INCOME TAXES

In conjunction with the year-end financial statement close process, an error was identified in the historical accounting for income taxes during the annual and quarterly periods from 2007 to 2014. The error resulted from the failure to identify the income tax ramifications associated with the non-timely settlement of sales transactions between the Company's Canadian subsidiary, Knoll North America Corp., and Knoll, Inc. The errors resulted in improperly stated deferred tax assets and liabilities, uncertain tax positions, other comprehensive income, and income tax expense. Consequently, the Company has restated certain prior period amounts. The Company has also corrected certain other identified errors, including the recognition of certain sales and cost of sales in the incorrect fiscal periods. See Notes 23 and 24 for the impact of these corrections on previously reported amounts.

Income before income tax expense consists of the following (in thousands):



	2014		2013		2012
U.S. operations	$	61,353	$	32,328	$	63,049
Foreign operations	14,397		6,574		18,858
Total	$	75,750	$	38,902	$	81,907

15. INCOME TAXES (continued)

Income tax expense is comprised of the following (in thousands):



	2014			2013			2012
Current:
Federal	$	20,154		$	6,665		$	18,708
State	4,472			1,903			3,347
Foreign	4,808			3,621			3,936
Total current	29,434			12,189			25,991
Deferred:
Federal	(1,315		)	4,135			2,934
State	753			607			608
Foreign	293			(1,213		)	851
Total deferred	(269		)	3,529			4,393
Income tax expense	$	29,165		$	15,718		$	30,384

The following table sets forth the tax effects of temporary differences that give rise to the deferred tax assets and liabilities (in thousands):



	December 31, 2014			December 31, 2013
Deferred tax assets
Accounts receivable, principally due to allowance for doubtful accounts	$	2,750		$	2,127
Inventories	3,883			3,649
Net operating loss carryforwards	8,626			8,817
Accrued pension	27,598			3,136
Stock-based compensation	5,794			7,347
Compensation-related accruals	4,218			3,364
Warranty	2,893			2,880
Obligation for postretirement benefits other than pension	3,706			3,770
Accrued liabilities and other items	9,247			7,956
Gross deferred tax assets	68,715			43,046
Valuation allowance	(7,901		)	(8,991		)
Net deferred tax assets	60,814			34,055
Deferred tax liabilities:
Intangibles	86,464			82,837
Plant and equipment	22,685			16,245
Gross deferred tax liabilities	109,149			99,082
Net deferred tax liabilities	$	(48,335	)	$	(65,027	)

Income taxes paid, net of refunds received, by the Company during 2014, 2013, and 2012, totaled $18.6 million, $18.3 million, and $26.7 million, respectively.

As of December 31, 2014, the Company had net operating loss carryforwards totaling approximately $32.4 million in Brazil, the United Kingdom, and Germany. The net operating loss carryforwards may be carried forward indefinitely in Brazil, United Kingdom, and Germany. The Company provides a valuation allowance against certain net foreign deferred tax assets (principally the net operating loss carryforwards) due to the uncertainty that they can be realized.

15. INCOME TAXES (continued)

The following table sets forth a reconciliation of the statutory federal income tax rate to the effective income tax rate:



	2014		2013		2012
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in the tax rate resulting from:
State taxes, net of federal effect	3.5	%	3.7	%	3.3	%
Effect of tax rates of other countries	(0.4	)%	0.2	%	(0.5	)%
Section 199 deduction	(1.2	)%	(1.7	)%	(1.5	)%
Change in Contingency Reserve	0.7	%	2.0	%	(1.8	)%
Limitation on deduction of Officer’s compensation	1.5	%	2.6	%	1.7	%
Other	(0.6	)%	(1.4	)%	0.9	%
Effective tax rate	38.5	%	40.4	%	37.1	%

As of December 31, 2014, there is $139.7 million of cumulative earnings overseas. Approximately $64.6 million has been subject to tax under the U.S. Subpart F of Section 956 provisions. Accordingly, $75.1 million of earnings have not been subject to U.S. tax and are reinvested indefinitely. It is not practical to estimate the amount of U.S. tax that would result upon the eventual repatriation of such earnings.

As of December 31, 2014 and 2013, the Company had unrecognized tax benefits of approximately $4.9 million and $4.6 million, respectively. The entire amount of the unrecognized tax benefits would reduce the effective tax rate if recognized.

The following table summarizes the activity related to our unrecognized tax benefits during 2014, 2013, and 2012 (in thousands):



	2014			2013			2012
Balance, beginning of the year	$	4,611		$	4,039		$	4,930
Additions for tax position related to the current year	125			691			125
Additions for tax position related to the prior year	350			—			191
Decreases for tax position related to the prior year	—			—			(1,207		)
Prior year reductions
Lapse of statute of limitations	(164		)	(119		)	—
Change in exchange rate	—			—			—
Balance, end of the year	$	4,922		$	4,611		$	4,039

Included in the unrecognized tax benefits at December 31, 2014 is $4.3 million associated with errors on previously reported income tax returns. It is anticipated that amended returns will be filed to report the incremental taxable income within the next twelve months.

During 2014, 2013, and 2012, respectively, the Company recognized approximately $0.2 million of interest and penalties. The Company has accrued approximately $0.5 million and $0.4 million for the payment of interest and penalties as of December 31, 2014 and December 31, 2013, respectively.

As of December 31, 2014, the Company is subject to U.S. Federal Income Tax examination for the tax years 2011 through 2014, and to non-U.S. income tax examination for the tax years 2005 to 2014. In addition, the Company is subject to state and local income tax examinations for the tax years 2005 through 2014.