Income Taxes

Polaris’ income from continuing operations before income taxes was generated from its United States and foreign operations as follows (in thousands):



	For the Years Ended December 31,
	2015		2014		2013
United States	$	640,604	$	666,323	$	535,265
Foreign	45,133		32,994		39,164
Income from continuing operations before income taxes	$	685,737	$	699,317	$	574,429

Components of Polaris’ provision for income taxes for continuing operations are as follows (in thousands):



	For the Years Ended December 31,
	2015			2014			2013
Current:
Federal	$	211,017		$	255,299		$	167,690
State	16,609			20,438			12,942
Foreign	20,733			21,584			15,457
Deferred	(17,983		)	(52,033		)	(2,729		)
Total provision for income taxes for continuing operations	$	230,376		$	245,288		$	193,360

Reconciliation of the Federal statutory income tax rate to the effective tax rate is as follows:



	For the Years Ended December 31,
	2015		2014		2013
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	1.5		1.5		1.5
Domestic manufacturing deduction	(0.8	)	(1.1	)	(1.0	)
Research and development tax credit	(3.1	)	(1.1	)	(2.2	)
Valuation allowance for foreign subsidiaries net operating losses	0.2		—		0.3
Other permanent differences	0.8		0.8		0.1
Effective income tax rate for continuing operations	33.6	%	35.1	%	33.7	%

In December 2015, the President of the United States signed the Consolidated Appropriations Act, 2016, which retroactively reinstated the research and development tax credit for 2015, and also made the research and development tax credit permanent. In addition to the 2015 research and development credits, the Company filed amended returns to claim additional credits related to qualified research expenditures incurred in prior years. In January 2013, the President of the United States signed the American Taxpayers Relief Act of 2012, which reinstated the research and development tax credit. As a result, the impact of both the 2012 and 2013 research and development tax credits were recorded in the 2013 tax provision.

Undistributed earnings relating to certain non-U.S. subsidiaries of approximately $143,284,000 and $105,782,000 at December 31, 2015 and 2014, respectively, are considered to be permanently reinvested; accordingly, no provision for U.S. federal income taxes has been provided thereon. If the Company were to distribute these earnings, it would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits reflecting the amounts paid to non-U.S. taxing authorities) and withholding taxes payable to the non-U.S. countries. Determination of the unrecognized deferred U.S. income tax liability related to these undistributed earnings is not practicable due to the complexities associated with this hypothetical calculation.

Polaris utilizes the liability method of accounting for income taxes whereby deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. This ASU requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in the consolidated balance sheet. The Company has early adopted the requirements of ASU No. 2015-17, and applied the amended provisions prospectively. The net deferred income taxes consist of the following (in thousands):



	December 31,
	2015			2014
Current deferred income taxes:
Inventories	—			$	9,034
Accrued expenses	—			104,279
Derivative instruments	—			864
Total current	—			114,177
Noncurrent deferred income taxes:
Inventories	$	10,047		—
Accrued expenses	107,767			—
Derivative instruments	(1,112		)	—
Cost in excess of net assets of business acquired	(7,956		)	(13,111		)
Property and equipment	(28,853		)	(28,921		)
Compensation payable in common stock	67,222			58,446
Net operating loss carryforwards and impairments	12,374			12,693
Valuation allowance	(6,684		)	(6,097		)
Total noncurrent	152,805			23,010
Total net deferred income tax asset	$	152,805		$	137,187

At December 31, 2015, the Company had available unused international and acquired federal net operating loss carryforwards of $38,039,000. The net operating loss carryforwards will expire at various dates from 2016 to 2034, with certain jurisdictions having indefinite carryforward terms.

Polaris classified liabilities related to unrecognized tax benefits as long-term income taxes payable in the accompanying consolidated balance sheets in accordance with ASC Topic 740. Polaris recognizes potential interest and penalties related to income tax positions as a component of the provision for income taxes on the consolidated statements of income. Reserves related to potential interest are recorded as a component of long-term income taxes payable. The entire balance of unrecognized tax benefits at December 31, 2015, if recognized, would affect the Company’s effective tax rate. The Company does not anticipate that total unrecognized tax benefits will materially change in the next twelve months. Tax years 2009 through 2015 remain open to examination by certain tax jurisdictions to which the Company is subject. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):



	For the Years Ended December 31,
	2015			2014
Balance at January 1,	$	9,836		$	13,199
Gross increases for tax positions of prior years	9,683			55
Gross increases for tax positions of current year	4,961			1,456
Decreases due to settlements and other prior year tax positions	(178		)	(2,346		)
Decreases for lapse of statute of limitations	(1,364		)	(1,586		)
Currency translation effect on foreign balances	(429		)	(942		)
Balance at December 31,	22,509			9,836
Reserves related to potential interest at December 31,	907			732
Unrecognized tax benefits at December 31,	$	23,416		$	10,568