INCOME TAXES

Income (loss) before income taxes, consisted of the following (amounts in thousands):



	2015			2014			2013
Domestic	$	(31,810	)	$	(47,730	)	$	27,023
Foreign	(20,196		)	(104,514		)	27,711
	$	(52,006	)	$	(152,244	)	$	54,734

The income tax provision (benefit) was as follows (amounts in thousands):



	2015			2014			2013
Current
Federal	$	3,143		$	(2,753	)	$	11,853
State	55			258			5,398
Foreign	7,114			5,476			11,800
	10,312			2,981			29,051
Deferred
Federal	28,283			(11,670		)	(8,473		)
State	3,599			(1,205		)	(316		)
Foreign	(3,913		)	(11,925		)	4,785
	27,969			(24,800		)	(4,004		)
Income tax provision (benefit)	$	38,281		$	(21,819	)	$	25,047

The income tax provision differs from the amount of income tax determined by applying the statutory U.S. federal income tax rate to pre-tax income (loss) as a result of the following:



	2015		2014		2013
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Unrecognized tax positions	—		0.7		6.2
Impact of foreign income	13.5		(0.4	)	4.5
Italian law change	—		—		(14.2	)
Goodwill impairment	—		(10.6	)	—
Valuation allowance	(144.0	)	(11.3	)	19.0
State taxes, net	(7.0	)	0.8		1.9
Domestic production exemption	—		—		(3.2	)
Debt conversion (benefit) expense	—		1.5		(1.0	)
Benefit from a US check-the-box election	35.5		—		—
Debt forgiveness	(2.2	)	—		—
Nondeductible royalty	(1.6	)	—		—
Other, net	(2.8	)	(1.4	)	(2.4	)
Effective tax rate	(73.6	)%	14.3	%	45.8	%

The effective tax rate for the year ended December 31, 2015 was a negative 73.6% as compared to 14.3% for the year ended December 31, 2014. The Company recorded a pre-tax loss in 2015 including a negative effective tax rate which represents tax expense and a pre-tax loss in 2014 including a positive effective tax rate which represents a tax benefit on the consolidated financial statements.

The 2015 effective tax rate was favorably impacted by a foreign exchange loss upon the outbound transfer of Brazil assets for U.S. tax purposes (U.S. check the box election) and unfavorably impacted by the recording of a valuation allowance. The rate was also favorably impacted by foreign earnings in jurisdictions where the statutory rate was less than 35%. The 2014 effective tax rate was impacted unfavorably by the goodwill impairment and foreign valuation allowances.

In jurisdictions where the Company operates its businesses, management analyzes the ability to utilize its deferred tax assets arising from losses in its cyclical business. During 2014 and prior, the company determined that it was more likely than not that the deferred tax assets would not be utilized in several jurisdictions, including Italy, Australia, and certain U.S. states. The Company continues to record a valuation allowance on these deferred tax assets as the amounts remain more likely than not that they will not be utilized. This increase in 2014 of $8.1 million is primarily related to additional net operating losses that are incurred in the foreign jurisdictions. For 2015, the Company recorded a full valuation allowance of $50.0 million on the net deferred tax asset in the U.S. during the fourth quarter, compared to $0.0 million in 2014. This is primarily related to net operating losses generated from the outbound transfer of Brazil assets for U.S. tax purposes (U.S. check the box election). The Company reviewed the available positive evidence and the objectively verifiable negative evidence along with the three year cumulative loss position during the fourth quarter and determined that a valuation allowance was needed. Also, the Company recorded a valuation allowance of $2.2 million on the Russian net operating loss as it is more likely than not that the deferred tax asset related to this attribute will not be realized within its statutory life of 10 years, compared to $0.0 million in 2014. The remaining jurisdictions, including Italy, Luxembourg, Australia, and certain U.S. states, increased their valuation allowance from $45.2 million to $67.9 million. The change of $22.7 million primarily is related to its continuing net operating losses in 2015. The Company recorded a total increase in the valuation allowance in 2015 of $74.9 million.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities at December 31, 2015 and 2014, are as follows (amounts in thousands):



