8. Income Taxes

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

	Fiscal Year Ended
	October 2, 2016		September 27, 2015			September 28, 2014
	(in thousands)
Income (loss) before income taxes:
United States	$	113,576	$	118,822		$	118,900
Foreign		10,890		(38,501	)		25,443

Total income before income taxes	$	124,466	$	80,321		$	144,343

Income tax expense consisted of the following:

	Fiscal Year Ended
	October 2, 2016			September 27, 2015			September 28, 2014
				(in thousands)
Current:
Federal	$	22,277		$	23,836		$	26,503
State		5,634			5,072			7,551
Foreign		6,651			3,773			1,759

Total current income tax expense		34,562			32,681			35,813

Deferred:
Federal		6,231			7,218			5,957
State		(16	)		2,335			434
Foreign		(164	)		(1,141	)		(6,536	)

Total deferred income tax expense (benefit)		6,051			8,412			(145	)

Total income tax expense	$	40,613		$	41,093		$	35,668

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
	October 2, 2016			September 27, 2015			September 28, 2014
Tax at federal statutory rate		35.0	%		35.0	%		35.0	%
State taxes, net of federal benefit		3.1			5.0			3.4
Research and Development ("R&D") credits		(3.4	)		(3.8	)		(0.6	)
Domestic production deduction		(0.7	)		(0.8	)		(0.7	)
Tax differential on foreign earnings		(5.5	)		(2.5	)		(5.5	)
Non-deductible executive compensation		2.0			–			–
Goodwill and contingent consideration		–			12.0			(8.2	)
Stock compensation		0.3			0.5			0.2
Valuation allowance		2.4			5.7			0.3
Change in uncertain tax positions		(2.0	)		–			–
Other		1.4			0.1			0.8

Total income tax expense		32.6	%		51.2	%		24.7	%

Our effective tax rates for fiscal 2016 and 2015 were 32.6% and 51.2%, respectively. In fiscal 2016, we incurred $13.3 million of acquisition and integration expenses and debt pre-payment fees for which no tax benefit was recognized. Of this amount, $6.4 million resulted from acquisition expenses that were not tax deductible, and $6.9 million resulted from integration expenses and debt pre-payment fees incurred in jurisdictions with current and historical net operating losses where the related deferred tax asset was fully reserved. Additionally, during the first quarter of fiscal 2016, the Protecting Americans from Tax Hikes Act of 2015 was signed into law which permanently extended the federal R&D credits retroactive to January 1, 2015. Our income tax expense for fiscal 2016 included a tax benefit of $2.0 million attributable to operating income during the last nine months of fiscal 2015, primarily related to the retroactive recognition of the R&D credits. Our income tax expense for fiscal 2015 included a similar retroactive tax benefit of $1.2 million attributable to operating income during the last nine months of fiscal 2014. Our effective tax rate in fiscal 2015 also reflected the impact of the $60.8 million goodwill and intangible asset impairment charge, of which most was not tax deductible. Excluding these items, our effective tax rates for fiscal 2016 and 2015 were 30.9% and 32.5%, respectively. The lower tax rate this year primarily reflects a measurement change in tax positions taken in prior years relating primarily to developments in our ongoing IRS examination that reduced our effective tax rate by 2.0% in fiscal 2016.

We are currently under examination by the Internal Revenue Service for 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
	October 2, 2016			September 27, 2015
	(in thousands)
Deferred Tax Asset:
State taxes	$	697		$	1,746
Reserves and contingent liabilities		2,539			3,842
Allowance for doubtful accounts		3,817			4,115
Accrued liabilities		24,663			19,404
Stock-based compensation		10,684			10,516
Intangibles		–			2,910
Loss carry-forwards		23,514			5,512
Valuation allowance		(25,447	)		(7,791	)

Total deferred tax asset		40,467			40,254

Deferred Tax Liability:
Unbilled revenue		(54,638	)		(46,513	)
Prepaid expense		(2,921	)		(5,506	)
Intangibles		(33,268	)		(33,068	)
Property and equipment		(9,358	)		(10,713	)

Total deferred tax liability		(100,185	)		(95,800	)

Net deferred tax liability	$	(59,718	)	$	(55,546	)

At October 2, 2016, undistributed earnings of our foreign subsidiaries, primarily in Canada, amounting to approximately $65.9 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 October 2, 2016, the incremental federal tax applicable to those earnings would be approximately $5.9 million.

At October 2, 2016, we had available unused state net operating loss ("NOL") carry forwards of $43.7 million that expire at various dates from 2022 to 2036; and available foreign NOL carry forwards of $74.2 million, of which $15.0 million expire at various dates from 2022 to 2036, and $59.2 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 $25.4 million has been provided.

At October 2, 2016, we had $22.8 million of unrecognized tax benefits. Included in the balance of unrecognized tax benefits at the end of fiscal year 2016 were $22.8 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
	October 2, 2016			September 27, 2015			September 28, 2014
	(in thousands)
Beginning balance	$	21,618		$	21,717		$	25,886
Additions for current year tax positions		2,802			1,147			1,243
Additions for prior year tax positions		1,466			2,309			1,416
Reductions for prior year tax positions		(3,100	)		(23	)		–
Settlements		–			(3,532	)		(6,828	)

Ending balance	$	22,786		$	21,618		$	21,717

We recognize potential interest and penalties related to unrecognized tax benefits in income tax expense. During fiscal years 2016 and 2015, we accrued additional interest income of $0.2 million and interest expense of $0.4 million, respectively, and recorded reductions in accrued interest of $0 million and $0.5 million, respectively, as a result of audit settlements and other prior-year adjustments. The amount of interest and penalties accrued at October 2, 2016 and September 27, 2015 was $1.0 million and $1.2 million, respectively.