INCOME TAXES

Income Tax Expense

Income from continuing operations before income taxes was as follows (in thousands):



	Year Ended December 31,
	2015		2014		2013
United States	$	39,242	$	29,115	$	15,386
Non-U.S.	780		1,109		653
	$	40,022	$	30,224	$	16,039

Income tax expense (benefit) from continuing operations was as follows (in thousands):



	Year Ended December 31,
	2015			2014			2013
Current:
U.S. federal	$	858		$	1,086		$	541
U.S. state	171			100			56
Non-U.S.	355			222			(12		)
Total current	1,384			1,408			585
Deferred:
U.S. federal	11,324			8,913			(29,552		)
U.S. state	573			(558		)	(3,370		)
Non-U.S.	(62		)	78			252
Total deferred	11,835			8,433			(32,670		)
	$	13,219		$	9,841		$	(32,085	)

Following is a reconciliation of the U.S. statutory federal income tax rate with our effective income tax rate for continuing operations:



	Year Ended December 31,
	2015		2014		2013
U.S. statutory income tax rate	35.0	%	35.0	%	35.0	%
State tax, net of U.S. federal tax benefit	2.6		2.5		2.9
Non-U.S. income taxes	(0.1	)	(0.3	)	1.2
Nondeductible operating expenses	0.8		0.2		(0.4	)
Research and development credit	(0.6	)	(2.4	)	(0.7	)
Change in deferred tax measurement rate	—		0.1		0.2
Change in uncertain tax positions	1.1		1.5		2.2
Expiration of capital loss carryforward	—		—		26.9
Change in valuation allowance	(5.8	)	(4.1	)	(267.6	)
Other	—		0.1		0.2
Effective income tax rate	33.0	%	32.6	%	(200.1	)%

Deferred Income Taxes

Individually significant components of deferred income tax assets and liabilities were as follows (in thousands):



	December 31,
	2015			2014
Deferred income tax assets:
Accrued liabilities	$	6,392		$	3,510
Allowance for doubtful accounts	467			33
Inventory valuation	818			377
Capitalized indirect inventory costs	671			295
Stock-based compensation expense	693			558
Deferred rent	869			—
Net operating loss carryforward	3,361			19,742
Basis difference on long-lived assets	1,810			3,289
Credit carryforward	3,736			4,565
Other	171			339
Gross deferred income tax assets	18,988			32,708
Valuation allowance	(888		)	(6,156		)
Deferred income tax assets, net of valuation allowance	18,100			26,552
Deferred income tax liabilities:
Prepaid advertising	(523		)	(467		)
Other prepaids	(579		)	(696		)
Basis difference on long-lived assets	(26,285		)	(3,355		)
Undistributed earnings of foreign subsidiaries	(188		)	(179		)
Other	(1		)	(1		)
Deferred income tax liabilities	(27,576		)	(4,698		)
Net deferred income tax assets (liabilities)	$	(9,476	)	$	21,854

Our net deferred income tax assets (liabilities) were recorded on our consolidated balance sheets as follows (in thousands):



	December 31,
	2015			2014
Deferred income tax assets	$	8,904		$	12,368
Long-term deferred income tax assets	—			9,546
Long-term deferred income tax liabilities	(18,380		)	—
Other long-term liabilities	—			(60		)
Net deferred income tax assets (liabilities)	$	(9,476	)	$	21,854

The table of deferred tax assets and liabilities shown above does not include certain deferred tax assets as of December 31, 2015 and 2014, that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting. Instead, equity will be increased by $1.4 million if and when such deferred tax assets are ultimately realized. We use FASB ASC 740 ordering for purposes of determining when excess tax benefits have been realized.

We account for income taxes based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. We have recorded a valuation allowance to reduce our deferred income tax assets to the amount we believe is more likely than not to be realized. Evaluating the need for, and amount of, a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence on a jurisdiction-by-jurisdiction basis. Such judgments require us to interpret existing tax law and other published guidance as applied to our circumstances. As part of this assessment, we consider both positive and negative evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which the strength of the evidence can be objectively verified.

