01		(0.51	)
Total provision for income taxes	23.96	%	17.06	%	28.52	%

We have operations and a taxable presence in numerous jurisdictions outside the U.S. All of these countries except one jurisdiction have a lower tax rate than the U.S. The significant jurisdictions in which we have a presence include Cayman Islands, Ireland, and the United Kingdom.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets (liabilities) are as follows (in thousands):



	December 31,
	2016			2015
Deferred tax assets:
Property and equipment	$	473		$	241
Stock-based compensation	23,071			15,859
Reserves and accruals not currently deductible	49,436			33,686
Net operating losses	1,140			221
Tax credits	15,015			12,465
State taxes	—			9
Other	194			380
Gross deferred tax assets	89,329			62,861
Valuation allowance	(16,894		)	(12,655		)
Total deferred tax assets	72,435			50,206
Deferred tax liabilities:
Property and equipment	(198		)	(1,517		)
Accrued liabilities	(2,555		)	(728		)
Other	(3		)	(1		)
Total deferred tax liabilities	(2,756		)	(2,246		)
Net deferred tax assets	$	69,679		$	47,960

The following table presents the breakdown between non-current deferred tax assets and liabilities (in thousands):



	December 31,
	2016			2015
Deferred tax assets, non-current	70,960			48,429
Deferred tax liabilities, non-current	(1,281		)	(469		)
Total net deferred tax assets	$	69,679			$47,960

Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. We believe that all of the deferred tax assets were realizable with the exception of California and Canada deferred tax assets. Therefore, a valuation allowance of $16.9 million and $12.7 million was recorded as of December 31, 2016 and 2015, respectively, against the California and Canadian deferred tax assets as it was not more likely than not that these assets will be recognized. The net valuation allowance increased by $4.2 million and $3.7 million as of December 31, 2016 and 2015, respectively.

As of December 31, 2016, we had no net operating loss carryforwards for federal and state income tax purposes. For foreign jurisdictions, we had combined foreign net operating loss carryforwards of $17.2 million which do not expire.

As of December 31, 2016, we had no U.S. federal credit carryforwards and state credit carryforwards of $39.2 million, which can be carried over indefinitely. For foreign jurisdictions, we had $1.1 million of Canadian scientific research and experimental development tax credit carry-forwards, which begin to expire in 2034.

Utilization of the net operating losses and tax credit carryforwards may be subject to limitations due to ownership changes limitations provided in the Internal Revenue code and similar state or foreign provisions. In all years up to December 31, 2016, such limitations had no impact to our deferred tax assets.

Our policy with respect to our undistributed foreign subsidiaries earnings is to consider those earnings to be indefinitely reinvested and, accordingly, no related provision for U.S. federal and state income taxes has been provided. Upon distribution of those earnings’ in the form of dividends or otherwise, we may be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes in the various countries. As of December 31, 2016, 2015 and 2014, the undistributed earnings approximated $36.4 million, $16.4 million and $4.9 million, respectively. The determination of the future tax consequences of the remittance of these earnings is not practicable.

Uncertain Tax Positions

We recognize uncertain tax positions only to the extent that management believes that it is more likely than not the position will be sustained. The reconciliation of the beginning and ending amount of gross unrecognized tax benefits as of December 31, 2016, 2015 and 2014 was as follows (in thousands):



	Year Ended December 31,
	2016			2015			2014
Gross unrecognized tax benefits—beginning balance	$	22,239		$	21,322		$	16,973
Increases related to tax positions taken in a prior year	46			346			425
Increases related to tax positions taken during current year	11,359			7,385			4,355
Decreases related to tax positions taken in a prior year	(426		)	(228		)	(431		)
Decreases related to settlements with taxing authorities	(432		)	—			—
Decreases related to lapse of statute of limitations	(5,871		)	(6,586		)	—
Gross unrecognized tax benefits—ending balance	$	26,915		$	22,239		$	21,322

As of December 31, 2016, 2015 and 2014 the total amount of gross unrecognized tax benefits was $26.9 million, $22.2 million and $21.3 million of which $13.9 million, $13.0 million and $15.8 million would affect our effective tax rate if recognized, respectively.

Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We have recorded a net benefit for interest and penalties of $0.5 million and net expense of $0.4 million in the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016 and 2015, we recognized a liability for interest and penalties of $0.6 million and $1.1 million, respectively.

We have been selected for examination by the Internal Revenue Service ("IRS") for our 2013 and 2014 tax years. It is difficult to determine when the examinations will be settled or their final outcomes in the foreseeable future. We believe that we have adequately provided reserves for any reasonably foreseeable adjustment to our tax returns.

The statute of limitations for Federal remains open for 2013 and forward. Because of the net operating loss and tax credit carryforwards, all tax years remain open to state tax examination. The majority of our foreign tax returns are open to audit under the statute of limitations of the respective foreign countries, in which the subsidiaries are located. It is possible that the amount of existing unrecognized tax benefits may decrease within the next 12 months as a result of statute of limitation lapses in some of the jurisdictions, however, an estimate of the range cannot be made.