Income Taxes

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



	December 31,
	2015			2014			2013
Current:
Federal	$	948		$	61		$	(565	)
State	399			(1,294		)	810
Foreign	41			69			18
Total current provision (benefit)	1,388			(1,164		)	263
Deferred:
Federal	(4,624		)	(5,267		)	(2,584		)
State	—			2,488			(1,635		)
Foreign	18			34			—
Total deferred benefit	(4,606		)	(2,745		)	(4,219		)
Benefit for income taxes	$	(3,218	)	$	(3,909	)	$	(3,956	)

The Company’s (loss) income before (benefit) provision for income taxes was subject to taxes in the following jurisdictions for the following periods (in thousands):



	December 31,
	2015			2014			2013
United States	$	(9,480	)	$	(11,328	)	$	3,364
Foreign	183			345			70
(Loss) income before benefit for income taxes	$	(9,297	)	$	(10,983	)	$	3,434

Significant components of the Company’s deferred tax assets as of December 31, 2015 and 2014 are shown below (in thousands).



	December 31,
	2015			2014
Deferred tax assets:
Net operating loss carryforwards	$	1,199		$	2,236
Intangible assets	3,574			3,366
Sale-leaseback, net	1,224			1,424
Allowance for returns and discounts	4,308			4,574
Stock based compensation	9,884			8,255
Tax credit carryforwards	2,341			2,060
Other, net	5,200			4,472
Total deferred tax assets	27,730			26,387
Valuation allowance for deferred tax assets	(3,087		)	(2,331		)
Total deferred tax assets, net of valuation allowance	24,643			24,056
Deferred tax liabilities:
Convertible Senior Notes	(9,474		)	(11,267		)
Intangible assets	(9,977		)	(12,939		)
Property, plant and equipment	(7,162		)	(6,424		)
Total deferred tax liabilities	(26,613		)	(30,630		)
Net deferred tax assets and liabilities	$	(1,970	)	$	(6,574	)

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative before-tax loss incurred over the three-year periods ended December 31, 2015 and 2014. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future profitability. On the basis of this evaluation, as of December 31, 2014, we recorded a valuation allowance of $2.3 million and increased the valuation allowance by $0.8 million to $3.1 million as of December 31, 2015. This valuation allowance represents the portion of the deferred tax asset that management could no longer conclude was more likely or not to be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted in the future based on changes in available evidence, such as if objective negative evidence in the form of continued net losses are no longer present and additional weight may be given to subjective evidence such as the Company's projections for profitability.

The Company recognizes excess tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized. Accordingly, deferred tax assets are not recognized for net operating loss (“NOL”) carryforwards resulting from excess tax benefits. As of December 31, 2015 and 2014, deferred tax assets do not include $1.3 million and $1.5 million, respectively, of these excess tax benefits from employee stock option exercises that are a component of the Company’s NOL and tax credit carryforwards. Additional paid-in capital will be increased up to an additional $1.3 million if such excess tax benefits are realized.

As of December 31, 2015, the Company had federal NOL carryforwards of approximately $1.5 million which will begin to expire in 2018, unless previously utilized. The Company also had state NOLs of approximately $17.6 million which will begin to expire in 2026, unless previously utilized. The Company has federal research credits of $2.7 million which will begin to expire on December 31, 2032, unless previously utilized. The Company has federal alternative minimum tax credits of $0.5 million which do not expire. The Company also has gross state research credits of $7.9 million, of which $7.7 million do not expire. The remaining $0.2 million begin to expire in 2027, unless previously utilized.

Pursuant to Internal Revenue Code (“IRC”) Sections 382 and 383, the Company’s use of its NOL and research credit carryforwards may be limited as a result of cumulative changes in ownership of more than 50% over a three-year period.

The benefit for income taxes reconciles to the amount computed by applying the federal statutory rate to income (loss) before taxes as follows (in thousands):



	Year ended December 31,
	2015		2014		2013
Tax (benefit) expense at statutory tax rate	(3,254	)	(3,844	)	1,214
State (benefit) taxes, net of federal tax (benefit)	(235	)	(151	)	63
Permanent differences	157		70		(76	)
Federal and state research credits—current year	(722	)	(765	)	(1,046	)
Federal research credits - prior year	—		—		(527	)
(Release) accrual of uncertain tax positions	101		(21	)	369
Expiration of statutes for uncertain tax positions	—		(953	)	(3,452	)
Impact of change in federal and state tax rate on revaluing deferred tax assets	56		110		(581	)
Change in valuation allowance	756		2,331		—
Acquisition related adjustments	—		(485	)	—
Other	(77	)	(201	)	80
Benefit for income taxes	(3,218	)	(3,909	)	(3,956	)

On December 18, 2015, the Protecting Americans from Tax Hikes Act was signed into law reinstating the federal research and development credit for 2015. Accordingly, we recorded the benefit related to the 2015 federal research and development credit of approximately $0.4 million in the fourth quarter of 2015.

On January 3, 2013, the American Taxpayer Relief Act of 2012 was signed into law reinstating the federal research and development credit for the 2012 and 2013 years. Accordingly, we recorded the benefit related to the 2012 federal research and development credit of approximately $0.5 million in the first quarter of 2013.

The Company considers earnings of its non-U.S. subsidiaries to be indefinitely reinvested in those operations. As of December 31, 2015, the Company has not made a provision for U.S. or additional foreign withholding taxes on approximately $0.4 million of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.

The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While the Company believes that it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcome of examinations by tax authorities in determining the adequacy of its provision for income taxes.

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



	Year ended December 31,
	2015			2014			2013
Beginning balance	$	7,065		$	7,765		$	9,051
(Decreases) increases related to prior year tax positions	(12		)	(68		)	773
Increases related to current year tax positions	631			642			1,019
Decreases due to settlements	—			(42		)	—
Expiration of the statute of limitations for the assessment of taxes	—			(1,232		)	(3,078		)
Ending balance	$	7,684		$	7,065		$	7,765

As of December 31, 2015 and 2014, the unrecognized tax benefits of $7.7 million and $7.1 million, respectively, of which $5.6 million and $5.2 million, respectively, would reduce the Company’s annual effective tax rate, subject to the valuation allowance. The Company does not anticipate any significant decreases in its unrecognized tax benefits over the next 12 months. The Company's policy is to recognize the interest expense and penalties related to income tax matters as a component of income tax expense. The Company has accrued approximately $0.2 million of interest and penalties associated with uncertain tax positions as of December 31, 2015. Interest expense, net of accrued interest (reversed), in 2015, 2014, and 2013 was approximately $0.1 million, $(0.2) million, and $(0.3) million, respectively.

The Company is subject to periodic audits by domestic and foreign tax authorities. During 2013, the Company was notified by the Internal Revenue Service that the Congressional Joint Committee of Taxation had completed its review and proposed no changes to the Company’s tax returns filed for the tax periods 2008 through 2010. As a result, the Company released tax reserves and related interest of approximately $3.5 million. During 2014, the Company released tax reserves and related interest of approximately $1.0 million, net of federal income tax benefits, related to the expiration of the statute of limitation on assessment for certain state matters.

Due to the carryforward of unutilized net operating loss and credit carryovers, the Company's federal tax years from 2009 and forward and state tax years 2001 and forward are subject to examination by tax authorities.

The Company believes that it has appropriate support for the income tax positions taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.