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Note 13 - Income Taxes

12 Months Ended

Dec. 31, 2014

13. Income Taxes

The Company’s provision for income taxes consists of the following:

	Year Ended December 31,
	2014			2013		2012
Current:
Federal	$	38,161		$	48,287	$	34,170
State		1,645			5,648		3,854
Foreign		5,701			2,214		81
		45,507			56,149		38,105
Deferred:
Federal		42,474			42,003		21,972
State		(3,134	)		5,523		3,048
Foreign		(1,462	)		167		25
		37,878			47,693		25,045
Change in valuation allowance		364			335		(21	)
Provision for income taxes	$	83,749		$	104,177	$	63,129

The Company has been notified by the Internal Revenue Service of an income tax audit for the 2012 tax year. To date, field work has not commenced. As of December 31, 2014, due to the carryforward of net operating losses and research and development credits, the Company is open to U.S. Federal and state income tax examinations for the tax years 2006 through 2014. In addition, the Company is subject to audit by various foreign taxing jurisdictions for the tax years 2009 through 2014.

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

	December 31,
	2014			2013
Deferred tax assets:
Goodwill and intangible assets	$	23,624		$	74,992
Accrued expenses		18,191			24,263
Deferred revenue		7,945			4,413
Inventories		6,306			4,483
Pension obligations		8,738			4,043
Stock-based compensation		8,628			6,609
Operating loss and credit carryforwards		10,047			976
Other		4,299			2,089
Valuation allowance		(1,385	)		(1,021	)
Total deferred tax assets		86,393			120,847

Deferred tax liabilities:
Depreciation		18,535			15,163
Debt refinancing costs		10,925			7,494
Prepaid expenses		1,032			1,183
Total deferred tax liabilities		30,492			23,840
Net deferred tax assets	$	55,901		$	97,007

The net current and noncurrent components of deferred taxes included in the consolidated balance sheets are as follows:

	December 31,
	2014			2013
Net current deferred tax assets	$	22,841		$	26,869
Net long-term deferred tax assets		47,894			86,125
Net long-term deferred tax liabilities		(13,449	)		(14,966	)
Valuation allowance		(1,385	)		(1,021	)
Net deferred tax assets	$	55,901		$	97,007

The net long-term deferred tax liabilities and valuation allowance are included in other long-term liabilities and deferred income taxes (noncurrent), respectively, in the consolidated balance sheets as of December 31, 2014 and 2013.

Generac Brazil, acquired as part of the Ottomotores acquisition, has generated net operating losses for multiple years as part of the start-up of the business. The realizability of the deferred tax assets associated with these net operating losses is uncertain so a valuation allowance was recorded in the opening balance sheet as of December 8, 2012 as well as at December 31, 2014 and 2013.

At December 31, 2014, the Company had state research and development credit, and state manufacturing credit carryforwards of approximately $15,610 and $2,424, respectively, which expire between 2017 and 2029.

Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows:

	December 31,
	2014
Unrecognized tax benefit, beginning of period	$	-
Increase in unrecognized tax benefit for positions taken in current period		6,394
Unrecognized tax benefit, end of period	$	6,394

At December 31, 2013 and 2012, the Company had no reserves recorded for uncertain tax positions.

The entire unrecognized tax benefit as of December 31, 2014, if recognized, would impact the effective tax rate.

Interest and penalties are recorded as a component of income tax expense. As of December 31, 2014, total interest of approximately $86 and penalties of approximately $263 associated with net unrecognized tax benefits are included in the Company’s consolidated balance sheet. There were no interest or penalties related to income taxes that had been accrued or recognized as of and for the years ended December 31, 2013 and 2012.

The Company does not expect a significant increase or decrease to the total amounts of unrecognized tax benefits related to continuing operations during the fiscal year ending December 31, 2015.

The Company considers the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and the Company’s specific plans for reinvestment of those subsidiary earnings. The Company has not provided for additional U.S. income taxes on approximately $9,139 of undistributed earnings of consolidated non-U.S. subsidiaries. It is not practicable to estimate the amount of unrecognized withholding taxes and deferred tax liability on such earnings.

A reconciliation of the statutory tax rates and the effective tax rates for the years ended December 31, 2014, 2013 and 2012 are as follows:

	Year Ended December 31,
	2014			2013			2012

U.S. statutory rate		35.0	%		35.0	%		35.0	%
State taxes		3.1			3.7			4.1
Valuation allowance		0.2			0.2			-
Research and development credits		(5.0	)		(0.6	)		(0.2	)
Other		(0.9	)		(0.9	)		1.5
Effective tax rate		32.4	%		37.4	%		40.4	%

- 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.

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