Note 12. Income Taxes

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



	Fiscal Year Ended August 31,
	2017		2016		2015
United States	$	42,060	$	41,128	$	38,044
Foreign (1)		32,562		31,661		25,066
Income before income taxes	$	74,622	$	72,789	$	63,110

⁽¹⁾

Included in these amounts are income before income taxes for the EMEA segment of $28.1 million, $28.3 million and $21.9 million for the fiscal years ended August 31, 2017, 2016 and 2015, respectively.

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



	Fiscal Year Ended August 31,
	2017		2016		2015
Current:
Federal	$	10,813	$	13,269	$	12,302
State		744		894		966
Foreign		7,465		7,593		5,886
Total current		19,022		21,756		19,154

Deferred:
United States		2,627		(1,100)		(870)
Foreign		43		(495)		19
Total deferred		2,670		(1,595)		(851)
Provision for income taxes	$	21,692	$	20,161	$	18,303

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



	August 31,		August 31,
	2017		2016
Deferred tax assets:
Accrued payroll and related expenses	$	1,252	$	1,621
Accounts receivable		644		498
Reserves and accruals		2,393		2,292
Unrealized exchange loss		25		992
Stock-based compensation expense		3,213		2,976
Uniform capitalization		1,598		1,473
Tax credit carryforwards		2,309		2,038
Other		1,264		2,043
Total gross deferred tax assets		12,698		13,933
Valuation allowance		(2,328)		(2,054)
Total net deferred tax assets		10,370		11,879

Deferred tax liabilities:
Property and equipment, net		(2,109)		(558)
Amortization of tax goodwill and intangible assets		(26,036)		(26,321)
Investments in partnerships		(679)		(744)
Total deferred tax liabilities		(28,824)		(27,623)
Net deferred tax liabilities	$	(18,454)	$	(15,744)

The Company had state net operating loss (“NOL”) carryforwards of $2.6 million and $2.4 million as of August 31, 2017 and 2016, respectively, which generated a net deferred tax asset of $0.2 million for each of the fiscal years 2017 and 2016. The state NOL carryforwards, if unused, will expire between fiscal year 2018 and 2037. The Company also had cumulative tax credit carryforwards of $2.3 million and $2.0 million as of August 31, 2017 and 2016, respectively, of which $2.1 million and $1.9 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.

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,
	2017		2016		2015
Amount computed at U.S. statutory federal tax rate	$	26,118	$	25,476	$	22,088
State income taxes, net of federal tax benefits		327		397		578
Effect of foreign operations		(4,277)		(4,382)		(3,221)
Benefit from qualified domestic production deduction		(1,295)		(1,190)		(1,131)
Other		819		(140)		(11)
Provision for income taxes	$	21,692	$	20,161	$	18,303

The provision for income taxes was 29.1% and 27.7% of income before income taxes for the fiscal years ended August 31, 2017 and 2016, respectively. The increase in the effective income tax rate from period to period was primarily driven by an immaterial out-of-period correction that the Company recorded in the second quarter of fiscal year 2017 associated with the tax impacts from certain unrealized foreign currency exchange losses in periods prior to fiscal year 2017.

As of August 31, 2017, the Company has not provided for U.S. federal and state income taxes and foreign withholding taxes on $137.5 million of the 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 $12.9 million as of August 31, 2017. 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. In the fourth quarter of fiscal year 2016, the Company approved a one-time repatriation of $8.2 million of historical foreign earnings from its Australia and China subsidiaries due to favorable tax consequences stemming principally from the strengthening of the U.S. dollar against various currencies in which the Company conducts business. This action resulted in the recognition of an incremental immaterial tax benefit in fiscal year 2016. The Company continues to consider the remaining amount of unremitted foreign earnings in Australia and China, in addition to the U.K, to be indefinitely reinvested outside of the United States. 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,
	2017		2016
Unrecognized tax benefits - beginning of fiscal year	$	1,239	$	1,279
Net decreases - prior period tax positions		(68)		-
Net increases - current period tax positions		228		211
Expirations of statute of limitations for assessment		(382)		(251)
Settlements		(36)		-
Unrecognized tax benefits - end of fiscal year	$	981	$	1,239

Gross unrecognized tax benefits totaled $1.0 million and $1.2 million as of August 31, 2017 and 2016, of which $0.6 million and $0.9 million, respectively, would affect the Company’s effective income tax rate if recognized. There were no material interest or penalties included in income tax expense for the fiscal years ended August 31, 2017 and 2016. The total balance of accrued interest and penalties related to uncertain tax positions was also immaterial at August 31, 2017 and 2016.

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 2014 are not subject to examination by the U.S. Internal Revenue Service. The Company was notified in September 2016 by the U.S. Internal Revenue Service of its plans to perform an income tax audit for the tax period ended August 31, 2015. The income tax examination was concluded in the third quarter of fiscal year 2017 with no changes to the original return as filed. The Company is also currently under audit in various state and international jurisdictions for fiscal years 2013 through 2016. Generally, for the majority of state and foreign jurisdictions where the Company does business, periods prior to fiscal year 2013 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.