Note 12. Income Taxes

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



	Years Ended December 31,
	2014		2013			2012
United States	$	6,981	$	(28,622	)	$	(134,384	)
Foreign	14,658		15,300			16,338
	$	21,639	$	(13,322	)	$	(118,046	)

The expense (benefit) for income taxes is comprised of (in thousands):



	Years Ended December 31,
	2014			2013			2012
Current tax provision (benefit):
Federal	$	496		$	195		$	(357	)
State	612			382			130
Foreign	4,930			6,487			6,804
	6,038			7,064			6,577
Deferred tax expense (benefit):
Federal	(1,549		)	1,100			(1,448		)
State	70			(817		)	92
Foreign	1,072			(1,748		)	(321		)
	(407		)	(1,465		)	(1,677		)
Income tax provision	$	5,631		$	5,599		$	4,900

Deferred tax assets and liabilities are classified as current or noncurrent according to the classification of the related asset or liability. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2014 and 2013 are as follows (in thousands):



	December 31,
	2014			2013
Deferred tax assets:
Reserves and allowances not currently deductible for tax purposes	$	15,861		$	16,953
Basis difference related to fixed assets	10,943			13,137
Compensation and benefits	8,147			6,878
Basis difference for inventory valuation	1,526			1,593
Compensatory stock options and rights	4,334			3,925
Deferred revenue and other	201			459
Operating loss carryforwards	100,227			94,639
Tax credit carryforwards	15,987			11,584
State taxes, net of federal income tax benefit	1			1
Basis difference related to intangible assets with a definite life	15,557			18,363
Other	434			—
Total deferred tax assets	173,218			167,532
Valuation allowance for deferred tax assets	(165,427		)	(158,747		)
Deferred tax assets, net of valuation allowance	$	7,791		$	8,785
Deferred tax liabilities:
Prepaid expenses	(1,368		)	(970		)
Other	—			(84		)
Basis difference related to intangible assets with an indefinite life	(34,065		)	(34,284		)
Total deferred tax liabilities	(35,433		)	(35,338		)
Net deferred tax liabilities	$	(27,642	)	$	(26,553	)
Net deferred tax assets (liabilities) are shown on the accompanying consolidated balance sheets as follows:
Current deferred tax assets	$	5,081		$	6,419
Non-current deferred tax assets	2,346			2,299
Current deferred tax liabilities	(26		)	—
Non-current deferred tax liabilities	(35,043		)	(35,271		)
Net deferred tax liabilities	$	(27,642	)	$	(26,553	)

The change in net deferred taxes in 2014 of $1,089,000 is comprised of a net deferred expense of $29,000 related to the change in the basis difference of intangible assets with an indefinite life, a net deferred expense of $596,000 related to foreign and separate state jurisdictions for which no valuation allowance has been provided, and $464,000 of expense related to foreign currency translation adjustments.

Deferred tax assets and liabilities result from temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are anticipated to be in effect at the time the differences are expected to reverse. The realization of the deferred tax assets, including the loss and credit carry forwards listed above, is subject to the Company generating sufficient taxable income during the periods in which the temporary differences become realizable. In accordance with the applicable accounting rules, the Company maintains a valuation allowance for a deferred tax asset when it is deemed to be more likely than not that some or all of the deferred tax assets will not be realized. In evaluating whether a valuation allowance is required under such rules, the Company considers all available positive and negative evidence, including prior operating results, the nature and reason for any losses, its forecast of future taxable income, and the dates on which any deferred tax assets are expected to expire. These assumptions require a significant amount of judgment, including estimates of future taxable income. These estimates are based on the Company’s best judgment at the time made based on current and projected circumstances and conditions.

In 2011, the Company established a valuation allowance against its U.S. deferred tax assets and discontinued recognizing income tax benefits related to its U.S. net operating losses. At December 31, 2014 and 2013, the valuation allowance against the Company’s U.S. deferred tax assets was $165,427,000 and $158,747,000, respectively. If sufficient positive evidence arises in the future, such as a sustained return to profitability, any existing valuation allowance could be reversed as appropriate, decreasing income tax expense in the period that such conclusion is reached. The Company has concluded that with respect to non-U.S. entities, there is sufficient positive evidence to conclude that realization of its deferred tax assets is more likely than not under applicable accounting rules, and no allowances have been established.

The Company's valuation allowance does not preclude the Company from using loss carry forwards or other deferred tax assets in the future, except as described below. Until the Company re-establishes a pattern of continuing profitability, in accordance with the applicable accounting guidance, U.S. income tax expense or benefit related to the recognition of deferred tax assets in the consolidated statement of operations for future periods will be offset by decreases or increases in the valuation allowance with no net effect on the consolidated statement of operations.