	2015			2014
Deferred tax assets:
Net operating loss carryforwards	$	103,490		$	55,590
Pension	8,580			8,590
Inventory	6,163			7,807
Warranty	8,056			9,945
Employee benefits and related costs	16,578			15,967
Allowance for bad debts	639			1,254
Prepaid royalties	4,381			7,960
Other	15,780			14,551
Deferred tax assets	163,667			121,664
Deferred tax liabilities:
Fixed assets	(43,663		)	(50,009		)
Intangible assets	(4,418		)	(6,043		)
Other	(3,958		)	(3,027		)
Deferred tax liabilities	(52,039		)	(59,079		)
Subtotal	111,628			62,585
Valuation allowance	(120,170		)	(45,241		)
Net deferred tax asset (liability)	$	(8,542	)	$	17,344

As of December 31, 2015 and 2014 certain tax loss carryforwards of $103.5 million and $55.6 million are available with $2.3 million expiring from 2016 through 2020 and $101.2 million expiring after 2020. At December 31, 2015, a valuation allowance of $120.2 million had been established. The Company has $83 million of Federal net operating loss carryforward which expires starting in 2034. Additionally, the Company has $181.9 million of state net operating losses and $261.6 million of foreign loss carryforwards. The majority of the valuation allowance is related to deferred tax assets in the U.S., Italy, Australia, Russia, and Luxembourg.

Titan has elected to adopt for the 2015 balance sheet the classification of deferred taxes based on Accounting Standards Update 2015-17 which requires all deferred taxes be classified as non-current on the balance sheet. Titan decided to adopt this guidance prospectively as of December 31, 2015. As a result, all deferred tax liabilities and assets are classified as non-current in the Consolidated Balance Sheet at December 31, 2015.

At December 31, 2015, U.S. income taxes have not been provided on approximately $155.5 million of unremitted earnings of subsidiaries operating outside the U.S. These earnings, which are considered to be invested indefinitely, would become subject to income tax if they were remitted as dividends, were lent to the Company or a U.S. affiliate, or if the Company were to sell its stock in the subsidiaries. It is not practical to estimate the amount of deferred tax liability on such earnings.

The Company or one of its subsidiaries files income tax returns in the U.S., Federal and State, and various foreign jurisdictions. The Company’s major locations are in the U.S., Italy, Australia, Russia, and Brazil. The U.S. Federal tax returns are currently under audit by the Internal Revenue Service for years 2010-2013. Italy has open tax years from 2010-2015 and has just completed an audit for years 2011-2013 without material adjustments. Russia has open tax years from 2012-2015. Australia and Brazil have open tax years from 2011-2015.

The Company has applied the provisions of ASC 740, “Income Taxes” related to unrecognized tax benefits. No adjustment was made to retained earnings in adopting these provisions in 2007. At December 31, 2015, 2014, and 2013, the unrecognized tax benefits were $18.0 million, $18.1 million, and $17.8 million respectively. As of December 31, 2015, $14.0 million of unrecognized tax benefits would affect income tax expense if the tax benefits were recognized. The majority of the accrual in unrecognized tax benefits relates to potential state tax exposures. Although management cannot predict with any degree of certainty the timing of ultimate resolution of matters under review by various taxing jurisdictions, it is unlikely that the Company’s gross unrecognized tax benefits balance will change significantly within the next twelve months.

Titan has identified the United States, the State of Illinois, Italy, Australia, Russia, and Brazil as “major” tax jurisdictions. The Company is subject to U.S. Federal tax examinations for years 2010 to 2015. Generally, tax years 2010 and forward remain open under state statutes of limitations and tax years 2010 and forward remain open tax years under foreign statutes of limitations.

A reconciliation of the total amounts of unrecognized tax benefits at December 31 were as follows (amounts in thousands):



	2015		2014		2013
Balance at January 1	15,320		15,363		11,872
Increases to tax positions taken during the current year	7		190		4,256
Increases to tax positions taken during the prior years	591		3,131		433
Decreases to tax positions taken during prior years	(534	)	(1,806	)	(250	)
Decreases due to lapse of statutes of limitations	(492	)	(802	)	(272	)
Settlements	(175	)	(656	)	(721	)
Foreign exchange	(19	)	(100	)	45
Balance at December 31	14,698		15,320		15,363

The Company accrues interest and penalties related to unrecognized tax benefits in income tax expense. The amount of interest and penalties related to unrecognized tax benefits recorded in income tax expense was $0.5 million, $0.3 million and $0.1 million at December 31, 2015, 2014 and 2013. The reconciliation of unrecognized tax benefits above does not include accrued interest and penalties of $3.3 million, $2.8 million, and $2.5 million, at December 31, 2015, 2014 and 2013, respectively.