5. Income Taxes

The income tax expense (benefit) included in the accompanying consolidated statement of operations represents federal, state and foreign income taxes. The components of income (loss) before income taxes and the expense (benefit) for income taxes consist of the following:


Years ended December 31		2015		2014		2013
Income (loss) before income taxes:
Domestic	$	22,959	$	1,635	$	5,771
Foreign		(2,729)		(54,695)		17,555
Total income (loss) before income taxes	$	20,230	$	(53,060)	$	23,326

Provision for income taxes:
Current:
Federal	$	386	$	-	$	-
State and foreign		1,232		1,382		5,878
Total current expense		1,618		1,382		5,878

Deferred:
Federal		-		-		-
State and foreign		(2,165)		(3,238)		(3,081)
Total deferred benefit		(2,165)		(3,238)		(3,081)
Total income tax expense (benefit)	$	(547)	$	(1,856)	$	2,797

A reconciliation of the Company’s effective income tax rate to the statutory federal tax rate is as follows:


Years ended December 31	2015		2014		2013
Statutory U.S. federal income tax rate	35.0	%	(35.0)	%	35.0	%
State income taxes, net of federal tax benefit	0.2		-		2.4
Tax credits	(2.8)		(1.3)		(3.5)
Foreign tax rate differential	(3.3)		0.2		(9.5)
Reduction (increase) of income tax accruals	(0.5)		0.2		(1.1)
Tax on foreign dividends, net of foreign tax credits	-		(0.1)		(8.1)
Reduction of deferred taxes	5.5		-		0.6
Valuation allowances	(36.0)		(2.1)		(6.2)
Loss of domestic flow-through entity not attributable to Stoneridge, Inc.	-		33.9		-
Non-deductible compensation	(1.5)		1.0		3.0
Other	0.7		(0.3)		(0.6)
Effective income tax rate	(2.7)	%	(3.5)	%	12.0	%

The Company recognized income tax expense (benefit) of $(547) or (2.7)%, $(1,856) or (3.5)% and $2,797 or 12.0% of income (loss) before income taxes for federal, state and foreign income taxes for the years ended December 31, 2015, 2014 and 2013, respectively. The decrease in tax benefit for the year ended December 31, 2015 compared to the same period for 2014 was predominantly due to the impact of recording a valuation allowance against the PST deferred tax assets. The increase in the effective tax rate to (2.7)% in 2015 from (3.5)% in 2014 was primarily due to providing a valuation allowance in 2015 with respect to the deferred tax assets of PST. The impact on the effective tax rate due to the PST valuation allowance was offset by the impact of the improvement in the performance of the U.S. operations, which do not attract tax due to the full valuation allowance, and the prior year impact of the nondeductible goodwill impairment in 2014 that did not impact the effective tax rate for 2015.

The Company has not recorded deferred income taxes on the undistributed earnings of its foreign subsidiaries because of management’s intent and ability to indefinitely reinvest such earnings. At December 31, 2015 the aggregate undistributed earnings of our foreign subsidiaries amounted to $37,648. The Company may be subject to U.S. income taxes and foreign withholding taxes if these earnings were distributed. It is not practicable to estimate the amount of taxes, if any, that may be payable on these earnings as that estimate depends upon circumstances that would exist at the time a remittance occurs.

Significant components of the Company’s deferred tax assets and liabilities were as follows:


As of December 31		2015		2014
Deferred tax assets:
Inventories	$	2,108	$	2,009
Employee compensation and benefits		3,902		3,675
Insurance		281		387
Depreciation and amortization		1,297		1,013
Net operating loss carryforwards		39,846		48,166
General business credit carryforwards		12,990		12,697
Other reserves		5,643		7,493
Gross deferred tax assets		66,067		75,440
Less: Valuation allowance		(59,391)		(67,907)
Deferred tax assets less valuation allowance		6,676		7,533

Deferred tax liabilities:
Depreciation and amortization		(13,282)		(20,910)
Basis difference - equity investee		(31,016)		(31,016)
Other		(1,074)		(976)
Gross deferred tax liabilities		(45,372)		(52,902)

Net deferred tax liability	$	(38,696)	$	(45,369)

Based on a review of objective positive and negative evidence at December 31, 2015 and 2014, the Company continued to conclude that it is more-likely-than-not that the U.S. federal, and certain state and foreign, deferred tax assets will not be realized before they expire, and as such, a valuation allowance continued to be recorded. During the fourth quarter of 2015, the Company concluded that it was more-likely-than-not that the deferred tax assets of PST will not be realized. As a result the Company provided a full valuation allowance, net of certain future reversing taxable temporary differences, with respect to PST’s deferred tax assets. The total valuation allowance represents the amount of tax benefit related to U.S. federal, state and foreign net operating losses, credits and other deferred tax assets that are not recognized at December 31, 2015 and 2014.

The Company has net operating loss carry forwards of $89,800, $28,031 and $29,721 for U.S. federal, state and foreign tax jurisdictions, respectively. The U.S. federal net operating losses, if unused, begin to expire in 2026, the state net operating losses expire at various times and the foreign net operating losses expire at various times or have indefinite expiration dates. The Company has general business and foreign tax credit carry forwards of $14,003, $1,602 and $1,404 for U.S. federal, state and foreign jurisdictions respectively. The U.S. federal general business credits, if unused, begin to expire in 2021, and the state and foreign tax credits expire at various times.

The Company is required to provide a deferred tax liability corresponding to the difference between the financial reporting basis (which was remeasured to fair value upon the acquisition of an additional 24% of PST in 2011) and the tax basis in the previously held 50% ownership interest in PST (the “outside” basis difference). This outside basis difference will generally remain fixed until (1) dividends from the subsidiary exceed the parent’s share of earnings subsequent to the date it became a subsidiary or (2) there is a transaction that affects the Company’s ownership of PST.

The following is a reconciliation of the Company’s total gross unrecognized tax benefits:


		2015		2014		2013
Balance as of January 1	$	3,888	$	3,624	$	3,416

Tax positions related to the current year:
Additions		201		217		217
Tax positions related to the prior years:
Additions		523		168		216
Reductions		-		-		(71)
Expirations of statutes of limitation		(308)		(121)		(154)

Balance as of December 31	$	4,304	$	3,888	$	3,624

At December 31, 2015 the Company has classified $290 as a noncurrent liability and $3,993 as a reduction to non-current deferred income tax assets. The amount of unrecognized tax benefits is not expected to change significantly during the next 12 months. Management is currently unaware of issues under review that could result in a significant change or a material deviation in this estimate.

If the Company’s tax positions are sustained by the taxing authorities in favor of the Company, the amount that would affect the Company’s effective tax rate is approximately $4,280 and $3,851 at December 31, 2015 and 2014, respectively.

The Company has elected to classify interest expense and, if applicable, penalties which could be assessed related to unrecognized tax benefits as a component of income tax expense (benefit). For the years ended December 31, 2015, 2014 and 2013, the Company recognized approximately $(90), $(411) and $(82) of gross interest and penalties, respectively, within income tax expense (benefit). The Company has accrued approximately $123 and $213 for the payment of interest and penalties at December 31, 2015 and 2014, respectively.

The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. The following table summarizes the open tax years for each important jurisdiction:


Jurisdiction	Open Tax Years
U.S. Federal		2012-2015
Brazil		2010-2015
China		2012-2015
France		2011-2015
Mexico		2011-2015
Spain		2011-2015
Sweden		2010-2015
United Kingdom		2011-2015