8. Income Taxes

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

	Fiscal Year Ended
	September 27, 2015			September 28, 2014		September 29, 2013
	(in thousands)
Income (loss) before income taxes:
United States	$	118,822		$	118,900	$	60,547
Foreign		(38,501	)		25,443		(48,015	)

Total income before income taxes	$	80,321		$	144,343	$	12,532

Income tax expense consisted of the following:

	Fiscal Year Ended
	September 27, 2015			September 28, 2014			September 29, 2013
				(in thousands)
Current:
Federal	$	23,836		$	26,503		$	11,155
State		5,072			7,551			2,705
Foreign		3,773			1,759			11,646

Total current income tax expense		32,681			35,813			25,506

Deferred:
Federal		7,218			5,957			(2,965	)
State		2,335			434			(637	)
Foreign		(1,141	)		(6,536	)		(7,866	)

Total deferred income tax expense (benefit)		8,412			(145	)		(11,468	)

Total income tax expense	$	41,093		$	35,668		$	14,038

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 27, 2015			September 28, 2014			September 29, 2013
Tax at federal statutory rate		35.0	%		35.0	%		35.0	%
State taxes, net of federal benefit		5.0			3.4			10.5
R&E credits		(3.8	)		(0.6	)		(52.8	)
Domestic production deduction		(0.8	)		(0.7	)		(6.6	)
Tax differential on foreign earnings		(2.5	)		(5.5	)		(34.0	)
Corrections of prior-year errors		–			–			26.0
Goodwill and contingent consideration		12.0			(8.2	)		90.0
Stock compensation		0.5			0.2			3.5
Valuation allowance		5.7			0.3			39.5
Other		0.1			0.8			0.9

Total income tax expense		51.2	%		24.7	%		112.0	%

In fiscal 2015, we recorded income tax expense of $41.1 million, representing an effective tax rate of 51.2%. This tax rate is significantly higher than the expected statutory tax rate primarily due to the $60.8 million goodwill and intangible assets impairment charge, most of which was not tax deductible. In fiscal 2014, we recorded income tax expense of $35.7 million, representing an effective tax rate of 24.7%, which was lower than the expected rate due to the impact of gains from changes to contingent consideration liabilities, most of which were not taxable. Excluding these items in both years, our effective tax rate was 32.3% in fiscal 2015 compared to 36.2% in fiscal 2014. During the first quarter of fiscal 2015, the Tax Increase Prevention Act of 2014 was signed into law. This law retroactively extended the federal R&E credits for amounts incurred from January 1, 2014 through December 31, 2014. Our income tax expense for fiscal 2015 includes a tax benefit of $1.2 million attributable to operating income during the last nine months of fiscal 2014, primarily related to the retroactive recognition of these credits. The remainder of the decline in the effective tax rate was primarily due to a higher proportion of operating income from international operations, which have lower tax rates than the U.S., in fiscal 2015 compared to last 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 2009. 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 27, 2015			September 28, 2014
	(in thousands)
Deferred Tax Asset:
State taxes	$	1,746		$	2,635
Reserves and contingent liabilities		3,842			8,860
Allowance for doubtful accounts		4,115			6,084
Accrued liabilities		19,404			12,212
Stock-based compensation		10,516			10,273
Intangibles		2,910			1,159
Loss carry-forwards		5,512			10,815
Valuation allowance		(7,791	)		(7,576	)

Total deferred tax asset		40,254			44,462

Deferred Tax Liability:
Unbilled revenue		(46,513	)		(49,150	)
Prepaid expense		(5,506	)		(5,834	)
Intangibles		(33,068	)		(30,416	)
Property and equipment		(10,713	)		(8,235	)

Total deferred tax liability		(95,800	)		(93,635	)

Net deferred tax liability	$	(55,546	)	$	(49,173	)

At September 27, 2015, undistributed earnings of our foreign subsidiaries, primarily in Canada, amounting to approximately $60.0 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. Assuming the permanently reinvested foreign earnings were repatriated under the laws and rates applicable at September 27, 2015, the incremental federal tax applicable to those earnings would be approximately $5.1 million.

At September 27, 2015, we had available unused state net operating loss ("NOL") carry forwards of $38.4 million that expire at various dates from 2022 to 2035; and available foreign NOL carry forwards of $18.4 million, of which $14.0 million expire at various dates from 2022 to 2035, and $4.4 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 and certain foreign intangibles for which a valuation allowance of $7.8 million has been provided.

At September 27, 2015, we had $21.6 million of unrecognized tax benefits. Included in the balance of unrecognized tax benefits at the end of fiscal year 2015 were $21.6 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 27, 2015			September 28, 2014			September 29, 2013
	(in thousands)
Beginning balance	$	21,717		$	25,886		$	24,092
Additions for current year tax positions		1,147			1,243			2,661
Additions for prior year tax positions		2,309			1,416			4,951
Reductions for prior year tax positions		(23	)		–			(5,818	)
Settlements		(3,532	)		(6,828	)		–

Ending balance	$	21,618		$	21,717		$	25,886

We recognize potential interest and penalties related to unrecognized tax benefits in income tax expense. During fiscal years 2015 and 2014, we accrued additional interest of $0.4 million and $0.2 million, respectively, and recorded reductions in accrued interest of $0.5 million and $0.9 million, respectively, as a result of audit settlements and other prior-year adjustments. The amount of interest and penalties accrued at September 27, 2015 and September 28, 2014, was $1.2 million and $1.4 million, respectively.