Income Taxes

The provision for income tax consisted of the following (in thousands):



	Years Ended December 31,
	2013			2012			2011
Current:
Federal	$	22,834		$	20,759		$	3,673
State	2,676			(289		)	412
Foreign	9,415			11,639			11,443
Total current	34,925			32,109			15,528

Deferred:
Federal	3,678			2,427			6,761
State	(235		)	314			2,012
Foreign	(3,193		)	(1,591		)	(1,951		)
Total deferred	250			1,150			6,822

Total provision	$	35,175		$	33,259		$	22,350

A reconciliation of the statutory federal income tax rate with j2 Global's effective income tax rate is as follows:



	Years Ended December 31,
	2013		2012			2011
Statutory tax rate	35	%		35	%		35	%
State income taxes, net	0.3			0.5			0.9
Foreign rate differential	(17.9	)		(17.4	)		(16	)
Reserve for uncertain tax positions	4.3			4.9			(5.7	)
Valuation Allowance	1.9			3.2			(0.1	)
IRC Section 199 deductions	(0.5	)		(3.4	)		—
Other	1.6			(1.3	)		2.2
Effective tax rates	24.7	%		21.5	%		16.3	%

The Company's effective rate for each year is normally lower than the 35% U.S. federal statutory plus applicable state income tax rates primarily due to earnings of j2 Global's subsidiaries outside of the U.S. in jurisdictions where the effective tax rate is lower than in the U.S.

Deferred tax assets and liabilities result from differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows (in thousands):



	Years Ended December 31,
	2013		2012
Deferred tax assets:
Net operating loss carryforwards	9,596		2,890
Tax credit carryforwards	9,233		7,600
Accrued expenses	1,196		821
Allowance for bad debt	1,423		1,028
Share-based compensation expense	4,917		5,990
Basis difference in fixed assets	1,266		—
Impairment of investments	161		355
Gain on sale of intangible assets	123		137
Deferred revenue	812		270
State taxes	1,451		1,534
	30,178		20,625
Less: Valuation Allowance	(8,493	)	(5,918	)
Total deferred tax assets	21,685		14,707

Deferred tax liabilities:
Basis difference in fixed assets	—		(84	)
Basis difference in intangible assets	(47,711	)	(38,864	)
Prepaid insurance	(369	)	(224	)
Other	(6,359	)	(5,018	)
Total deferred tax liabilities	(54,439	)	(44,190	)

Net deferred tax assets	(32,754	)	(29,483	)

The Company had approximately $21.7 million and $14.7 million in deferred tax assets as of December 31, 2013 and 2012, respectively, related primarily to tax credit carryforwards, net operating loss carryforwards and differences in share-based compensation between its financial statements and its tax returns. Based on the weight of available evidence, the Company assesses whether it is more likely than not that some portion or all of a deferred tax asset will not be realized. If necessary, j2 Global records a valuation allowance sufficient to reduce the deferred tax asset to the amount that is more likely that not to be realized. The deferred tax assets should be realized through future operating results and the reversal of temporary differences.

As of December 31, 2013, the Company had federal and state (California) net operating loss carryforwards (“NOLs”) of $22.9 million and $0.7 million, respectively, after considering substantial restrictions on the utilization of these NOLs due to “ownership changes” as defined in the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). j2 Global current estimates that all of the above-mentioned federal and a portion of the state NOLs will be available for use before their expiration. However, the Company expects a substantial portion of the state NOL to not be utilizable and thus recorded a valuation allowance against it as of December 31, 2013. These NOLs expire through the year 2028 for the federal and 2030 for the state. In addition, as of December 31, 2013 and 2012, the Company had state research and development tax credits of $0.9 million and $0.4 million, respectively, which last indefinitely. In addition, as of December 31, 2013, the Company had state enterprise zone tax credits of $0.5 million, which last indefinitely.

Certain tax payments are prepaid during the year and included within prepaid expenses and other current assets on the consolidated balance sheet. The Company's prepaid tax payments were $11.3 million and $9.0 million at December 31, 2013 and 2012, respectively.

