Income taxes

Income before income taxes consisted of the following:



	Year ended December 31,
(in thousands)	2015		2014		2013
Domestic	$	13,562	$	114,937	$	57,251
Foreign	39,023		66,038		34,078
	$	52,585	$	180,975	$	91,329

Income tax expense consisted of the following:



	Year ended December 31,
(in thousands)	2015			2014			2013
Current:
Federal	$	18,548		$	55,846		$	28,856
State	3,007			6,075			1,634
Foreign	6,539			8,219			8,058
Total current	28,094			70,140			38,548
Deferred:
Federal	(11,211		)	(13,551		)	(7,268)
State	(204		)	(3,369		)	(861)
Foreign	(225		)	(333		)	332
Total deferred	(11,640		)	(17,253		)	(7,797)
Income tax expense	$	16,454		$	52,887		$	30,751

Income tax expense for 2015 of $16.5 million decreased $36.4 million from 2014, primarily due to lower pre-tax income.

As of December 31, 2015, undistributed earnings of $129.1 million of the Company’s foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for federal and state income taxes have been provided thereon. The Company intends to reinvest these earnings indefinitely in its foreign subsidiaries. If these earnings were distributed to the United States in the form of dividends or otherwise or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred the Company would be subject to additional U.S. income taxes (subject to adjustment for foreign tax credits) and foreign withholding taxes. We do not intend to repatriate these earnings to fund U.S. operations and, accordingly, we do not provide for U.S. federal income and foreign withholding tax on these earnings. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practical.

Income tax expense reconciles to the amount computed by applying the federal statutory rate of 35% to income before income taxes as follows:



	Year ended December 31,
	2015					2014					2013
(in thousands, except percentage)	$			%		$			%		$			%
Reconciliation to statutory rate:
Tax at federal statutory rate	$	18,405		35.0	%	$	63,341		35.0	%	$	31,965		35.0	%
State taxes, net of federal benefit	1,454			2.8		4,911			2.7		2,344			2.6
Impact of foreign operations	6,434			12.2		(13,305		)	(7.4	)	(113		)	(0.1	)
Stock-based compensation	2,390			4.5		8,050			4.4		2,982			3.3
Tax credits	(21,891		)	(41.6	)	(10,616		)	(5.9	)	(5,637		)	(6.2	)
Change in valuation allowance	8,555			16.3		—			—		—			—
Other	1,107			2.1		506			0.4		(790		)	(0.9	)
	$	16,454		31.3	%	$	52,887		29.2	%	$	30,751		33.7	%

The higher effective tax rate for 2015 compared to 2014 was due to higher U.S. taxable income and lower international taxable income, which resulted from incurring a higher proportion of our 2015 operating expenses in foreign jurisdictions. Additionally, the effective tax rate for 2015 was lower than the federal statutory rate of 35% primarily due to benefits from research and development tax credits.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows:



	December 31,
(in thousands)	2015			2014
Deferred tax assets:
Net operating loss carryforwards	$	339		$	—
Tax credit carryforwards	9,372			2,347
Stock-based compensation	19,096			9,950
Allowance for returns	8,812			9,466
Accruals and reserves	20,398			14,484
Total deferred tax assets	58,017			36,247
Valuation allowance	(8,555		)	—
Total deferred tax assets, net of valuation allowance	49,462			36,247
Deferred tax liabilities:
Depreciation and amortization	(6,937		)	(3,418		)
Intangible assets	(2,904		)	—
Total deferred tax liabilities	(9,841		)	(3,418		)
Net deferred tax assets	$	39,621		$	32,829

Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. Based upon the weight of available evidence, which includes the Company’s historical operating performance and the U.S. cumulative net profits in prior periods and anticipated future earnings, the Company believes it is more likely than not that deferred tax assets, other than California research credit carryforwards, will be realized.

The Company's valuation allowance increased by $8.6 million during the year ended December 31, 2015. The change in the 2015 valuation allowance was primarily due to the addition of current year California research credit carryforwards.

As of December 31, 2015, the Company’s federal and state net operating loss carryforwards for income tax purposes were approximately $395.5 million and $249.2 million, and federal and state tax credit carryforwards were approximately $24.2 million and $18.4 million, respectively. All of the Company's federal loss, federal credit and state loss carryforwards and $3.9 million of the state tax credit carryforwards will be recorded to additional paid-in capital when realized. If not utilized, federal loss, federal credit and state loss carryforwards will begin to expire from 2019 to 2035, while the state tax credits may be carried forward indefinitely. If certain substantial changes in the entity's ownership occur, there could be an annual limitation on the amount of the carryforwards that can be utilized.

On December 18, 2015, The Consolidated Appropriations Act of 2016 was signed into law, which retroactively reinstated and made permanent the federal research tax credit provisions from January 1, 2015 through December 31, 2015. As a result, the Company recognized an income tax benefit of $13.7 million for federal research credits during the fourth quarter of 2015.

In November 2015, the FASB issued ASU 2015-17 which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The Company early-adopted this standard as of December 31, 2015 on a prospective basis. The impact to the Company's consolidated balance sheet at December 31, 2015 is a reclassification from current to non-current deferred tax assets of $22.2 million.

Uncertain income tax positions

As of December 31, 2015, the Company’s total amount of gross unrecognized tax benefits was $36.3 million, which represented an increase in unrecognized tax benefits of $19.7 million during 2015. If recognized, $31.0 million of these unrecognized income tax benefits (net of federal benefit) would be recorded as a reduction of future income tax provision.

A reconciliation of the beginning and ending amount of the unrecognized income tax benefits during the tax periods ending December 31, 2015, 2014 and 2013 are as follows:



	December 31,
(in thousands)	2015		2014		2013
Gross balance at January 1	$	16,558	$	9,898	$	4,439
Gross increase related to current year tax positions	19,948		6,401		5,280
Gross increase related to prior year tax positions	108		259		179
Gross decrease related to prior year tax positions	(341)		—		0
	$	36,273	$	16,558	$	9,898

The Company’s policy is to account for interest and penalties as income tax expense. As of December 31, 2015 and 2014, the Company had accrued interest and penalties of approximately $0.2 million and $0.2 million related to unrecognized tax benefits. There were no accrued interest and penalties as of December 31, 2013.

It is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase within the next 12 months. However, the range of the reasonably possible change cannot be reliably estimated.

The Company files income tax returns in the U.S. and non-U.S. jurisdictions. The Company is subject to U.S. income tax examinations for calendar tax years ending 2011 through 2014, and foreign income tax examinations from 2013 through 2014. The U.S. federal and U.S. state taxing authorities may choose to audit tax returns for tax years beyond the statute of limitation period due to tax attribute carryforwards from prior years, making adjustments only to carryforward attributes.

The Company is currently under examination by the Internal Revenue Service for the 2012 through 2014 tax years and California Franchise Tax Board for the 2011 and 2012 tax years. At this time, the Company is not able to estimate the potential impact that the examination may have on income tax expense. If the examinations are resolved unfavorably, there is a possibility it may have a material negative impact on the Company's results of operations.