3. INCOME TAXES

Income tax expense (benefit) is summarized as follows:

	Years Ended January 31,
	2015			2014		2013
	(in thousands)
Current:
Federal	$	174		$	303	$	684
State		109			33		25
Foreign		3,010			2,703		2,569
Subtotal		3, 293			3,039		3,278
Deferred:
Federal		(786	)		20		942
State		229			306		220
Foreign		(348	)		297		(929	)
Subtotal		(905	)		623		233
Equity adjustment		251			104		140
Total	$	2,639		$	3,766	$	3,651

Actual income tax expense (benefit) differs from that obtained by applying the statutory federal income tax rate of 34% to income before income taxes as follows:

	Years Ended January 31,
	2015			2014			2013
	(in thousands)
Computed expected tax expense	$	5,299		$	3,452		$	3,499
State income taxes, net of federal income tax expense		253			330			208
Incremental tax benefit from foreign operations		(5,220	)		(2,676	)		(1,355	)
Non-deductible equity compensation		258			1,176			913
Foreign withholding taxes		1,256			1,171			928
Net change in valuation allowance		1,657			(108	)		(826	)
Net change in contingency reserve		(594	)		45			(68	)
Non-deductible expenses		742			1,084			296
Benefit of tax credits		(1,345	)		(1,624	)		(446	)
Subpart F Income		283			198			313
Rate change impact		54			(88	)		164
Other		(4	)		806			25
Total	$	2,639		$	3,766		$	3,651

Consolidated U.S. income (loss) before income taxes was $(2.4) million, $(1.2) million and $2.3 million for the fiscal years ended January 31, 2015, 2014 and 2013, respectively. The corresponding income before income taxes for foreign operations was $18.0 million, $11.4 million and $8.0 million for the fiscal years ended January 31, 2015, 2014 and 2013, respectively.

The Company files U.S. federal, state, and foreign tax returns that are subject to audit by various tax authorities. The Company is currently under audit in:

·	India for fiscal years ended March 31, 2008, 2009, 2010, 2012 and 2013

·	California for fiscal years ended 2004

·	State of Minnesota for fiscal years ended 2010, 2011, 2012 and 2013

U.S. income and foreign withholding taxes have not been recorded on permanently reinvested earnings of our foreign subsidiaries. These permanently reinvested earnings are approximately $76.1 million at January 31, 2015. It is not practicable for the Company to determine the amount of the related unrecognized deferred income tax liability. Such earnings would likely become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends.

Deferred income taxes reflect the net effects of the 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 are as follows:

	January 31,
	2015			2014
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts and sales adjustments	$	452		$	492
Accrued vacation		2,015			1,923
Tax credits		8,584			7,911
Deferred revenue		3,666			3,467
Net operating loss carry forwards		9,646			10,608
Accrued expenses - other		2,478			2,076
Section 263(a) interest capitalization		353			368
Equity compensation		3,673			4,306
Other		1,824			1,423
Total deferred tax assets		32,691			32,574
Less valuation allowance		(10,684	)		(10,293	)
Less netting of unrecognized tax benefits against deferred tax assets		(1,406	)		—
Deferred tax assets, net of valuation allowance	$	20,601		$	22,281
Deferred tax liabilities:
Unrecognized capital gain		(863	)		(1,033	)
Depreciation and amortization		(379	)		(654	)
Other comprehensive income		(20	)		(295	)
Other		(346	)		(378	)
Total deferred tax liabilities		(1,608	)		(2,360	)
Total net deferred tax assets	$	18,993		$	19,921
Recorded as:
Current portion of deferred tax assets		9,434			8,242
Non-current portion of deferred tax assets		11,229			13,110
Current portion of deferred tax liabilities (in current deferred tax assets)		(121	)		(109	)
Non-current portion of deferred tax liabilities (in non-current deferred tax assets)		(1,549	)		(1,322	)
Total net deferred tax assets	$	18,993		$	19,921

The Company reviews its net deferred tax assets by jurisdiction on a quarterly basis to determine whether a valuation allowance is necessary based on the more-likely-than-not standard. If and when the Company’s operating performance improves on a sustained basis, the conclusion regarding the need for a valuation allowance could change, resulting in the reversal of some or all of the valuation allowance in the future. At January 31, 2015 and 2014, the valuation allowance attributable to deferred tax assets was $10.7 million and $10.3 million, respectively.

Deferred tax assets at January 31, 2015 and 2014 do not include $2.1 million and $1.2 million, respectively, of excess tax benefits from employee stock exercises. During fiscal 2015, the Company was able to recognize $0.1 million of deferred excess tax benefits. Equity will be increased by an additional $2.1 million when such excess tax benefits are ultimately realized.

The Company has gross net operating loss carryforwards of $35.2 million and tax credit carryforwards of $10.8 million as of January 31, 2015. The majority of the Company’s net operating loss carryforwards do not expire, the remaining begin to expire in fiscal year 2016. The majority of the Company’s tax credit carryforwards do not expire, the remaining begin to expire in fiscal year 2020.

During the fiscal year ended January 31, 2015, the Company decreased its reserves for uncertain tax positions by $0.7 million. Interest and penalties on accrued but unpaid taxes are classified in the Consolidated Statements of Income and Comprehensive Income as income tax expense. The liability for unrecognized tax benefits that may be recognized in the next twelve months is classified as short-term in the Company’s Consolidated Balance Sheet while the remainder is classified as long-term.

The following table reconciles the gross amounts of unrecognized tax benefits at the beginning and end of the period:

	Years Ended January 31,
	2015			2014
	(in thousands)
Unrecognized tax benefits at beginning of the year	$	2,626		$	2,581
Increases as a result of tax positions taken in a prior period		85			45
Increases as a result of tax positions taken in the current period		27			—
Reduction as a result of a lapse of the statute of limitations		(649	)		—
Decreases as a result of tax settlements		(165	)		—
Unrecognized tax benefit at end of year	$	1,924		$	2,626

All of the unrecognized tax benefits included in the balance sheet at January 31, 2015 would impact the effective tax rate on income from continuing operations, if recognized.

The total amount of interest recognized in the Consolidated Statement of Income and Comprehensive Income for unpaid taxes was $37,000 for the year ended January 31, 2015. The total amount of interest and penalties recognized in the Consolidated Balance Sheet at January 31, 2015 was $0.2 million.

In the next twelve months, due to a potential tax credit settlement an estimated $0.1 million of gross unrecognized tax benefits may be recognized.

The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statute of limitations. The years that may be subject to examination will vary by jurisdiction. Below is a list of our material jurisdictions and the years open for audit as of fiscal 2015:

Jurisdiction	Years Open for Audit
U.S. Federal	FY12 and beyond
California	FY11 and beyond
Michigan	FY11 and beyond
New Jersey	FY11 and beyond
Australia	FY11 and beyond
France	FY12 and beyond
India	FY99 and beyond
Ireland	FY11 and beyond
United Kingdom	FY12 and beyond