INCOME TAXES

Income before income tax expense consisted of the following (in thousands):



	Year Ended March 31,
	2015		2014			2013
Domestic	$	93,447	$	80,515		$	66,735
Foreign	1,518		(2,659		)	(2,999		)
	$	94,965	$	77,856		$	63,736

The components of the income tax expense are as follows (in thousands):



	Year Ended March 31,
	2015			2014			2013
Current income tax expense:
Federal	$	25,927		$	20,123		$	15,826
State	3,825			2,260			2,266
Foreign	1,307			1,174			1,035
	31,059			23,557			19,127
Deferred income tax expense (benefit):
Federal	2,836			5,347			5,161
State	17			96			320
Foreign	(139		)	(250		)	(1,481		)
	2,714			5,193			4,000
	$	33,773		$	28,750		$	23,127

The income tax expense computed using the federal statutory income tax rate differs from NetScout’s effective tax rate primarily due to the following:



	Year Ended March 31,
	2015		2014		2013
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal tax effect	3.2		2.8		3.6
Research and development tax credits	(1.4	)	(1.9	)	(2.1	)
Tax rate differential of foreign operations	0.1		0.2		0.7
Domestic production activities deduction	(2.9	)	(2.7	)	(2.9	)
Change in valuation allowance	0.4		2.0		0.4
Transaction costs	—		—		0.7
Other	1.2		1.5		0.9
	35.6	%	36.9	%	36.3	%

The components of net deferred tax assets are as follows (in thousands):



	Year Ended March 31,
	2015			2014
Assets:
Accrued expenses	$	3,730		$	3,954
Depreciation	(732		)	140
Deferred revenue	9,054			8,873
Reserves	1,651			1,006
Net operating loss carryforwards	19,214			23,730
Tax credit carryforwards	3,838			3,628
Share-based compensation	2,660			2,125
Transaction related costs	4,001			—
Other	808			233
	44,224			43,689
Liabilities:
Intangible assets	(29,202		)	(25,659		)
Valuation allowance	(3,906		)	(4,941		)
	$	11,116		$	13,089

Deferred tax assets and liabilities are recognized based on the anticipated future tax consequences, attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. We evaluate the recoverability of deferred tax assets by considering all positive and negative evidence relating to future profitability. We weigh objective and verifiable evidence more heavily in this analysis. In situations where we conclude that we do not have sufficient objective and verifiable evidence to support the realizability of the asset we create a valuation allowance against it. A valuation allowance has been established for the deferred tax assets related to Psytechnics Ltd., NetScout Systems Italy Srl. and for certain deferred tax assets related to the acquisition of ONPATH, as well as for the federal foreign tax credits acquired as part of the Network General acquisition, as the Company has determined there is not sufficient objective evidence to support the realizability of these tax assets. If it is later determined the Company is able to use all or a portion of the deferred tax assets for which a valuation allowance has been established, then the Company may be required to recognize these deferred tax assets through a tax benefit recorded in the period such determination is made.

At March 31, 2015, undistributed earnings of non-U.S. subsidiaries totaled $21.3 million. No provision for U.S. income and foreign withholding taxes has been made for these permanently invested foreign earnings because it is expected that such earnings will be reinvested indefinitely. If these earnings were distributed to the United States in the form of dividends or otherwise, they would be included in the Company’s U.S. taxable income. The amount of unrecognized deferred income tax liability related to these earnings is approximately $1.9 million.

At March 31, 2015, the Company had United States federal net operating loss carryforwards of $34.2 million, state net operating loss carryforwards of approximately $67.3 million and gross federal and state research and development tax carryforwards of $4.5 million. The net operating loss and credit carryforwards will expire at various dates beginning in 2023 and extending through 2033, if not utilized. The Company also had foreign net operating loss carryforwards of approximately $19.5 million at March 31, 2015. The majority of foreign net operating losses have no expiration dates. Utilization of the U.S. net operating losses and credits are subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state tax provisions.

The Company files U.S. federal tax returns and files returns in various state, local and foreign jurisdictions. With respect to the U.S. federal and primary state jurisdictions, the Company is no longer subject to examinations by tax authorities for tax years before 2013, although carryforward attributes that were generated prior to 2013 may still be adjusted upon examination if they either have been or will be used in a future period. The Company also receives inquiries from various tax jurisdictions during the year, and some of those inquiries may include an audit of the tax return previously filed. In the normal course of business, NetScout and its subsidiaries are examined by various taxing authorities, including the IRS in the United States. At March 31, 2015, the Company remained subject to examination in the United States for the 2013 and 2014 tax years.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the fiscal years ended March 31, 2015, 2014 and 2013 is as follows (in thousands):



	Year Ended March 31,
	2015			2014		2013
Balance at April 1,	$	421		$	370	$	335
Additions based on tax positions related to the current year	45			51		35
Release of tax positions of prior years	(75		)	—		—
Increase in unrecognized tax benefits as a result of a tax position taken during a prior period	647			—		—
Balance at March 31,	$	1,038		$	421	$	370

The Company notes that a majority of the unrecognized tax benefits are in the appeals process in foreign jurisdictions. We are unable to make a reliable estimate when cash settlement, if any, will occur with a tax authority as the timing of examinations and ultimate resolution of those examinations is uncertain. All of the unrecognized tax benefits would affect the effective tax rate if recognized.

The Company includes interest and penalties accrued in the consolidated financial statements as a component of the tax provision.