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Income Taxes | 12 Months Ended
--- | ---
Dec. 31, 2015
Income Taxes |
Income Taxes | 14. Income Taxes The Company’s income (loss) before income taxes generated from its United States and foreign operations were:
|  | Year Ended December 31, |
|  | 2015 |  | 2014 |  | 2013 |
|  | (in thousands) |
Income (loss) before income taxes: |  |  |  |  |  |  |  |  |  |
United States |  | $ | (4,344) |  | $ | (12,946) |  | $ | 20,116 |
Foreign |  |  | (6,020) |  |  | (5,202) |  |  | (2,889) |
Total income (loss) before taxes |  | $ | (10,364) |  | $ | (18,148) |  | $ | 17,227 |
The Company’s provision (benefit) for income taxes consisted of the following:
|  | Year Ended December 31, |
|  | 2015 |  | 2014 |  | 2013 |
|  | (in thousands) |
Current provision (benefit): |  |  |  |  |  |  |  |  |  |
Federal |  | $ | 82 |  | $ | (131) |  | $ | 3,306 |
State |  |  | 73 |  |  | 193 |  |  | 541 |
Foreign |  |  | (112) |  |  | 1,388 |  |  | 104 |
Total current provision (benefit) |  |  | 43 |  |  | 1,450 |  |  | 3,951 |
Deferred provision (benefit): |  |  |  |  |  |  |  |  |  |
Federal |  |  | (5,222) |  |  | (4,309) |  |  | 2,254 |
State |  |  | (1,250) |  |  | (1,699) |  |  | 227 |
Foreign |  |  | (1,148) |  |  | (2,891) |  |  | (1,067) |
Total deferred provision (benefit) |  |  | (7,620) |  |  | (8,899) |  |  | 1,414 |
Total provision (benefit) for income taxes |  | $ | (7,577) |  | $ | (7,449) |  | $ | 5,365 |
A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
|  | Year Ended December 31, |
|  | 2015 |  | 2014 |  | 2013 |
Statutory federal income tax (benefit) |  | (35.0) | % | (35.0) | % | 35.0 | %
State tax expense, net of federal tax benefit |  | (7.4) |  | (5.4) |  | 2.9 |
Foreign income tax |  | (24.4) |  | 1.8 |  | 0.3 |
Qualified production activities deduction |  | — |  | — |  | (3.3) |
Research and development credits |  | (15.4) |  | (6.4) |  | (9.9) |
ISO portion of stock options deductions |  | 7.7 |  | 4.0 |  | 6.3 |
Other |  | 1.4 |  | — |  | (0.2) |
Effective tax rate (benefit) |  | (73.1) | % | (41.0) | % | 31.1 | %
Deferred Tax Assets and Liabilities 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. The significant components of the Company’s deferred tax assets and liabilities are as follows:
|  | December 31, |
|  | 2015 |  | 2014 |
|  | (in thousands) |
Deferred tax assets: |  |  |  |  |  |  |
Net operating loss carryforward |  | $ | 8,616 |  | $ | 7,877 |
State income taxes |  |  | 300 |  |  | 270 |
Inventory capitalization and reserve |  |  | 5,365 |  |  | 6,843 |
Deferred revenue |  |  | 584 |  |  | 864 |
Accrued payroll and benefits |  |  | 1,793 |  |  | 1,571 |
Share-based compensation |  |  | 10,125 |  |  | 8,437 |
Research and development credits |  |  | 13,071 |  |  | 9,863 |
Alternative minimum tax |  |  | 529 |  |  | 447 |
Accrued professional fees |  |  | 987 |  |  | 568 |
Product return allowance |  |  | 1,545 |  |  | 1,221 |
Accrued chargebacks |  |  | 5,910 |  |  | 4,792 |
Bad debt reserve |  |  | 253 |  |  | 67 |
Intangibles |  |  | 3,370 |  |  | 3,861 |
Accrued for workers’ compensation insurance |  |  | 1,035 |  |  | 864 |
Total deferred tax assets |  |  | 53,483 |  |  | 47,545 |
Deferred tax liabilities: |  |  |  |  |  |  |
Depreciation/amortization |  |  | 15,065 |  |  | 15,649 |
Intangibles |  |  | 5,430 |  |  | 4,753 |
Federal impact of state deferred taxes |  |  | 3,380 |  |  | 2,910 |
Other |  |  | 1,241 |  |  | 937 |
Total deferred tax liabilities |  |  | 25,116 |  |  | 24,249 |
Valuation allowance |  |  | (923) |  |  | (3,862) |
Net deferred tax assets |  | $ | 27,444 |  | $ | 19,434 |
Net Operating Loss Carryforwards and Tax Credits At December 31, 2015, the Company had U.S. federal, California, and other State net operating loss, or NOL carryforwards of approximately $11.4 million, $13.2 million, and $1.5 million, respectively. The federal, California and other states loss carryforwards begin to expire in 2034, 2030, and 2030, respectively. The Company also had foreign NOL carryforwards of approximately $9.9 million which can be used annually with certain limitations and have an indefinite carryforward period. The California and other state NOL carryforwards exclude $15.8 million and $0.1 million, respectively, related to excess tax benefits from share-based awards. When the related tax benefits from these share-based awards are utilized, the tax benefit of these adjustments, which will reduce the amount of income taxes payable, will be offset against additional paid in capital. At December 31, 2015, the Company had federal and California research and development tax credit carryforwards of approximately $6.0 million and $10.7 million, respectively. The federal research and