Income Taxes (Notes)

12 Months Ended

Dec. 31, 2016

Income tax expense consisted of the following (in thousands):



	2016			2015		2014
Current:
Federal	$	21,634		$	7,272	$	29,484
State	5,289			3,870		4,161
	26,923			11,142		33,645
Deferred:
Federal	(105		)	13,567		747
State	(2,302		)	202		(258		)
	(2,407		)	13,769		489
Income tax expense	$	24,516		$	24,911	$	34,134

The following table provides a reconciliation between the statutory federal income tax rate and our effective income tax rate:



	2016		2015		2014
Statutory federal income tax	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	2.6		3.0		2.5
Manufacturing deduction	(3.3	)	(1.7	)	(3.3	)
Changes in unrecognized tax benefits	1.2		0.3		0.3
Non-taxable acquisition-related transactions	—		(2.6	)	—
Other	(3.2	)	(1.0	)	(1.1	)
Effective income tax rate	32.3	%	33.0	%	33.4	%

We file income tax returns with the U.S. federal government and various state jurisdictions. In the normal course of business, we are subject to examination by federal and state taxing authorities. We are no longer subject to federal income tax examinations for years prior to 2013 or state income tax examinations prior to 2012.

Deferred Income Taxes

The tax effects of temporary differences that give rise to deferred income taxes were as follows (in thousands):



	2016			2015
Deferred tax assets:
Stock-based compensation	$	9,834		$	8,756
Deferred rent and lease incentives	8,388			6,977
Warranty and returns liabilities	7,948			10,817
Net operating loss carryforwards and credits	6,368			7,847
Compensation and benefits	4,115			3,788
Other	5,264			4,561
Total gross deferred tax assets	41,917			42,746
Valuation allowance	(620		)	(1,441		)
Total deferred tax assets after valuation allowance	41,297			41,305
Deferred tax liabilities:
Property and equipment	27,049			26,330
Deferred revenue	3,279			5,598
Other	6,302			6,341
Total gross deferred tax liabilities	36,630			38,269
Net deferred tax assets	$	4,667		$	3,036

At December 31, 2016, we had net operating loss carryforwards for federal purposes of $10.0 million, which will expire between 2025 and 2034, and for state income tax purposes of $14.8 million, which will expire between 2017 and 2036.

We evaluate our deferred income taxes quarterly to determine if valuation allowances are required. As part of this evaluation, we assess whether valuation allowances should be established for any deferred tax assets that are not considered more likely than not to be realized, using all available evidence, both positive and negative. This assessment considers, among other matters, the nature, frequency, and severity of historical losses, forecasts of future profitability, taxable income in available carryback periods and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified. We have provided a $0.6 million valuation allowance resulting primarily from our inability to utilize certain foreign net operating losses, and federal net operating losses associated with our acquisition of BAM Labs, Inc.

Unrecognized Tax Benefits

Reconciliations of the beginning and ending amounts of unrecognized tax benefits for 2016, 2015 and 2014 were as follows (in thousands):



	Federal and State Tax
	2016			2015			2014
Beginning balance	$	2,077		$	742		$	474
Increases related to current-year tax positions	326			1,277			172
Increases related to prior-year tax positions	1,594			113			110
Lapse of statute of limitations	(333		)	(55		)	(14		)
Settlements with taxing authorities	(204		)	—			—
Ending balance	$	3,460		$	2,077		$	742

As of December 31, 2016 and January 2, 2016, we had $3.5 million and $2.1 million, respectively, of unrecognized tax benefits, which if recognized, would affect our effective tax rate. The amount of unrecognized tax benefits is not expected to change materially within the next 12 months.