11. Income Taxes

The consolidated income (loss) before income taxes, by domestic and foreign sources, is as follows:

(in thousands)	Years ended December 31,
	2013				2012			2011
Domestic		$	(7,797	)		$	127		$	1,204
Foreign			(2,568	)			1,736			1,159
Total		$	(10,365	)		$	1,863		$	2,363

The provision (benefit) for income taxes is as follows:

(in thousands)	Years ended December 31,
	2013			2012		2011
Current:
Federal	$	4		$	22	$	62
State		22			19		181
Foreign		382			562		462
Subtotal		408			603		705

Deferred:
Federal		-			-		(1,002	)
Foreign		(262	)		86		(141	)
Subtotal		(262	)		86		(1,143	)
Total	$	146		$	689	$	(438	)

The Company is entitled to a deduction for federal and state tax purposes with respect to employees' stock option activity. As of December 31, 2013, the Company had $5.4 million of unrecognized excess tax deductions related to compensation for stock option exercises which will be recognized when the net operating loss carryforwards are fully utilized and those excess tax benefits result in a reduction to income taxes payable.

The effective income tax rate differed from the statutory federal income tax rate due to the following:

	Effective Tax Rate Percentage (%)
	Years ended December 31,
	2013	2012	2011
Statutory federal income tax rate	34.0%	34.0%	34.0%
State income taxes, net of federal tax benefit	(0.1)%	0.7%	5.0%
Effect of foreign operations	(6.9)%	(9.5)%	(12.0)%
Tax benefit resulting from OCI allocation	0.5%	0.0%	0.0%
Change in valuation allowance	(12.1)%	(13.4)%	(68.3)%
Other, principally permanent differences	(16.8)%	25.2%	22.8%
Effective tax rate	(1.4)%	37.0%	(18.5)%

For the year ended December 31, 2013, the Company's effective income tax rate was (1.4)% which was composed of a 0.5% non-cash tax provision. The Company recorded a $49,000 non-cash income tax adjustment for operations during the fourth quarter of 2013. Under current accounting rules, the Company is required to consider all items (including items recorded in other comprehensive income) in determining the tax benefit that results from a loss from operations and that should be allocated to operations. As a result, the Company recorded a tax benefit on the loss from operations for the year, which is exactly offset by income tax expense on other comprehensive income. However, while the income tax benefit from operations is reported on the income statement, the income tax expense on other comprehensive income is recorded directly to accumulated other comprehensive income (loss) ("AOCI"), which is a component of stockholders' equity. Because the income tax expense on other comprehensive income is equal to the income tax benefit from operations for this item, the Company's year-end net deferred tax position is not impacted by this tax allocation. The resulting residual income tax expense will remain in AOCI until all amounts in AOCI that relate to the plan or program that gave rise to the residual income taxes are recognized in the Consolidated Statement of Operations.

Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. A summary of the tax effect of the significant components of the deferred income tax liabilities is as follows:

(in thousands)	Years ended December 31,
	2013			2012			2011
Deferred tax assets:
Net operating loss carryforwards	$	5,589		$	4,352		$	4,850
Capital loss carryforwards		703			2,446			2,351
Accruals		337			145			135
Reserves		611			1,353			1,494
Alternative minimum tax credit carryforwards		166			166			166
Other		1,701			1,568			1,449
Total deferred tax asset		9,107			10,030			10,445
Valuation allowance		(7,057	)		(7,026	)		(6,869	)
Total deferred tax asset less valuation allowance		2,050			3,004			3,576

Deferred tax liabilities:
Undistributed earnings of foreign subsidiary		(1,228	)		(1,473	)		(1,950	)
Software development costs		(384	)		(934	)		(690	)
Other		(491	)		(910	)		(1,145	)
Total deferred tax liability		(2,103	)		(3,317	)		(3,785	)

Net deferred tax liability	$	(53	)	$	(313	)	$	(209	)

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future income in making this assessment.

Management believes that the Company will achieve profitable operations in future years that will enable the Company to recover the benefit of its deferred tax assets. However, other than for a portion of the deferred tax assets that are related to the Company's Indian, and Chinese subsidiaries, the Company presently does not have sufficient objective evidence to substantiate the recovery of the deferred tax assets. Accordingly, the Company has established a full $6.8 million valuation allowance on its U.S. deferred tax assets at December 31, 2013. The valuation allowance for deferred tax assets increased by $31,000 in 2013, increased by $0.2 million in 2012 and decreased by $1.8 million in 2011.

At December 31, 2013, the Company's largest deferred tax asset of $5.2 million primarily relates to a U.S. net operating loss carryforward of $14.7 million which expires in various amounts between 2020 and 2033. The amount of U.S. loss carryforward which can be used by the Company each year is limited due to changes in the Company's ownership which occurred in 2003. Thus, a portion of the Company's loss carryforward may expire unutilized.

Uncertain Tax Positions

The Company, through its acquisition of EnVision on January 4, 2011, recorded $320,000 of unrecognized tax benefits as well as a receivable from the EnVision shareholders for the same amount as indemnity for this tax position. During 2012, the Company partially reduced both the liability and receivable from the EnVision acquisition by $269,000 as the related period is now outside the applicable statute of limitations. During 2013 and 2012, the Company also recorded $187,000 and $165,000, respectively, of tax liabilities for certain foreign tax contingencies, respectively. The Company made payments of $103,000 and $8,000 during 2013 and 2012, respectively, related to these foreign tax liabilities. The Company recorded these uncertain tax positions in other current liabilities on the consolidated balance sheet, and recorded the associated interest and penalties as a component of income tax expense. In 2013 and 2012, the Company accrued $2,000 and $4,000 of interest and penalties, respectively.

Intraperiod tax allocation

The Company utilizes the with-and-without intraperiod tax allocation approach as described in ASC 740-20-45-12 which results in the use of the windfall tax benefits being utilized last.