development tax credit begins to expire in 2031. The California research and development tax credit has an indefinite carryforward period. The Company also had a U.S. federal alternative minimum tax credit carryforward of $0.5 million which can be used to offset future regular tax to the extent of the current AMT; the credit has an indefinite carryforward period. The utilization of the NOL and credit carryforwards and other tax attributes could be subject to an annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986 (the “Code”), whereby they could be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period, as defined in the Code. Valuation Allowance In assessing the need for a valuation allowance, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Ultimately, the realization of deferred tax assets depends on the existence of future taxable income. M anagement considers sources of taxable income such as income in prior carryback periods, future reversal of existing deferred taxable temporary differences, tax-planning strategies, and projected future taxable income. In connection with the AFP purchase accounting in 2014, the Company recorded a valuation allowance against an intangible deferred tax asset of €3.2 million, or $4.4 million with an offsetting entry to goodwill, since management did not believe that it was more likely than not that the deferre d tax asset would be realized. In March 2015, the Company reversed the €3.2 million, or $3.3 million, deferred tax valuation allowance in conjunction with the transfer of AFPs intangible assets from France to the U.S. The difference in U.S. dollars relates to the currency exchange fluctuation, which is recorded in the Company’s accumulated other comprehensive loss as a foreign currency translation adjustment. In 2015, the Company continued to assess the realizability of the deferred tax assets for AFP. Due to the potential impact of reduced revenues from the MannKind contract and other factors, the Company determined that it was not more likely than not that the net deferred tax assets of AFP would be realized and established a full valuation allowance of $0.9 million as of December 31, 2015; therefore, contributing to the recognition of $0.9 million in income tax expense for the year ended December 31, 2015. Undistributed Earnings (Losses) from Foreign Operations As of December 31, 2015 and 2014, deferred income taxes have not been provided on the accumulated undistributed losses of the Company’s foreign subsidiaries of approximately $7.1 million and $10.5 million, respectively. In addition, it is the Company’s plan not to repatriate future foreign earnings to the U.S. It is not practicable to compute the tax on undistributed earnings of the Company's foreign subsidiaries as of December 31, 2015 since they have accumulated undistributed losses. Uncertain Income Tax Positions A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:
|  | December 31,
|  | 2015 |  | 2014 |  | 2013
|  | (in thousands)
Balance at the beginning of the year |  | $ | 4,783 |  | $ | 4,186 |  | $ | 3,532
Additions based on tax positions related to the current year |  |  | 812 |  |  | 655 |  |  | 766
Deductions based on tax audit settlement |  |  | — |  |  | — |  |  | (93)
Deductions based on statute of limitations |  |  | — |  |  | (58) |  |  | (19)
Balance at the end of the year |  | $ | 5,595 |  | $ | 4,783 |  | $ | 4,186
Included in the balance of unrecognized tax benefits as of December 31, 2015 was $5.0 million that represents the portion that would impact the effective income tax rate if recognized. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefit as of December 31, 2015 will decline by $1.9 million in the next 12 months as a result of the expected resolution of a current U.S. state audit. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its income tax provision. For the years ended December 31, 2015 and 2014, the Company recognized accrued interest of approximately $0.1 million and $0.1 million, respectively, related to its uncertain tax position. The Company and/or one or more of its subsidiaries filed income tax returns in the U.S. federal jurisdiction and various U.S. sta tes and foreign jurisdictions. As of December 31, 201 5, the Company is not subject to U.S. federal, state, and foreign income tax examinations for years before 2006. In August 2011, the California FTB commenced an audit of the Company’s 2007, 2008, and 2009 tax returns; th is audit is currently ongoing. The Company is subject to income tax audit by tax authorities for tax years 2012, 2013 and 2014 for federal and 2007 to 2014 for states.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 + Details
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