8. Income Taxes

The income before income taxes, by geographic area, was as follows:

	Fiscal Year Ended
	September 28, 2014		September 29, 2013			September 30, 2012
	(in thousands)
Income (loss) before income taxes:
United States	$	118,900	$	60,547		$	141,035
Foreign		25,443		(48,015	)		19,761

Total income before income taxes	$	144,343	$	12,532		$	160,796

Income tax expense consisted of the following:

	Fiscal Year Ended
	September 28, 2014			September 29, 2013			September 30, 2012
				(in thousands)
Current:
Federal	$	26,503		$	11,155		$	46,058
State		7,551			2,705			6,949
Foreign		1,759			11,646			8,569

Total current income tax expense		35,813			25,506			61,576

Deferred:
Federal		5,957			(2,965	)		(200	)
State		434			(637	)		(622	)
Foreign		(6,536	)		(7,866	)		(4,690	)

Total deferred income tax expense (benefit)		(145	)		(11,468	)		(5,512	)

Total income tax expense	$	35,668		$	14,038		$	56,064

Total income tax expense was different from the amount computed by applying the U.S. federal statutory rate to pre-tax income as follows:

	Fiscal Year Ended
	September 28, 2014					September 29, 2013					September 30, 2012
	($ in thousands)
Tax at federal statutory rate	$	50,521		35.0	%	$	4,386		35.0	%	$	56,278		35.0	%
State taxes, net of federal benefit		4,956		3.4			1,316		10.5			4,932		3.1
R&E credits		(867	)	(0.6	)		(6,622	)	(52.8	)		(360	)	(0.2	)
Domestic production deduction		(1,048	)	(0.7	)		(828	)	(6.6	)		(774	)	(0.5	)
Tax differential on foreign earnings		(7,956	)	(5.5	)		(4,263	)	(34.0	)		(4,444	)	(2.8	)
Corrections of prior-year errors		–		–			3,255		26.0			–		–
Goodwill and contingent consideration		(11,808	)	(8.2	)		11,288		90.0			(1,552	)	(1.0	)
Stock compensation		298		0.2			443		3.5			80		0.1
Valuation allowance		396		0.3			4,947		39.5			2,512		1.6
Other		1,176		0.8			116		0.9			(608	)	(0.4	)

Total income tax expense	$	35,668		24.7	%	$	14,038		112.0	%	$	56,064		34.9	%

Our fiscal year 2014 effective tax rate was 24.7% compared to 112.0% for fiscal 2013. The lower effective tax rate in fiscal 2014 resulted primarily from goodwill impairment charges and valuation allowances that increased the rate in fiscal 2013 versus earn-out adjustments that lowered the effective rate this year. We are currently under examination by the Internal Revenue Service for the fiscal years 2010 through 2013, and by the California Franchise Tax Board for fiscal years 2004 through 2005, with respect to R&E credits. We are also subject to various other state audits. With a few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for fiscal years before 2010.

Temporary differences comprising the net deferred income tax liability shown on the accompanying consolidated balance sheets were as follows:

	Fiscal Year Ended
	September 28, 2014			September 29, 2013
	(in thousands)
Deferred Tax Asset:
State taxes	$	2,635		$	452
Reserves and contingent liabilities		8,860			5,883
Allowance for doubtful accounts		6,084			7,345
Accrued liabilities		12,212			14,425
Stock-based compensation		10,273			10,778
Loss carry-forwards		10,815			9,563
Valuation allowance on loss carry-forwards		(7,576	)		(7,459	)

Total deferred tax asset		43,303			40,987

Deferred Tax Liability:
Unbilled revenue		(49,150	)		(47,281	)
Prepaid expense		(5,834	)		(7,522	)
Intangibles		(29,257	)		(24,933	)
Property and equipment		(8,235	)		(9,946	)

Total deferred tax liability		(92,476	)		(89,682	)

Net deferred tax liability	$	(49,173	)	$	(48,695	)

At September 28, 2014, undistributed earnings of our foreign subsidiaries, primarily in Canada, amounting to approximately $52.6 million are expected to be permanently reinvested. Accordingly, no provision for U.S. income taxes or foreign withholding taxes has been made. Upon distribution of those earnings, we would be subject to U.S. income taxes and foreign withholding taxes. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable; however, the potential foreign tax credit associated with the deferred income would be available to partially reduce the resulting U.S. tax liabilities.

At September 28, 2014, we had available unused state net operating loss ("NOL") carry forwards of $22.8 million which expire at various dates through 2033 and foreign NOL carry forwards of $36.8 million of which $26.2 million expire at various dates through 2033, and $10.6 million have no expiration date. We have performed an assessment of positive and negative evidence regarding the realization of the deferred tax assets. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, availability of carrybacks, cumulative losses in recent years, and estimates of projected future taxable income. Although realization is not assured, based on our assessment, we have concluded that it is more likely than not that the assets will be realized except for the assets related to the loss carry-forwards in foreign jurisdictions for which a valuation allowance of $7.6 million has been provided.

At September 28, 2014, we had $21.7 million of unrecognized tax benefits. Included in the balance of unrecognized tax benefits at the end of fiscal year 2014 were $21.7 million of tax benefits that, if recognized, would affect our effective tax rate. It is not expected that there will be a significant change in the unrecognized tax benefits in the next 12 months. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	Fiscal Year Ended
	September 28, 2014			September 29, 2013			September 30, 2012
	(in thousands)
Beginning balance	$	25,886		$	24,092		$	25,940
Additions for current year tax positions		1,243			2,661			6,273
Additions for prior year tax positions		1,416			4,951			19
Reductions for prior year tax positions		–			(5,818	)		(8,072	)
Settlements		(6,828	)		–			(68	)

Ending balance	$	21,717		$	25,886		$	24,092

We recognize potential interest and penalties related to unrecognized tax benefits in income tax expense. The amount of interest expense (net of interest income) accrued at September 28, 2014 and September 29, 2013, was $0.9 million and $2.3 million, respectively.