Each quarter, we assess the total weight of positive and negative evidence including cumulative income or loss for the past three years and forecasted taxable income and re-evaluate whether any adjustments or release of all or any portion of valuation allowance is appropriate. As a result of this evaluation, in 2014, we determined that a portion of the existing valuation allowance against the state net operating loss deferred tax assets was no longer necessary. Accordingly, an income tax benefit of $1.2 million was recorded in the fourth quarter of 2014 related to the reduction of our existing valuation allowance. Further, in the fourth quarter of 2015, after re-evaluating the potential realization of the remainder of our deferred income tax assets, we concluded that, as of December 31, 2015, the existing valuation allowance against the foreign tax credit deferred tax assets as well as the substantially all of the remaining valuation allowance against the state net operating loss deferred tax assets were no longer necessary. As such, an income tax benefit of $2.4 million was recorded in the fourth quarter of 2015 related to the reduction of our existing valuation allowance.

As of December 31, 2015, we have a valuation allowance against net deferred income tax assets of $0.9 million. Of the remaining valuation allowance, $0.6 million primarily relates to domestic tax credit carryforwards as we currently do not anticipate generating the income of appropriate character to utilize those credits. The remainder of $0.3 million relates to foreign net operating loss carryforwards. Should it be determined in the future that it is more likely than not that our domestic deferred income tax assets will be realized, an additional valuation allowance would be released during the period in which such an assessment is made. There have been no material changes to our foreign operations since December 31, 2014 and, accordingly, we maintain our existing valuation allowance on foreign deferred income tax assets in such jurisdictions at December 31, 2015.

Income Tax Carryforwards

As of December 31, 2015, we had the following income tax carryforwards (in millions):



	Amount		Expires in
Net operating loss carryforwards
U.S. State	$	71.1	2016 - 2035
China	$	0.3	2020
Italy	$	0.8	2016 - 2017
Income tax credit carryforwards
U.S. Federal	$	3.2	2018 - 2035
U.S. State	$	0.5	2018 - 2022

As previously mentioned, the table of tax attributes shown above does not include deferred tax assets created by, and associated with, excess tax benefits arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting.

The timing and manner in which we are permitted to utilize our net operating loss carryforwards may be limited by Internal Revenue Code Section 382, Limitation on Net Operating Loss Carry-forwards and Certain Built-in-Losses Following Ownership Change.

Unrecognized Tax Benefits

Following is a reconciliation of gross unrecognized tax benefits from uncertain tax positions, excluding the impact of penalties and interest (in thousands):



	Year Ended December 31,
	2015			2014			2013
Balance, January 1	$	2,768		$	1,964		$	2,530
Additions for tax positions taken in prior years	1			72			166
Reductions for tax positions taken in prior years	(426		)	—			(472		)
Additions for tax positions related to the current year	43			821			54
Settlements	—			—			—
Lapses of statutes of limitations	—			(89		)	(314		)
Other	133			—			—
Balance, December 31	$	2,519		$	2,768		$	1,964

Of the $2.5 million of gross unrecognized tax benefits from uncertain tax positions outstanding as of December 31, 2015, $2.4 million would affect our effective tax rate if recognized.

We recorded tax-related interest and penalties of $0.5 million, $0.4 million and $0.0 million in 2015, 2014 and 2013, respectively. We had a cumulative liability for interest and penalties related to uncertain tax positions as of December 31, 2015 and 2014 of $2.5 million and $2.0 million, respectively.

Our U.S. federal income tax returns for 2009 through 2015 are open to review by the U.S. Internal Revenue Service. Our state income tax returns for 2006 through 2015 are open to review, depending on the respective statute of limitation in each state. In addition, we file income tax returns in several non-U.S. jurisdictions with varying statutes of limitation.

As of December 31, 2015, we believe it is reasonably likely that, within the next 12 months, $0.6 million of the previously unrecognized tax benefits related to certain non-U.S. filing positions will be recognized as we anticipate the deregistration of certain entities.