Note 13. Income Taxes

Income before income taxes consisted of the following (in thousands):



	Fiscal Year Ended August 31,
	2013		2012		2011
United States	$	36,302	$	36,666	$	37,309
Foreign ⁽¹⁾		20,565		14,247		16,222
Income before income taxes	$	56,867	$	50,913	$	53,531

⁽¹⁾	Included in these amounts are income before income taxes for the EMEA segment of $17.5 million, $11.1 million and $14.5 million for the fiscal years ended August 31, 2013, 2012 and 2011, respectively.

The provision for income taxes consisted of the following (in thousands):



	Fiscal Year Ended August 31,
	2013		2012		2011
Current:
Federal	$	11,239	$	10,100	$	9,321
State		886		3		951
Foreign		4,973		3,820		4,627
Total current		17,098		13,923		14,899

Deferred:
United States		(157)		1,449		2,162
Foreign		113		56		37
Total deferred		(44)		1,505		2,199
Provision for income taxes	$	17,054	$	15,428	$	17,098

Deferred tax assets and deferred tax liabilities consisted of the following (in thousands):



	August 31,		August 31,
	2013		2012
Deferred tax assets:
Accrued payroll and related expenses	$	1,367	$	886
Accounts receivable		675		702
Reserves and accruals		2,584		2,676
Stock-based compensation expense		2,023		2,121
Uniform capitalization		1,623		1,156
Tax credit carryforwards		1,631		1,240
Other		1,584		1,604
Total gross deferred tax assets		11,487		10,385
Valuation allowance		(1,842)		(1,302)
Total deferred tax assets		9,645		9,083

Deferred tax liabilities:
Property and equipment, net		(1,023)		(1,163)
Amortization of tax goodwill and intangible assets		(25,331)		(24,708)
Investments in partnerships		(1,506)		(1,471)
Other		(124)		(197)
Total deferred tax liabilities		(27,984)		(27,539)
Net deferred tax liabilities	$	(18,339)	$	(18,456)

The Company had state net operating loss (“NOL”) carryforwards of $6.2 million and $4.8 million as of August 31, 2013 and 2012, which generated a net deferred tax asset of $0.3 million and $0.2 million, respectively. The state NOL carryforwards for fiscal year ended August 31, 2013 will begin to expire in fiscal year 2014. The Company also had cumulative tax credit carryforwards of $1.6 million as of August 31, 2013 and $1.2 million as of August 31, 2012, of which $1.5 million and $1.1 million, respectively, is attributable to a U.K. tax credit carryforward, which does not expire. Future utilization of the tax credit carryforwards and certain state NOL carryovers is uncertain and is dependent upon several factors that may not occur, including the generation of future taxable income in certain jurisdictions. At this time, management cannot conclude that it is “more likely than not” that the related deferred tax assets will be realized. Accordingly, a full valuation allowance has been recorded against the related deferred tax asset associated with cumulative tax credit carryforwards. In addition, a valuation allowance has been recorded against the deferred tax asset associated with certain state NOL carryovers in the amount of $0.2 million and $0.1 million as of August 31, 2013 and 2012, respectively.

A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows (in thousands):



	Fiscal Year Ended August 31,
	2013		2012		2011
Amount computed at U.S. statutory federal tax rate	$	19,904	$	17,820	$	18,736
State income taxes, net of federal tax benefits		661		(16)		734
Effect of foreign operations		(2,353)		(1,377)		(1,377)
Benefit from qualified domestic production deduction		(1,050)		(951)		(798)
Research and experimentation credits		(82)		(22)		(117)
Other		(26)		(26)		(80)
Provision for income taxes	$	17,054	$	15,428	$	17,098

As of August 31, 2013, the Company has not provided for U.S. federal and state income taxes and foreign withholding taxes on $84.7 million of undistributed earnings of certain foreign subsidiaries since these earnings are considered indefinitely reinvested outside of the United States. The amount of unrecognized deferred U.S. federal and state income tax liability, net of unrecognized foreign tax credits, is estimated to be approximately $6.7 million as of August 31, 2013. This net liability is impacted by changes in foreign currency exchange rates and, as a result, will fluctuate with any changes in such rates. If management decides to repatriate such foreign earnings in future periods, the Company would incur incremental U.S. federal and state income taxes as well as foreign withholding taxes. However, the Company’s intent is to keep these funds indefinitely reinvested outside the U.S. and its current plans do not demonstrate a need to repatriate them to fund the U.S. operations. Regarding certain foreign subsidiaries not indefinitely reinvested, the Company has provided for U.S. income taxes and foreign withholding taxes on the undistributed earnings.

Reconciliations of the beginning and ending amounts of the Company’s gross unrecognized tax benefits, excluding interest and penalties, are as follows (in thousands):



	Fiscal Year Ended August 31,
	2013		2012
Unrecognized tax benefits - beginning of fiscal year	$	1,023	$	1,374
Gross increases - tax positions in prior periods		-		7
Gross decreases - tax positions in prior periods		-		(67)
Gross increases - current period tax positions		169		422
Expirations of statute of limitations for assessment		(173)		(406)
Settlements		(39)		(307)
Unrecognized tax benefits - end of fiscal year	$	980	$	1,023

There were no material interest or penalties included in income tax expense for the fiscal years ended August 31, 2013 and 2012. The total balance of accrued interest and penalties related to uncertain tax positions was also immaterial at August 31, 2013 and 2012.

The Company is subject to taxation in the U.S. and in various state and foreign jurisdictions. Due to expired statutes, the Company’s federal income tax returns for years prior to fiscal year 2010 are not subject to examination by the U.S. Internal Revenue Service. Generally, for the majority of state and foreign jurisdictions where the Company does business, periods prior to fiscal year 2009 are no longer subject to examination. The Company has estimated that up to $0.2 million of unrecognized tax benefits related to income tax positions may be affected by the resolution of tax examinations or expiring statutes of limitation within the next twelve months. Audit outcomes and the timing of settlements are subject to significant uncertainty.