15. INCOME TAXES

Effective tax rate

The components of income before provision for income taxes are as follows for the years ended December 31:


(in thousands)	2016			2015			2014
Domestic	$	37,329		$	63,124		$	36,485
Foreign		(2,127	)		(2,619	)		11,509

Total income before provision	$	35,202		$	60,505		$	47,994

The components of the provision for income taxes are as follows for the years ended December 31:


(in thousands)	2016			2015			2014
Current:
Federal	$	6,741		$	17,864		$	22,488
State		2,963			4,565			2,952
Foreign		4,322			3,853			3,195

Total current provision		14,026			26,282			28,635

Deferred:
Federal		(1,120	)		2,075			(11,972	)
State		(480	)		(466	)		(1,209	)
Foreign		(4,210	)		(3,708	)		(715	)

Total deferred benefit		(5,810	)		(2,099	)		(13,896	)

Total provision	$	8,216		$	24,183		$	14,739

The effective income tax rate differed from the statutory federal income tax rate due to the following:


	2016			2015			2014
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
Valuation allowance		0.3			0.7			0.5
Transaction costs		1.1			—			—
State income taxes, net of federal benefit and tax credits		3.7			4.6			1.8
Permanent differences		2.2			1.1			1.3
Domestic production activities		(3.2	)		(3.1	)		(4.9	)
Federal research and experimentation credits		(2.3	)		(1.2	)		(1.7	)
Tax effects of foreign activities		5.2			2.0			(2.2	)
Tax-exempt income		(0.3	)		(0.1	)		(0.1	)
Provision to return adjustments		0.3			0.3			—
Non-deductible compensation		6.2			3.3			2.5
Provision for uncertain tax positions		(2.3	)		(2.6	)		(0.7	)
Excess tax benefits related to share-based compensation		(20.1	)		—			—
Other		(2.5	)		—			(0.8	)

Effective income tax rate		23.3	%		40.0	%		30.7	%

Deferred income taxes

Deferred income taxes reflect the tax attributes and 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. The Company retrospectively adopted ASU 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” in the fourth quarter of 2016. As a result, all net deferred income taxes are classified as non-current in the consolidated balance sheets for all periods presented. See Note 2 “Significant Accounting Policies” —New accounting pronouncements for further detail.

Significant components of net deferred tax assets and liabilities are as follows:


(in thousands)	2016			2015
Deferred tax assets:
Net operating loss carryforwards	$	69,307		$	65,601
Accruals and reserves		34,021			30,322
Software revenue		6,559			6,608
Depreciation		3,593			5,327
Tax credit carryforwards		8,094			6,686
Other		19			58

Total deferred tax assets		121,593			114,602
Less valuation allowances		(34,054	)		(35,509	)

Total net deferred tax assets	$	87,539		$	79,093

Deferred tax liabilities:
Intangibles	$	(17,641	)	$	(13,363	)

Total deferred tax liabilities		(17,641	)		(13,363	)

Total net deferred income taxes	$	69,898		$	65,730

The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. This determination requires significant judgment, including assumptions about future taxable income that are based on historical and projected information. The $1.5 million net change in the valuation allowance during the period primarily relates to a $2.4 million decrease for movements in foreign exchange rates, partially offset by $0.9 million increase of acquired OpenSpan federal and state net operating losses and tax credits that are projected to expire unutilized.

The Company acquired approximately $22.4 million and $0.3 million of federal and state net operating losses (“NOLs”) respectively, and approximately $0.9 million of general business credits, in connection with the acquisition of OpenSpan on April 11, 2016. The Company has determined it may utilize $20.2 million and $0.1 million of the acquired OpenSpan federal and state NOLs, respectively, and $0.4 million of the general business credits subject to annual limitations, in accordance with Section 382 and Section 383 of the Internal Revenue Code of 1986, as amended, which are scheduled to expire by 2036. As of December 31, 2016, the Company anticipates using $16.9 million of the remaining NOLs by 2021.

As of December 31, 2016, the Company had approximately $38.5 million of acquired Antenna federal NOLs, which are subject to annual use limitations under Section 382 and Section 383 of the Internal Revenue Code of 1986, as amended. Based on those limitations, the Company anticipates using $6.2 million of the remaining NOLs by 2031. With regard to the acquired foreign NOLs of $58.1 million, a full valuation allowance has been recorded as of December 31, 2016 due to uncertainty regarding the availability of these NOLs to offset future income generated by the related foreign businesses due to limitations under local country change in control provisions.

