Note 12. Income Taxes

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



	Fiscal Year Ended August 31,
	2014		2013		2012
United States	$	41,537	$	36,302	$	36,666
Foreign (1)		21,422		20,565		14,247
Income before income taxes	$	62,959	$	56,867	$	50,913

⁽¹⁾

Included in these amounts are income before income taxes for the EMEA segment of $18.4 million, $17.5 million and $11.1 million for the fiscal years ended August 31, 2014, 2013 and 2012, respectively.

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



	Fiscal Year Ended August 31,
	2014		2013		2012
Current:
Federal	$	12,663	$	11,239	$	10,100
State		972		886		3
Foreign		5,489		4,973		3,820
Total current		19,124		17,098		13,923

Deferred:
United States		(11)		(157)		1,449
Foreign		100		113		56
Total deferred		89		(44)		1,505
Provision for income taxes	$	19,213	$	17,054	$	15,428

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



	August 31,		August 31,
	2014		2013
Deferred tax assets:
Accrued payroll and related expenses	$	1,423	$	1,367
Accounts receivable		544		675
Reserves and accruals		2,519		2,584
Stock-based compensation expense		2,175		2,023
Uniform capitalization		1,700		1,623
Tax credit carryforwards		1,914		1,631
Other		1,561		1,584
Total gross deferred tax assets		11,836		11,487
Valuation allowance		(2,130)		(1,842)
Total net deferred tax assets		9,706		9,645

Deferred tax liabilities:
Property and equipment, net		(749)		(1,023)
Amortization of tax goodwill and intangible assets		(26,163)		(25,331)
Investments in partnerships		(1,099)		(1,506)
Other		(93)		(124)
Total deferred tax liabilities		(28,104)		(27,984)
Net deferred tax liabilities	$	(18,398)	$	(18,339)

The Company had state net operating loss (“NOL”) carryforwards of $6.4 million and $6.2 million as of August 31, 2014 and 2013, which generated a net deferred tax asset of $0.3 million for each of the fiscal years 2014 and 2013. The state NOL carryforwards for fiscal year ended August 31, 2014 will begin to expire in fiscal year 2019. The Company also had cumulative tax credit carryforwards of $1.9 million as of August 31, 2014 and $1.6 million as of August 31, 2013, of which $1.8 million and $1.5 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 as of both August 31, 2014 and 2013.

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,
	2014		2013		2012
Amount computed at U.S. statutory federal tax rate	$	22,036	$	19,904	$	17,820
State income taxes, net of federal tax benefits		674		661		(16)
Effect of foreign operations		(2,270)		(2,353)		(1,377)
Benefit from qualified domestic production deduction		(1,048)		(1,050)		(951)
Other		(179)		(108)		(48)
Provision for income taxes	$	19,213	$	17,054	$	15,428

As of August 31, 2014, the Company has not provided for U.S. federal and state income taxes and foreign withholding taxes on $106.4 million of undistributed earnings of the U.K., Australia and China 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 $11.0 million as of August 31, 2014. 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,
	2014		2013
Unrecognized tax benefits - beginning of fiscal year	$	980	$	1,023
Gross increases - tax positions in prior periods		152		-
Gross increases - current period tax positions		250		169
Expirations of statute of limitations for assessment		(134)		(173)
Settlements		-		(39)
Unrecognized tax benefits - end of fiscal year	$	1,248	$	980

There were no material interest or penalties included in income tax expense for the fiscal years ended August 31, 2014 and 2013. The total balance of accrued interest and penalties related to uncertain tax positions was also immaterial at August 31, 2014 and 2013.

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 2011 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 2010 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.