3. INCOME TAXES

Income tax expense (benefit) is summarized as follows:

	Years Ended January 31,
	2016			2015			2014
	(in thousands)
Current:
Federal	$	(1,656	)	$	174		$	303
State		26			109			33
Foreign		2,591			3,010			2,703
Subtotal		961			3,293			3,039
Deferred:
Federal		(956	)		(786	)		20
State		303			229			306
Foreign		63			(348	)		297
Subtotal		(590	)		(905	)		623
Equity adjustment		1,254			251			104
Total	$	1,624		$	2,639		$	3,766

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,
	2016			2015			2014
	(in thousands)
Computed expected tax expense	$	3,582		$	5,299		$	3,452
State income taxes, net of federal income tax expense		252			253			330
Incremental tax benefit from foreign operations		(2,548	)		(5,220	)		(2,676	)
Non-deductible equity compensation		254			258			1,176
Foreign withholding taxes		968			1,256			1,171
Net change in valuation allowance		2,564			1,657			(108	)
Net change in contingency reserve		(379	)		(594	)		45
Non-deductible expenses		621			742			1,084
Benefit of tax credits		(3,186	)		(1,345	)		(1,624	)
Subpart F Income		254			283			198
Rate change impact		193			54			(88	)
Benefit from liquidation utilized		(1,321	)		—			—
Other		370			(4	)		806
	$	1,624		$	2,639		$	3,766

Consolidated U.S. (loss) before income taxes was $(7.8) million, $(2.4) million, and $(1.2) million, for the fiscal years ended January 31, 2016, 2015 and 2014, respectively. The corresponding income before income taxes for foreign operations was $18.4 million, $18.0 million, and $11.4 million for the fiscal years ended January 31, 2016, 2015 and 2014, 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, 1998, 1999, 2009, 2010, 2012, 2013 and 2014.

Italy for fiscal years ended 2011, 2012, 2013 and 2014.

State of Wisconsin for fiscal years ended 2012, 2013 and 2014.

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 $81.9 million at January 31, 2016. It is not practicable for the Company to determine the amount of the related unrecognized deferred income tax liability. Such earnings would 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,
	2016			2015
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts and sales adjustments	$	486		$	452
Accrued vacation		1,900			2,015
Tax credits		11,025			8,584
Deferred revenue		3,520			3,666
Net operating loss carry forwards		7,965			9,646
Accrued expenses - other		1,557			2,478
Other comprehensive income		1,483			—
Section 263(a) interest capitalization		333			353
Equity compensation		4,631			3,673
Other		2,111			1,824
Total deferred tax assets		35,011			32,691
Less valuation allowance		(13,480	)		(10,684	)
Less netting of unrecognized tax benefits against deferred tax assets		(1,042	)		(1,406	)
Deferred tax assets, net of valuation allowance	$	20,489		$	20,601
Deferred tax liabilities:
Basis difference in foreign subsidiaries		—			(2,004	)
Depreciation and amortization		(249	)		(379	)
Other comprehensive income		—			(20	)
Other		(118	)		(346	)
Total deferred tax liabilities		(367	)		(2,749	)
Total net deferred tax assets	$	20,122		$	17,852
Recorded as:
Current portion of deferred tax assets		8,261			9,434
Non-current portion of deferred tax assets		12,342			11,229
Current portion of deferred tax liabilities (in current deferred tax assets)		(58	)		(2,125	)
Non-current portion of deferred tax liabilities (in non-current deferred tax assets)		(423	)		(686	)
Total net deferred tax assets	$	20,122		$	17,852

Financial results for fiscal 2013, 2014 and 2015 include an immaterial correction of an error related to two non-recurring foreign transactions which each occurred in fiscal 2004. The Company filed an amended return in fiscal 2004 to claim a deduction related to the write-off of the investment in a Japan legal entity and additionally merged two entities within France. The deferred tax liabilities related to these transactions were incorrectly recorded. The impact of these corrections was an increase to deferred tax liabilities of $1.1 million and a corresponding adjustment to retained earnings of $1.1 million, which is reflected in the January 31, 2013, 2014 and 2015 consolidated statements of stockholders’ equity and consolidated balance sheets. The correction has no impact on the Company’s consolidated statement of income and comprehensive income or consolidated statement of cash flows for any periods presented.

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, 2016 and 2015, the valuation allowance attributable to deferred tax assets was $13.5 million and $10.7 million, respectively.

Deferred tax assets at January 31, 2016 and 2015 do not include $2.6 million and $2.1 million, respectively, of excess tax benefits from employee stock exercises. During fiscal 2016, the Company was able to recognize $0.6 million of deferred excess tax benefits. Equity will be increased by an additional $2.6 million when such excess tax benefits are ultimately realized.

The Company has gross net operating loss carryforwards of $29.3 million and tax credit carryforwards of $14.2 million as of January 31, 2016. The majority of the Company’s net operating loss carryforwards do not expire, the remaining begin to expire in fiscal year 2017. The majority of the Company’s tax credits carryforwards do not expire, the remaining begin to expire in fiscal year 2020.

During the fiscal year ended January 31, 2016, the Company decreased its reserves for uncertain tax positions by $0.4 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,
	2016			2015
	(in thousands)
Unrecognized tax benefits at beginning of the year	$	1,924		$	2,626
Increases as a result of tax positions taken in a prior period		(17	)		85
Increases as a result of tax positions taken in the current period		15			27
Reduction as a result of a lapse of the statute of limitations		(288	)		(649	)
Decreases as a result of tax settlements		(89	)		(165	)
Unrecognized tax benefit at end of year	$	1,545		$	1,924

All of the unrecognized tax benefits included in the balance sheet at January 31, 2016 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 $19,000 for the year ended January 31, 2016. The total amount of interest and penalties recognized in the Consolidated Balance Sheet at January 31, 2016 was $0.2 million.

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 2016:

Jurisdiction	Years Open for Audit
U.S. Federal	FY13 and beyond
California	FY12 and beyond
Michigan	FY12 and beyond
New Jersey	FY12 and beyond
Australia	FY12 and beyond
France	FY14 and beyond
India	FY98, FY99, FY09, FY10, FY12 and beyond
Ireland	FY12 and beyond
United Kingdom	FY15 and beyond