10) Income Taxes

The components of income before income taxes consist of the following (in thousands):


	Years Ended December 31,
	2011		2010		2009
Income before income taxes:
Domestic	$	4,177	$	11,593	$	12,065
Foreign		492		503		1,047
	$	4,669	$	12,096	$	13,112

The provision for income tax expense (benefit) consists of the following (in thousands):


	Years Ended December 31,
	2011			2010			2009

Current:
U.S. Federal	$	3,103		$	3,667		$	3,671
State		723			563			827
Foreign		259			223			348
Total current		4,085			4,453			4,846

Deferred:
U.S. Federal		(1,633	)		(35	)		(143	)
State		(455	)		76			(86	)
Total deferred		(2,088	)		41			(229	)
	$	1,997		$	4,494		$	4,617

Total income tax expense differs from the expected income tax expense, computed by applying the federal statutory rate of 34% in 2011 and 35% in 2010 and 2009 to earnings before income taxes as follows (in thousands):


	Years Ended December 31,
	2011			2010			2009

Expected income tax expense	$	1,587		$	4,234		$	4,589
State income taxes, net of federal tax effect		177			415			481
Change in deferred for lower federal rate		102			—			—
Manufacturer's deduction		(155	)		(149	)		(120	)
Federal R&D credit		(163	)		(62	)		(38	)
Tax-exempt interest income		(18	)		(80	)		(367	)
Change in valuation allowance		(97	)		(69	)		(22	)
Benefit of lower federal tax bracket		—			(100	)		(100	)
Non-deductible acquisition costs		363			—			—
Other, net		201			305			194
	$	1,997		$	4,494		$	4,617

The tax effects of temporary differences that give rise to significant portions of deferred tax assets (liabilities) are presented below (in thousands):


	December 31,
	2011			2010
Deferred tax assets:
Inventory provisions and uniform capitalization	$	338		$	229
Accounts receivable allowances		59			91
Fixed assets		297			—
Non-qualified stock option and restricted stock expense		2,283			1,795
Deferred maintenance revenue		1,115			685
Unrecognized tax benefits		11			34
Loss and credit carryforwards of U.S. subsidiary		13,862			—
Loss carryforward of foreign subsidiary and joint venture		740			837
Other accruals and reserves		882			155
Other		75			—
Total deferred tax assets before valuation allowance		19,662			3,826
Less valuation allowance		(740	)		(837	)
Total deferred tax assets	$	18,922		$	2,989

Deferred tax liabilities:
Unrealized gain on marketable securities	$	—		$	(51	)
Acquired intangibles		(6,802	)		—
Other		—			(4	)
Total deferred tax liabilities	$	(6,802	)	$	(55	)
Total net deferred tax assets	$	12,120		$	2,934

The Company generally believes that it is more likely than not that the future results of its operations will generate sufficient taxable income to realize the tax benefits related to the Company's net deferred tax assets. However, the Company established full valuation allowances on the tax benefits of loss carryforwards for a subsidiary in Japan established in May 2005 and a majority-owned joint venture in China established in August 2010. The cumulative pre-tax loss amounts generated by the Japanese subsidiary from 2005 through 2011 approximated $2.0 million. The cumulative pre-tax loss generated from 2010 through 2011 by the majority-owned joint venture in China approximated $0.5 million. The valuation allowances were calculated in accordance with the requirement that a valuation allowance be established or maintained when it is "more likely than not" that all or a portion of deferred tax assets will not be realized. The available loss carryforwards at December 31, 2011 of the Company's Japanese subsidiary and majority-owned joint venture in China are scheduled to expire between tax years 2012 and 2017 in Japan and between 2015 and 2016 in China.

As a result of Rimage's acquisition of Qumu, the Company established a deferred tax asset of approximately $13.9 million related to the tax benefits of acquired loss and tax credit carryforwards. The net operating losses generated by Qumu approximated $33 million, and will expire between 2020 and 2030 if not utilized. As a result of prior changes in ownership, utilization of U.S. net operating losses and tax credits of Qumu are subject to annual limitations under Internal Revenue Code Sections 382 and 383, respectively. During 2011, the Company initiated an IRC section 382 study with respect to the net operating losses and tax credits of Qumu. The Section 382 limitation and accompanying recognized built-in gain limitation is currently estimated to result in the expiration of $1.2 million of the Company's gross federal net operating loss carryforward and $0.2 million of research and development credits, with such reductions reflected in the deferred tax asset balances. Except to the extent of carryovers limited by Sections 382 and 383, the Company believes that it is more likely than not that the future results of its operations will generate sufficient taxable income to realize the tax benefits related to the net deferred tax assets established as a result of the acquisition.

The Company has not provided deferred taxes on unremitted earnings attributable to its international subsidiaries that are considered to be reinvested indefinitely. These earnings relate to ongoing operations in Germany and were approximately $6.3 million as of December 31, 2011.

A recognition threshold and measurement criteria are in place for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Guidance is also provided on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits for the years ended December 31 is presented in the table below (in thousands):


	Years Ended December 31,
	2011			2010
Gross unrecognized tax benefits at beginning of year	$	360		$	364
Increases related to:
Prior year income tax positions		736			—
Current year income tax positions		41			25
Decreases related to:
Prior year income tax positions		(160	)		(29	)
Gross unrecognized tax benefits at end of year	$	977		$	360

Included in the balance of unrecognized tax benefits at December 31, 2011 are potential benefits of $971,000 that if recognized, would affect the effective tax rate. The Company does not anticipate that the total amount of unrecognized tax benefits as of December 31, 2011 will change significantly by December 31, 2012.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Total accrued interest and penalties amounted to $17,000 and $43,000 on a gross basis at December 31, 2011 and 2010, respectively, and are excluded from the reconciliation of unrecognized tax benefits presented above. Interest and penalties recognized in the consolidated statements of income related to uncertain tax positions amounted to a net $26,000 benefit in 2011 and $7,000 of expense in 2010.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2011, the Company was no longer subject to income tax examinations for taxable years before 2010 and 2007 in the case of U.S. federal and German taxing authorities, respectively, and taxable years generally before 2007 in the case of state taxing authorities, consisting primarily of Minnesota and California.