INCOME TAXES

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



	Year Ended March 31,
	2017		2016			2015
Domestic	$	32,475	$	(6,979	)	$	93,447
Foreign	19,710		(25,460		)	1,518
	$	52,185	$	(32,439	)	$	94,965

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



	Year Ended March 31,
	2017			2016			2015
Current income tax expense:
Federal	$	15,912		$	29,238		$	25,927
State	3,152			2,223			3,825
Foreign	11,175			6,628			1,307
	30,239			38,089			31,059
Deferred income tax expense (benefit):
Federal	(8,278		)	(30,216		)	2,836
State	3,578			(4,461		)	17
Foreign	(6,645		)	(7,482		)	(139		)
	(11,345		)	(42,159		)	2,714
	$	18,894		$	(4,070	)	$	33,773

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



	Year Ended March 31,
	2017		2016		2015
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal tax effect	9.7		3.1		3.2
Research and development tax credits	(8.2	)	13.0		(1.4	)
Effect of foreign operations	(6.7	)	(18.2	)	0.1
Meals and entertainment	2.5		(3.5	)	0.5
Domestic production activities deduction	(4.0	)	9.2		(2.9	)
Change in valuation allowance	(0.1	)	0.7		0.4
Transaction costs	—		(19.1	)	—
Foreign withholding	3.8		(6.1	)	—
Other permanent differences	4.2		(1.6	)	0.7
	36.2	%	12.5	%	35.6	%

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



	Year Ended March 31,
	2017			2016
Deferred tax assets:
Accrued expenses	$	4,883		$	6,734
Deferred revenue	8,427			13,913
Reserves	6,240			7,916
Pension and other retiree benefits	4,978			4,842
Net operating loss carryforwards	27,322			41,225
Tax credit carryforwards	5,502			5,824
Share-based compensation	6,418			4,975
Other	288			426
Total gross deferred tax assets	64,058			85,855
Valuation allowance	(3,374		)	(3,777		)
Net deferred tax assets	60,684			82,078
Deferred tax liabilities:
Intangible assets	(323,008		)	(354,601		)
Depreciation	(8,695		)	(6,630		)
Total deferred tax asset (liability)	$	(271,019	)	$	(279,153	)

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., and for certain deferred tax assets related to the acquisition of ONPATH. 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, 2017, undistributed earnings of non-U.S. subsidiaries totaled approximately $58 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. At this time, the Company has deemed it to be impracticable to determine the amount of any taxes payable if these amounts were to be repatriated to the United States.

At March 31, 2017, the Company had United States federal net operating loss carry forwards of approximately $39 million, state net operating loss carryforwards of approximately $69 million and tax credit carryforwards of approximately $6 million. The net operating loss and credit carryforwards will expire at various dates beginning in 2018. The Company also had foreign net operating loss carryforwards of approximately $71 million at March 31, 2017. 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 2014, although carryforward attributes that were generated prior to 2014 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.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the fiscal years ended March 31, 2017, 2016 and 2015 is as follows (in thousands):



	Year Ended March 31,
	2017			2016		2015
Balance at April 1,	$	1,588		$	1,038	$	421
Additions based on tax positions related to the current year	46			48		45
Release of tax positions of prior years	(154		)	—		(75		)
Increase in unrecognized tax benefits as a result of a tax position taken during a prior period	1,446			502		647
Balance at March 31,	$	2,926		$	1,588	$	1,038

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.