As of December 31, 2016, the Company had approximately $101.9 million of acquired Chordiant federal NOLs, which are subject to annual use limitations under Section 382 and Section 383 of the Internal Revenue Code of 1986, as amended. Based on those limitations, the Company anticipates using $76.1 million of the remaining NOLs by 2029. In addition, the Company has $0.3 million of deferred tax assets related to state NOLs as of December 31, 2016.

As of December 31, 2016, the Company had available $23.8 million of foreign NOLS which have an unlimited carryover period.

As of December 31, 2016, the Company had available $7.1 million of state tax research and experimentation (“R&E”) credits expiring in the years 2017 through 2031 and $0.9 million of investment and other state tax credits, which have an unlimited carryover.

The Company’s India subsidiary is a development center in an area designated as a Special Economic Zone (“SEZ”) and is entitled to a tax holiday in India. The tax holiday reduces or eliminates income tax in that country and is scheduled to expire in 2022. For the years ended December 31, 2016, 2015, and 2014, the effect of the income tax holiday was to reduce the overall income tax provision by approximately $1 million, $0.9 million, and $0.8 million, respectively. The benefit of the tax holiday on net income per share (diluted) was $0.01 for each of the years ended December 31, 2016, 2015, and 2014.

The Company elected to early adopt ASU 2016-09 in the fourth quarter of 2016, which requires, among other things, excess tax benefits to be recorded as a reduction of the provision for income taxes in the consolidated statement of operations, whereas they were previous recognized in equity. The Company is required to reflect any adoption adjustments as of January 1, 2016, the beginning of the annual period that includes the period of adoption. Upon adoption of ASU 2016-09, the Company recognized, on a modified retrospective basis, all historical excess tax benefits previously unrecognized, which resulted in a net cumulative-effect adjustment of a $0.3 million increase to retained earnings as of January 1, 2016, with an offsetting increase to long-term deferred income tax assets. The Company recognized a reduction to its provision for income taxes of $6.7 million for the year ended December 31, 2016 related to net excess tax benefits from awards that vested or settled in 2016. See Note 2 “Significant Accounting Policies—New accounting pronouncements” for additional information related to this adoption.

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $33.7 million as of December 31, 2016. The Company has not provided any additional federal or state income taxes or foreign withholding taxes on the undistributed earnings as such earnings have been indefinitely reinvested in the business. It is impractical to estimate the amount of tax the Company could have to pay upon repatriation due to the complexity of foreign tax credit calculations and because the Company considers its earnings permanently reinvested.

Uncertain tax benefits and other considerations

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:


(in thousands)	2016			2015			2014
Balance as of January 1,	$	23,972		$	43,396		$	40,929
Additions based on tax positions related to the current year		80			817			4,041
Additions for tax positions of prior years		110			183			285
(Reductions) Additions for acquired uncertain tax benefits		387			—			(716	)
Reductions for tax positions of prior years		(1,541	)		(19,855	)		(853	)
Reductions for a lapse of the applicable statute of limitations		(337	)		(569	)		(290	)

Balance as of December 31,	$	22,671		$	23,972		$	43,396

As of December 31, 2016, the Company had approximately $22.7 million of total unrecognized tax benefits, which would decrease the Company’s effective tax rate if recognized. The $1.5 million reduction for tax positions of prior years primarily relates the lapse in the applicable statute of limitations, revision of accounting estimates, and the impact of foreign currency exchange rates. The Company expects that the changes in the unrecognized benefits within the next twelve months will be approximately $0.1 million due to the lapse of statute of limitations.

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision. For the year ended December 31, 2016 the Company did not recognize any significant change in net interest expense. For the year ended December 31, 2015 and 2014, the Company recognized a decrease of approximately $0.6 million and an increase of $0.3 million, respectively, of interest expense. As of December 31, 2016, 2015 and 2014, the company did not recognized any significant penalties. As of December 31, 2016, 2015 and 2014, the Company had accrued approximately $1.2 million, $1.2 million, and $1.5 million, respectively, for interest and penalties.

The Company files income tax returns in the U.S. and in foreign jurisdictions. We have no tax returns under examination by the Internal Revenue Service as of December 31, 2016. However, certain states and foreign jurisdictions are auditing our income tax returns for periods ranging from 2010 through 2014. The Company does not expect the results of these audits to have a material effect on our financial condition, results of operations, or cash flows. With few exceptions, the statute of limitations remains open in all jurisdictions for the tax years 2013 to the present.