At December 31, 2014, the Company had federal and state income tax credit carryforwards of $12,174,000 and $10,680,000, respectively, which will expire at various dates beginning in 2020. Such credit carryforwards expire as follows (in thousands):



U.S. foreign tax credit	$	7,365	2020 - 2023
U.S. research tax credit	$	4,793	2030 - 2033
U.S. business tax credits	$	16	2030 - 2033
State investment tax credits	$	757	Do not expire
State research tax credits	$	9,923	Do not expire

The Company has recorded a deferred tax asset reflecting the benefit of operating loss carryforwards. The net operating losses expire as follows (in thousands):



U.S. loss carryforwards	$	257,037	2031 - 2033
State loss carryforwards	$	174,385	2015 - 2033

Although the Company has set up a valuation allowance against the majority of its U.S. federal and state deferred tax assets, which include net operating loss carry forwards and other losses, such allowance does not preclude the Company from using the deferred tax assets in the future. However, the Company’s ability to utilize the losses to offset future taxable income may be deferred or limited significantly if the Company were to experience an “ownership change” as defined in section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership change will occur if there is a cumulative change in ownership of the Company’s stock by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. The Company determined that no ownership change has occurred for purposes of Section 382 as of December 31, 2014.

A reconciliation of the effective tax rate on income or loss and the statutory tax rate is as follows:



	Years Ended December 31,
	2014		2013		2012
Statutory U.S. tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of U.S. tax benefit	1.9	%	0.9	%	(0.8	)%
Federal and State tax credits, net of U.S. tax benefit	(9.8	)%	22.6	%	(0.1	)%
Expenses with no tax benefit	1.1	%	(0.3	)%	(0.1	)%
Foreign income taxed at other than U.S. statutory rate	(13.4	)%	(5.1	)%	2.5	%
Effect of foreign rate changes	1.3	%	(4.2	)%	(0.6	)%
Foreign tax credit	(13.5	)%	9.4	%	(1.2	)%
Basis differences of intangibles with an indefinite life	0.1	%	(4.1	)%	1.3	%
Change in deferred tax valuation allowance	35.3	%	(76.8	)%	(37.7	)%
Reversal of previously accrued taxes	—	%	—	%	0.1	%
Accrual for interest and income taxes related to uncertain tax positions	(7.3	)%	(0.1	)%	0.8	%
Income (loss) from flowthrough entities	(1.9	)%	1.3	%	(0.4	)%
Meals and entertainment	3.3	%	(7.2	)%	(0.8	)%
Group loss relief	(2.6	)%	4.9	%	0.6	%
Stock option compensation	2.3	%	(6.9	)%	(0.1	)%
Foreign dividends and earnings inclusion	(0.9	)%	(6.8	)%	—	%
Foreign tax withholding	2.4	%	(1.5	)%	(0.2	)%
Other	(7.3	)%	(3.1	)%	(2.5	)%
Effective tax rate	26.0	%	(42.0	)%	(4.2	)%

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	2014			2013			2012
Balance at January 1	$	11,851		$	7,064		$	9,875
Additions based on tax positions related to the current year	638			4,853			432
Additions for tax positions of prior years	121			545			96
Reductions for tax positions of prior years	(3,691		)	(538		)	(24		)
Settlement of tax audits	(258		)	—			(768		)
Reductions due to lapsed statute of limitations	(2,102		)	(73		)	(2,547		)
Balance at December 31	$	6,559		$	11,851		$	7,064

As of December 31, 2014, the liability for income taxes associated with uncertain tax benefits was $6,559,000 and can be reduced by $1,692,000 of offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, which was recorded as a long-term income tax receivable, as well as $3,765,000 of deferred taxes. The net amount of $1,102,000, if recognized, would affect the Company’s financial statements and favorably affect the Company’s effective income tax rate.

The Company does expect changes to the unrecognized tax benefits in the next 12 months; however, the Company does not expect the changes to have a material impact on its results of operations or its financial position.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. For the year ended December 31, 2014, the Company recognized a tax benefit of approximately $101,000, and tax expense of approximately $229,000 and $44,000 for the years ended December 31, 2013 and 2012, respectively, related to interest and penalties in the provision for income taxes. As of December 31, 2014 and 2013, the gross amount of accrued interest and penalties included in income taxes payable in the accompanying consolidated balance sheets was $1,062,000 and $1,163,000, respectively.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in its major jurisdictions as follows:



Major Tax Jurisdiction	Years No Longer Subject to Audit
U.S. federal	2010 and prior
California (U.S.)	2009 and prior
Canada	2009 and prior
Japan	2008 and prior
South Korea	2008 and prior
United Kingdom	2010 and prior

As of December 31, 2014, the Company did not provide for United States income taxes or foreign withholding taxes on a cumulative total of $117,658,000 of undistributed earnings from certain non-U.S. subsidiaries that will be permanently reinvested outside the United States. Upon remittance, certain foreign countries impose withholding taxes, subject to certain limitations, for use as credits against the Company’s U.S. tax liability, if any. If the foreign earnings were remitted, the Company does not anticipate a material impact to the Company's federal or state income taxes due to the Company's available net operating losses and credits. The Company estimates that it would have withholding taxes of $1,181,000 upon remittance.