INCOME TAXES

The domestic and foreign components of loss before income taxes is as follows:



	Years Ended December 31,
In thousands	2015			2014			2013
Domestic	$	(37,696	)	$	(16,027	)	$	(27,201	)
Foreign	23,018			(2,840		)	12,285
Loss before income taxes	$	(14,678	)	$	(18,867	)	$	(14,916	)

The components of the provision (benefit) for income taxes were as follows:



	Years Ended December 31,
In thousands	2015			2014			2013
Federal:
Current	$	—		$	—		$	(1,616	)
Deferred	—			—			—
	—			—			(1,616		)
State:
Current	(23		)	(18		)	58
Deferred	—			—			—
	(23		)	(18		)	58
Foreign:
Current	289			390			289
Deferred	184			(128		)	122
	473			262			411
Total income tax provision (benefit)	$	450		$	244		$	(1,147	)

The difference between the provision (benefit) for income taxes and the amount computed by applying the U.S. federal statutory rate of 35 percent to income (loss) before income taxes is explained below:



	Years Ended December 31,
In thousands	2015			2014			2013
Tax computed at statutory rate	$	(5,136	)	$	(6,602	)	$	(5,220	)
Foreign taxes	(7,583		)	1,256			(3,890		)
Credits	(169		)	(282		)	(525		)
Change in valuation allowance	13,338			5,872			8,488
Income tax provision	$	450		$	244		$	(1,147	)

To better align with the international nature of our business, we transitioned certain manufacturing processes to Singapore, thereby bringing these activities closer to our Asia-based customers. We have qualified for tax incentives that provide that certain income earned in Singapore would be subject to a tax holiday and/or reduced tax rates for a limited period of time under the laws of Singapore. To realize these benefits, we must meet certain requirements relating to employment and investment activities. This exemption is expected to expire within five years. In 2015, the tax benefit attributable to tax holidays was approximately $3.0 million with a $0.11 impact on diluted earnings per share. In 2014, the tax benefit attributable to tax holidays was approximately $1.0 million with a $0.04 impact on diluted earnings per share. In 2013, the tax benefit attributable to tax holidays was approximately $0.5 million with a $0.02 impact on diluted earnings per share. Our ability to realize benefits from these initiatives could be materially adversely affected if, among other things, applicable requirements are not met, the incentives are substantially modified, or if we incur losses for which we cannot take a deduction.

Significant components of deferred income tax assets and liabilities are as follows:



In thousands	2015			2014			2013
Deferred tax assets:
Net operating loss carry-forwards	$	21,550		$	20,661		$	18,061
Inventory valuation	3,838			4,101			4,744
Bad debt reserve	184			181			185
Basis difference in assets	44			133			276
Tax credit carry-forwards	16,127			16,050			15,394
Warranty reserves	211			290			302
Deferred product and services income	411			328			312
Other non-deductible accruals and reserves	5,538			5,730			5,382
Stock compensation	6,515			6,440			5,290
Total deferred tax assets	54,418			53,914			49,946
Valuation allowance	(52,380		)	(51,558		)	(47,877		)
Net deferred tax assets	$	2,038		$	2,356		$	2,069
Deferred tax liabilities:
Other	(1,719		)	(1,854		)	(1,695		)
Total deferred tax liabilities	(1,719		)	(1,854		)	(1,695		)
Net deferred tax assets	$	318		$	502		$	374

We have not provided for U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries as of December 31, 2015 because we intend to permanently reinvest such earnings outside the United States given that we have moved certain manufacturing processes to Singapore and that our future U.S. cash flows are expected to meet our future U.S. cash needs. As of December 31, 2015, the cumulative amount of earnings for which U.S. income taxes have not been provided is approximately $53.7 million. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.

