11. Income Taxes

Income before provision for income taxes for fiscal 2014, 2013, and 2012 consisted of the following (in thousands):


	2014			2013		2012
United States	$	76,709		$	44,005	$	3,602
Foreign		(2,250	)		57,728		64,948

Income before provision for income taxes	$	74,459		$	101,733	$	68,550

The provision for income taxes for fiscal 2014, 2013, and 2012 consisted of the following (in thousands):


	2014			2013			2012
Current tax expense (benefit)
Federal	$	(3,370	)	$	(9,232	)	$	5,524
State		7			4			36
Foreign		12,334			10,521			9,587

		8,971			1,293			15,147

Deferred tax expense (benefit)
Federal		18,713			1,876			(814	)
State		—			—			—
Foreign		86			(369	)		73

		18,799			1,507			(741	)

Provision for income taxes	$	27,770		$	2,800		$	14,406

The provision for income taxes differs from the federal statutory rate for fiscal 2014, 2013, and 2012 as follows (in thousands):


	2014			2013			2012
Provision at U.S. federal statutory rate	$	26,061		$	35,606		$	23,992
State income taxes		5			3			139
Qualified stock options		939			2,071			2,280
Business credits		(2,852	)		(3,722	)		(1,278	)
Foreign tax differential		(19,584	)		(16,589	)		(10,933	)
Remeasurement of unrecognized tax benefits		—			(15,569	)		—
Non-deductible portion of contingent consideration		21,222			—			—
Change in valuation allowance		(370	)		(154	)		(27	)
Nondeductible amortization		935			578			—
Other differences		1,414			576			233

Provision for income taxes	$	27,770		$	2,800		$	14,406

Net deferred tax assets as of the end of fiscal 2014 and 2013 consisted of the following (in thousands):


	2014		2013
Current deferred tax assets	$	7,232	$	2,837
Non-current deferred tax assets		5,043		13,374

Net deferred tax assets	$	12,275	$	16,211

Current deferred tax assets and non-current deferred tax assets are included in prepaid expenses and other current assets, and other assets, respectively, in the accompanying consolidated balance sheets.

Significant components of our deferred tax assets (liabilities) as of the end of fiscal 2014 and 2013 consisted of the following (in thousands):


	2014			2013
Deferred tax assets:
Investment writedowns	$	6,279		$	6,769
Capital loss carryforward		14			1,352
Inventory writedowns		305			268
Depreciation and amortization		2,277			86
Accrued compensation		2,519			2,027
Deferred compensation		4,605			—
Share-based compensation		9,255			15,436
Business credit carryforward		18,103			13,332
Net operating loss carryforward		8,738			1,166
Other accruals		681			437

		52,776			40,873
Valuation allowance		(14,812	)		(15,556	)

		37,964			25,317

Deferred tax liabilities:
Acquisition intangibles		(18,057	)		(834	)
Interest		(7,632	)		(8,272	)

		(25,689	)		(9,106	)

Net deferred tax assets	$	12,275		$	16,211

Realization of deferred tax assets depends on our generating sufficient U.S. and certain foreign taxable income in future years to obtain a benefit from the utilization of those deferred tax assets on our tax returns. Accordingly, the amount of deferred tax assets considered realizable may increase or decrease when we reevaluate the underlying basis for our estimates of future U.S. and foreign taxable income. As of the end of fiscal 2014, a valuation allowance of $14.8 million had been established to reduce deferred tax assets to levels that we believe are more likely than not to be realized through future taxable income. The net change in the valuation allowance during fiscal 2014 was a decrease of $744,000.

Undistributed operating earnings of our foreign subsidiaries were approximately $548.8 million as of the end of fiscal 2014 and are considered to be indefinitely reinvested overseas; accordingly, no U.S. income taxes have been provided for on these earnings. The potential deferred tax liability associated with undistributed operating earnings of our foreign subsidiaries was approximately $120.2 million.

As of the end of fiscal 2014, we had California net operating loss carryforwards of approximately $48.2 million. The California net operating loss carryforwards of $33.1 million were attributable to share-based award deductions. Any benefit of these net operating losses will be recorded directly to additional paid-in capital when realized. The California net operating loss will begin to expire in fiscal 2021, if not utilized. The federal and state capital loss carryforwards will begin to expire in fiscal 2015, if not utilized. In addition, we had $25.0 million of federal, $2.4 million of Idaho, and $15.0 million of California net operating loss carryforwards related to acquisitions. Under current tax law, net operating loss and tax credit carryforwards available to offset future income or income taxes may be limited by statute or upon the occurrence of certain events, including significant changes in ownership.

We had $8.3 million and $13.1 million of federal and state research tax credit carryforwards, respectively, as of the end of fiscal 2014. The federal research tax credit carryforward will begin to expire in 2027 and the state research tax credit can be carried forward indefinitely. We also had $1.3 million of federal alternative minimum tax credit carryforward available to offset future federal tax liabilities with no expiration.

The total liability for gross unrecognized tax benefits, included in other liabilities in our consolidated balance sheets, increased by $2.0 million to $10.2 million in fiscal 2014 from $8.2 million in fiscal 2013. This total amount would reduce the effective tax rate on income from continuing operations, if recognized. A reconciliation of the beginning and ending balance of gross unrecognized tax benefits for fiscal 2014, 2013, and 2012 consisted of the following (in millions):


	2014			2013			2012
Beginning balance	$	8.2		$	23.1		$	20.2
Increase in unrecognized tax benefits related to current year tax positions		1.1			1.8			2.6
Increase in unrecognized tax benefits related to prior year tax positions		1.7			—			0.3
Remeasurement for results of income tax examination		—			(15.0	)		—
Decrease due to statute expiration		(0.8	)		(1.7	)		—

Ending Balance	$	10.2		$	8.2		$	23.1

Accrued interest and penalties increased by $22,000, decreased by $1.5 million, and increased by $749,000 representing income tax expense or benefit, in fiscal 2014, 2013, and 2012, respectively. Accrued interest and penalties was $935,000 and $913,000 as of June 30, 2014 and 2013, respectively. Our policy is to classify interest and penalties, if any, as components of income tax expense.

In May 2011, we were notified by the Internal Revenue Service, or the Service, that our fiscal 2003 through 2006 and fiscal 2008 through 2010 returns would be subject to examination. The early periods were being audited in connection with a mandatory review of tax refunds in excess of $2.0 million which resulted when we carried back our fiscal 2008 net operating loss. In March 2013, we received the Revenue Agent’s Report resolving our examination with the Service and paid an assessment that had no material impact on our condensed consolidated financial statements. Our case is pending review by the Joint Committee on Taxation, which we anticipate will conclude in our fiscal 2015. Any prospective adjustments to our unrecognized tax benefits will be recorded as an increase or decrease to income tax expense and cause a corresponding change to our effective tax rate. Accordingly, our effective tax rate could fluctuate materially from period to period.

On January 2, 2013, President Barack Obama signed into law The American Taxpayer Relief Act of 2013, or the Act. The Act extended the federal research credit for two years retroactively from January 1, 2012 through December 31, 2013. As such, we only recognized six months of tax benefit from the research tax credit for fiscal 2014.

It is reasonably possible that the amount of liability for unrecognized tax benefits may change within the next 12 months and an estimate of the range of possible changes could result in an increase of up to $2.0 million.

Our major tax jurisdictions are the United States, California, and Hong Kong SAR, and fiscal 2003 onward remain subject to examination by one or more of these jurisdictions.