Uncertain Income Tax Positions

j2 Global accrues liabilities for uncertain income tax positions in accordance with the requirements of ASC 740. During 2013, j2 Global recognized a net increase of $7.1 million in liabilities related to positions taken during 2013. The Company also had a net decrease of $(1.6) million related to the reversal of positions taken in prior years. Accordingly, the Company had $43.9 million in liabilities for uncertain income tax positions at December 31, 2013. Included in this liability amount were $3.0 million accrued for related interest, net of federal income tax benefits and penalties recorded in income tax expense on j2 Global's consolidated statement of income.

A reconciliation of the Company's unrecognized tax benefits, excluding interest and penalties, is as follows (in thousands):



Balance at January 1, 2013	$	35,421
Decreases related to positions taken during a prior period	(1,646		)
Increases related to positions taken in the current period	7,113
Balance at December 31, 2013	$	40,888

Uncertain income tax positions are reasonably possible to significantly change during the next 12 months as a result of completion of income tax audits and expiration of statutes of limitations. At this point it is not possible to provide an estimate of the amount, if any, of significant changes in reserves for uncertain income tax positions as a result of the completion of income tax audits that are reasonably possible to occur in the next 12 months. In addition, the Company cannot currently estimate the amount of, if any, uncertain income tax positions which will be released in the next 12 months as a result of expiration of statutes of limitations due to ongoing audits. As a result of ongoing federal, state and foreign income tax audits (discussed below), it is reasonably possible that our entire reserve for uncertain income tax positions for the periods under audit will be released. It is also reasonably possible that the Company's reserves will be inadequate to cover the entire amount of any such income tax liability.

The Company has not provided U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries as of December 31, 2013 because it intends to permanently reinvest such earnings outside the U.S. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any foreign income taxes previously paid on these earnings and would generate foreign tax credits that would reduce the federal tax liability. As of December 31, 2013, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $389.5 million. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable. Income before income taxes included income from domestic operations of $61.0 million, $54.2 million and $60.5 million for the year ended December 31, 2013, 2012 and 2011, respectively, and income from foreign operations of $81.7 million, $100.7 million and $76.6 million for the year ended December 31, 2013, 2012 and 2011, respectively.

During 2013, 2012 and 2011, the Company recorded tax benefits of $7.1 million, $3.3 million and $15.8 million from the exercise of non-qualifying stock options, restricted stock and disqualifying dispositions of incentive stock options as a reduction of j2 Global's income tax liability and an increase in equity, respectively.

Income Tax Audits:

j2 Global is currently under audit by the California Franchise Tax Board ("FTB") for tax years 2005 through 2007 and during the second quarter of 2013 were notified that the FTB will be auditing it for tax years 2009 through 2011. The FTB has also issued Information Document Requests regarding the 2004 and 2008 tax years, although no formal notice of audit for these years has been provided. During 2013, the Company was notified by the Illinois Department of Revenue that it will be audited for income tax for tax years 2008 and 2009. During 2013, the Company was notified by the New York City Department of Finance that it will be audited for income tax for tax years 2009 through 2011.

The Company is also under audit by the U.S. Internal Revenue Service ("IRS") for tax years 2009 and 2010 and during the second quarter of 2013 received notice that the IRS will be auditing it for tax year 2011. The Company has appealed the IRS tax examiner's decision regarding transfer pricing for tax years 2009 and 2010 with the IRS appeals office and the process remains on-going.

In addition, the Company is under income tax audit by the Canada Revenue Agency ("CRA") for tax years 2010 through 2011. During 2013, we were notified by the CRA that the income tax audit for tax years 2008 and 2009 has concluded with no changes and that tax year 2011 would be subject to an income tax audit. The Company is also under audit by the CRA for Goods and Services Tax for tax period beginning on October 1, 2008 and ending on September 30, 2012.

It is reasonably possible that these audits may conclude in the next 12 months and that the uncertain tax positions the Company has recorded in relation to these tax years may change compared to the liabilities recorded for these periods. If the recorded uncertain tax positions are inadequate to cover the associated tax liabilities, the Company would be required to record additional tax expense in the relevant period, which could be material. If the recorded uncertain tax positions are adequate to cover the associated tax liabilities, the Company would be required to record any excess as reduction in tax expense in the relevant period, which could be material However, it is not currently possible to estimate the amount, if any, of such change.