We currently have a full valuation allowance against our U.S. net deferred tax asset. Each quarter we assess the likelihood that we will be able to recover our deferred tax assets. As a result of our analysis, we concluded that it is more likely than not that, as of December 31, 2015, our net deferred tax assets will not be realized, with the exception of those in Japan and Taiwan. Therefore, we continue to provide a full valuation allowance against net deferred tax assets outside of Japan and Taiwan. Management continues to monitor the relative weight of positive and negative evidence of future profitability in relevant jurisdictions. However, as of December 31, 2015, we have determined that the following negative evidence outweighs the positive evidence such that it is not more likely than not we will generate sufficient taxable income in the relevant jurisdictions to utilize our deferred tax assets and release the associated valuation allowance:


•	Movement of certain product manufacturing to Singapore,


•	Cumulative three year U.S. taxable loss,


•	Inherent earnings volatility of our industry resulting in our inability to forecast long term earnings, and


•	Usage limitations resulting in a longer period being required to realize our deferred tax assets.

The net valuation allowance increased by $0.8 million during the year ended December 31, 2015, and increased by $3.7 million and $10.9 million during the years ended December 31, 2014 and 2013, respectively. The increase in valuation allowance in 2015 was primarily due to an increase in net operating loss carry-forwards and tax credit carryforwards.

Approximately $4.7 million of the valuation allowance as of December 31, 2015 is attributable to pre-2006 windfall stock option deductions, the benefit of which will be credited to paid-in capital if and when realized through a reduction in income taxes payable. Beginning in 2006, we are tracking the windfall stock option deductions off balance sheet, as required by ASC 718. As of December 31, 2015, we have a previously recorded balance of $40.7 million of windfall stock option deductions that are being tracked off balance sheet. If and when realized, a tax benefit of $15.0 million associated with those deductions will be credited to additional paid-in capital. In 2015, no entry was made to paid-in capital to reflect the benefit from windfall stock option deductions, which is the excess of federal income tax liabilities expected on the tax return without windfall stock option deductions over federal income tax liabilities expected on the tax return with windfall stock option deductions, because we are in a loss position. Prior to 2015, a tax benefit of $9.9 million associated with those deductions had been credited to additional paid-in capital.

As of December 31, 2015, we had net operating loss carry-forwards for federal and state tax purposes of $54.9 million and $24.5 million, respectively. We also had federal and California research and development tax credit carry-forwards of approximately $5.5 million and $13.6 million, respectively. The federal and state net operating loss carry-forwards will expire at various dates beginning in 2020 through 2035, if not utilized. The federal tax credit carry-forwards will expire at various dates beginning in 2021 through 2035, if not utilized. The California tax credit carry-forwards have no expiration date.

Utilization of our net operating loss and tax credit carry-forwards is subject to an annual limitation due to an ownership change, as defined by the IRS code section 382 that occurred in 2007. None of the net operating loss or tax credit carry-forwards is anticipated to expire as a result of the ownership change. Any future changes of ownership could result in the expiration of net operating losses or credits before utilization.

During the year ended December 31, 2015, our reserve for uncertain tax positions increased by $9.3 million, net due to additional royalty reserves. Interest and penalties related to the reserve for uncertain tax positions were insignificant in 2015 and 2014. Over the next twelve months, we expect an approximately $2.4 million reduction in the estimated amount of liabilities associated with our uncertain tax positions which arose prior to December 31, 2015 as a result of expiring statutes of limitations.

If we are able to eventually recognize these uncertain tax positions, $8.1 million of the unrecognized benefit on January 1, 2015 and $17.4 million of the unrecognized benefit on December 31, 2015, would reduce our effective tax rate. We currently have a full valuation allowance against our U.S. net deferred tax asset which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future.

We are subject to federal and state tax examination for years 2000 forward and 1997 forward, respectively, by virtue of the tax attributes carrying forward from those years. We are also subject to audits in the foreign jurisdictions in which we operate for years 2003 and forward. There are no income tax examinations currently in progress.

A reconciliation of the change in the uncertain income tax benefits from January 1, 2014 to December 31, 2015 is as follows:



In thousands	2015			2014
Balance at January 1	$	8,146		$	6,948
Tax positions related to the current year:
Additions	9,336			1,262
Tax positions related to the prior years:
Additions	—			—
Reductions	(78		)	(4		)
Lapses in statutes of limitations	(2		)	(60		)
Balance at December 31	$	17,402		$	8,146