Income Taxes

The components of income from continuing operations before income taxes and income tax expense were as follows:



	Year Ended June 30,
	2017			2016			2015
Income from continuing operations before income taxes:
United States	$	30,499		$	25,194		$	18,443
Foreign	569			92			352
	$	31,068		$	25,286		$	18,795
Tax provision (benefit):
Federal:
Current	$	11,476		$	6,707		$	4,267
Deferred	(7,645		)	(2,627		)	(458		)
	$	3,831		$	4,080		$	3,809
State:
Current	$	3,650		$	1,839		$	1,372
Deferred	(1,684		)	(424		)	(921		)
	$	1,966		$	1,415		$	451
Foreign:
Current	$	240		$	59		$	58
Deferred	156			(10		)	48
	396			49			106
	$	6,193		$	5,544		$	4,366

The following is the reconciliation between the statutory federal income tax rate and the Company’s effective income tax rate for continuing operations:



	Year Ended June 30,
	2017		2016		2015
Tax provision at federal statutory rates	35.0	%	35.0	%	35.0	%
State income tax, net of federal tax benefit	4.9		5.0		4.9
Research and development credits	(6.1	)	(8.4	)	(4.8	)
Excess tax benefits on stock compensation	(13.1	)	(4.4	)	—
Domestic manufacturing deduction	(3.9	)	(3.5	)	(3.2	)
Income from legal settlement excluded from taxable income	—		(2.8	)	—
Deemed repatriation of foreign earnings	(0.1	)	(0.2	)	(0.4	)
Foreign income tax rate differential	0.2		—		—
Equity compensation	0.6		0.3		(0.1	)
Officers' compensation	1.2		2.3		2.8
Deferred tax asset and liability adjustments	—		—		(4.2	)
Change in state tax rates	—		—		(3.1	)
Acquisition costs	0.9		—		—
Reserves for tax contingencies	(0.6	)	(3.2	)	(5.0	)
Other	0.9		1.8		1.3
	19.9	%	21.9	%	23.2	%

The components of the Company’s net deferred tax liabilities for continuing operations were as follows:



	June 30,
	2017			2016
Deferred tax assets:
Inventory valuation and receivable allowances	$	13,845		$	12,768
Accrued compensation	4,555			3,267
Equity compensation	4,858			3,201
Federal and state research and development tax credit carryforwards	13,415			15,870
Gain on sale-leaseback	—			371
Other accruals	2,125			1,570
Deferred compensation	1,606			—
Capital loss carryforwards	3,562			3,562
Other temporary differences	1,500			4,011
	45,466			44,620
Valuation allowance	(16,570		)	(18,472		)
Total deferred tax assets	28,896			26,148
Deferred tax liabilities:
Prepaid expenses	(481		)	(773		)
Property and equipment	(3,749		)	(2,451		)
Intangible assets	(28,163		)	(33,826		)
Tax method of accounting change	(285		)	(570		)
Other temporary differences	(441		)	(370		)
Total deferred tax liabilities	(33,119		)	(37,990		)
Net deferred tax (liabilities) assets	$	(4,223	)	$	(11,842	)

As reported:
Deferred tax assets	$	633		$	—
Deferred tax liabilities	(4,856		)	(11,842		)
	$	(4,223	)	$	(11,842	)

At June 30, 2017, the Company evaluated the need for a valuation allowance on deferred tax assets. In assessing whether the deferred tax assets are realizable, management considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the Company's past operating results, its forecast of future earnings, future taxable income, and tax planning strategies. The Company continues to conclude that it is more likely than not that most domestic deferred tax assets would be realizable based on recent financial performance, projected future taxable income and the reversal of existing deferred tax liabilities.

The Company continues to record a full valuation allowance on capital loss carryforwards and certain state research and development credits as of June 30, 2017 as management continues to believe that it is not more likely than not that these deferred tax assets would be realized. Any future reversals of the valuation allowance will impact income tax expense.

The Company had federal research and development credit carryforwards of $406, which will expire in 2033. The Company had state research and development credit carryforwards of $13,008, which will expire from 2017 through 2032.

Upon consideration of changing business conditions and cash position in its foreign subsidiaries, management has determined that it does not need to indefinitely reinvest the earnings of certain foreign subsidiaries. Therefore, the Company has accrued deferred taxes in association with $794 in undistributed foreign earnings and profits.

The Company files income tax returns in all jurisdictions in which it operates. The Company has established reserves to provide for additional income taxes that management believes will more likely than not be due in future years as these previously filed tax returns are audited. These reserves have been established based upon management’s assessment as to the potential exposures. All tax reserves are analyzed quarterly and adjustments are made as events occur and warrant modification.

The changes in the Company’s reserves for unrecognized income tax benefits are summarized as follows:



	Year Ended June 30,
	2017			2016
Unrecognized tax benefits, beginning of period	$	1,566		$	2,190
Increases for previously recognized positions	46			79
Settlements of previously recognized positions	(793		)	—
Reductions as a result of a lapse of the applicable statute of limitations	(273		)	—
Increases for currently recognized positions	384			302
Reductions for previously recognized positions deemed effectively settled	—			(681		)
Reductions for previously recognized positions	(126		)	(324		)
Unrecognized tax benefits, end of period	$	804		$	1,566

The $804 of unrecognized tax benefits as of June 30, 2017, if released, would reduce income tax expense.

The Company’s major tax jurisdiction is the U.S. and the open tax years are fiscal 2014 through 2017.

The Internal Revenue Service (the “IRS”) accepted the final examination report during the fourth quarter of fiscal year 2017 in connection with the IRS’s examination of the Company’s consolidated federal income tax returns for the fiscal year 2013, which resolved various tax matters for the Company. As a result of the acceptance, the Company recorded a $273 income tax benefit attributable to the reversal of tax reserves and $793 for amounts previously reserved that were settled through the examination process. The Company received a refund of $1,598 during July 2017 in connection with the conclusion of the IRS examination.

The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of June 30, 2017 and 2016, the total amount of gross interest and penalties accrued was $54 and $258, respectively. In connection with tax matters, the Company recognized interest and penalty expense in fiscal 2017, 2016 and 2015 of $30, $204 and $26, respectively.