INCOME TAXES

The Company's pre-tax (loss) income from continuing operations for domestic and foreign sources is as follows (in thousands):



	Year Ended December 31,
	2014			2013			2012
Domestic	$	(7,230	)	$	(950	)	$	(4,142	)
Foreign	6,105			6,882			23,483
Total	$	(1,125	)	$	5,932		$	19,341

Significant components of income tax expense attributable to continuing operations are as follows (in thousands):



	Year Ended December 31,
	2014			2013			2012
Current:
State	$	47		$	(2	)	$	—
Foreign	740			1,929			4,736
Total current	787			1,927			4,736

Deferred:
Federal	(386		)	(410		)	(2,720		)
Foreign	832			20			(530		)
Total deferred	446			(390		)	(3,250		)
Total income tax expense	$	1,233		$	1,537		$	1,486

The following is a reconciliation of income tax expense computed at the United States statutory rate to amounts shown in the Consolidated Statements of Operations:



	2014		2013		2012
Federal income taxes at statutory rate	35.0	%	35.0	%	35.0	%
Taxes on foreign income which differ from the U.S. statutory rate	13.9		(2.1	)	(18.1	)
Effect of change in the enacted rate	—		3.1		(1.3	)
Change in valuation allowance	158.4		(63.4	)	(46.0	)
U.S. taxation of international operations	(170.1	)	12.0		37.3
Change in estimated liabilities	26.8		0.1		0.4
Non-deductible items	(170.9	)	41.3		—
State and local income taxes	(2.7	)	(0.1	)	—
Other	—		—		0.4
	(109.6	)%	25.9	%	7.7	%

Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):



	December 31,
	2014			2013
Deferred tax assets:
Federal, state, and foreign net operating losses	$	21,301		$	26,622
State tax credit carryforwards	—			6,933
Postretirement benefits	655			649
Deferred employee benefits	2,450			1,937
Accrued pension	14,861			7,411
Inventory valuation	3,445			3,037
Foreign tax credit carryforwards	5,030			4,502
Other	3,155			3,262
	50,897			54,353
Less valuation allowance	(44,789		)	(49,297		)
Total deferred tax assets	6,108			5,056

Deferred tax liabilities:
Tax over book depreciation	(3,997		)	(4,499		)
Inventory valuation	(2,103		)	(2,291		)
Intangible assets	(1,672		)	(1,831		)
Other	(477		)	(1,059		)
Total deferred tax liabilities	(8,249		)	(9,680		)
Net deferred tax liabilities	$	(2,141	)	$	(4,624	)

Current deferred tax assets of $2.2 million and $2.1 million for 2014 and 2013, respectively, are reported in "Other current assets" in the Consolidated Balance Sheets. Non-current deferred tax assets of $0.5 million and $0.8 million for 2014 and 2013, respectively, are reported in "Other non-current assets" in the Consolidated Balance Sheets.

In 2014, the valuation allowance decreased by $4.5 million. The valuation allowance decreased by $10.1 million due to operational results and a decrease in state tax credits in the U.S. In New York State, corporate tax reform enacted in March 2014 changed the tax rate of a qualified manufacturing company such as Hardinge to 0%. As a result, Hardinge determined that it was unlikely to recognize any of the $6.9 million of New York State Investment Credit carryovers, and therefore wrote off the deferred tax asset for the carryovers. A corresponding decrease in the valuation allowance of $6.9 million was recorded, since the deferred tax asset on the carryover had a valuation allowance against it. This decrease was offset by $5.6 million of valuation allowance recorded in other comprehensive income (loss).

In 2013, the valuation allowance decreased by $8.4 million. The valuation allowance decreased by $9.5 million due to operational results and a decrease in minimum pension liabilities in the U.S. and other items recorded in other comprehensive income (loss), and this decrease was offset by $1.1 million of valuation allowance established on deferred tax assets arising from the acquisition of Forkardt.

At December 31, 2014, there were U.S. federal and state net operating loss carryforwards of $35.5 million and $37.3 million, respectively, which expire from 2023 through 2031. If certain substantial changes in the Company's ownership occur, there would be an annual limitation on the amount of the carryforwards that can be utilized. The U.S. net operating loss includes approximately $2.2 million of the net operating loss carryforwards for which a benefit will be recorded in "Additional paid-in capital" in the Consolidated Balance Sheets when realized. There are Foreign Tax Credit Carryforwards of $5.0 million which expire between 2020 and 2024. There also are foreign net operating loss carryforwards of $35.4 million, of which $3.1 million will expire between 2018 through 2034, and of which $32.3 million have no expiration date.

At the end of 2014, the undistributed earnings of the Company's foreign subsidiaries, which amounted to approximately $89.4 million, are considered to be indefinitely reinvested and, accordingly, no provision for taxes has been provided thereon. Given the complexities of the foreign tax credit calculations, it is not practicable to compute the tax liability that would be due upon distribution of those earnings in the form of dividends or liquidation or sale of the foreign subsidiaries.

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



	December 31,
	2014			2013			2012
Balance at beginning of year	$	2,743		$	2,514		$	2,333
Additions for acquired subsidiaries	—			267			—
Additions for tax positions related to the current year	182			—			—
Additions for tax positions of prior years	430			150			235
Reductions for tax positions of prior years	(393		)	—			—
Reductions for tax positions related to the current year	—			(57		)	—
Reductions due to lapse of applicable statutes of limitation	(620		)	(131		)	(54		)
Balance at end of year	$	2,342		$	2,743		$	2,514

If recognized, essentially all of the uncertain tax positions and related interest at December 31, 2014 would be recorded as a benefit to income tax expense on the Consolidated Statements of Operations. It is reasonably possible that certain of the uncertain tax positions pertaining to the foreign operations may change within the next 12 months due to audit settlements and statute of limitations expirations. The estimated change in uncertain tax positions for these items would be a benefit to income tax expense up to $1.5 million.

Interest and penalties related to uncertain tax positions are recorded as income tax expense in the Consolidated Statements of Operations. Accrued interest related to the uncertain tax positions was $0.4 million and $0.8 million at December 31, 2014 and 2013, respectively. Accrued penalties related to uncertain tax positions were $0.1 million and $0.2 million at 2014 and 2013, respectively. The accrued interest and penalties are reported in other liabilities on the Consolidated Balance Sheets.

The tax years 2012, 2013, and 2014 remain open to examination by the U.S. federal taxing authorities. The tax years 2010 through 2014 remain open to examination by the U.S. state taxing authorities. For other major jurisdictions (Switzerland, U.K., Taiwan, India, Germany, Netherlands and China); the tax years between 2008 and 2014 generally remain open to routine examination by foreign taxing authorities, depending on the jurisdiction.

Net taxes paid in 2014, 2013 and 2012 totaled $1.9 million, $5.2 million and $4.1 million, respectively.