Note 12. Income Taxes

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



	Fiscal Year Ended August 31,
	2016		2015		2014
United States	$	41,128	$	38,044	$	41,537
Foreign (1)		31,661		25,066		21,422
Income before income taxes	$	72,789	$	63,110	$	62,959

⁽¹⁾

Included in these amounts are income before income taxes for the EMEA segment of $28.3 million, $21.9 million and $18.4 million for the fiscal years ended August 31, 2016, 2015 and 2014, respectively.

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



	Fiscal Year Ended August 31,
	2016		2015		2014
Current:
Federal	$	13,269	$	12,302	$	12,663
State		894		966		972
Foreign		7,593		5,886		5,489
Total current		21,756		19,154		19,124

Deferred:
United States		(1,100)		(870)		(11)
Foreign		(495)		19		100
Total deferred		(1,595)		(851)		89
Provision for income taxes	$	20,161	$	18,303	$	19,213

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



	August 31,		August 31,
	2016		2015
Deferred tax assets:
Accrued payroll and related expenses	$	1,621	$	1,680
Accounts receivable		498		532
Reserves and accruals		2,292		2,450
Unrealized exchange loss		992		416
Stock-based compensation expense		2,976		2,610
Uniform capitalization		1,473		1,335
Tax credit carryforwards		2,038		2,040
Other		2,043		1,258
Total gross deferred tax assets		13,933		12,321
Valuation allowance		(2,054)		(2,052)
Total net deferred tax assets		11,879		10,269

Deferred tax liabilities:
Property and equipment, net		(558)		(470)
Amortization of tax goodwill and intangible assets		(26,321)		(26,334)
Investments in partnerships		(744)		(786)
Total deferred tax liabilities		(27,623)		(27,590)
Net deferred tax liabilities	$	(15,744)	$	(17,321)

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”, which requires that all deferred tax liabilities and assets be classified as noncurrent on the balance sheet, and eliminates the current requirement for an entity to separate these liabilities and assets into current and noncurrent amounts based on the classification of the related asset or liability. The Company early adopted this updated guidance in the fourth quarter of fiscal year 2016 on a prospective basis and, as a result, classified all deferred taxes and liabilities as non-current on the consolidated balance sheet as of August 31, 2016. As the Company elected to apply this guidance prospectively, no changes were made to the consolidated balance sheet as of August 31, 2015.

The Company had state net operating loss (“NOL”) carryforwards of $2.4 million and $1.3 million as of August 31, 2016 and 2015, which generated a net deferred tax asset of $0.2 million and $0.1 million for fiscal years 2016 and 2015, respectively. The state NOL carryforwards, if unused, will expire between fiscal year 2017 and 2036. The Company also had cumulative tax credit carryforwards of $2.0 million as of both August 31, 2016 and 2015, of which $1.9 million for both periods, 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 carryfowards in the amount of $0.1 million as of both August 31, 2016 and 2015.

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,
	2016		2015		2014
Amount computed at U.S. statutory federal tax rate	$	25,476	$	22,088	$	22,036
State income taxes, net of federal tax benefits		397		578		674
Effect of foreign operations		(4,382)		(3,221)		(2,270)
Benefit from qualified domestic production deduction		(1,190)		(1,131)		(1,048)
Other		(140)		(11)		(179)
Provision for income taxes	$	20,161	$	18,303	$	19,213

Historically, the Company has not provided for U.S. federal and state income taxes and foreign withholding taxes on the undistributed earnings of its foreign subsidiaries in the U.K., Australia, and China as the Company had considered those earnings indefinitely reinvested outside the United States. In the fourth quarter of fiscal year 2016, the Company determined that it would undertake, in fiscal year 2017, a one-time repatriation of $8.2 million, which represents all of the historical foreign earnings from its Australia subsidiary and 90% of the historical foreign earnings from its China subsidiary. Management determined that such a foreign distribution was prudent due to the current favorable tax consequences of such a distribution, stemming principally from the recent significant strengthening of the U.S. dollar against various currencies in which the Company conducts business. Accordingly, the Company determined that it was no longer indefinitely reinvested with respect to this amount of unremitted earnings and recorded the impact of this decision in the 2016 income tax provision, which resulted in the recognition of an incremental immaterial tax benefit.

As of August 31, 2016, the Company has not provided for U.S. federal and state income taxes and foreign withholding taxes on $113.4 million of the remaining undistributed earnings of certain foreign subsidiaries, mostly attributable to the U.K., 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 $8.8 million as of August 31, 2016. 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 foreign earnings in future periods, the Company would be required to provide for the incremental U.S. federal and state income taxes as well as foreign withholding taxes on such amounts in the period in which the decision is made. The Company continues to provide for U.S. income taxes and foreign withholding taxes on the undistributed earnings of its Canada and Malaysia subsidiaries, whose earnings are not considered indefinitely reinvested.

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,
	2016		2015
Unrecognized tax benefits - beginning of fiscal year	$	1,279	$	1,248
Gross increases - current period tax positions		211		222
Expirations of statute of limitations for assessment		(251)		(63)
Settlements		-		(128)
Unrecognized tax benefits - end of fiscal year	$	1,239	$	1,279

There were no material interest or penalties included in income tax expense for the fiscal years ended August 31, 2016 and 2015. The total balance of accrued interest and penalties related to uncertain tax positions was also immaterial at August 31, 2016 and 2015.

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 2013 are not subject to examination by the U.S. Internal Revenue Service. The Company was recently notified by the U.S. Internal Revenue Service of its plans to perform an income tax audit for the tax period ended August 31, 2014. The Company is also currently under audit in various state and local jurisdictions for fiscal years 2013 through 2015. Generally, for the majority of state and foreign jurisdictions where the Company does business, periods prior to fiscal year 2012 are no longer subject to examination. The Company has estimated that up to $0.4 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.