

NOTE 10.	Income Taxes

The Company’s geographical breakdown of income before provision for income taxes is as follows:



	Year Ended December 31,
	2013		2012		2011
	(in thousands)
Domestic	$	947	$	1,656	$	1,593
Foreign	1,177		982		777
Income before provision for income taxes	$	2,124	$	2,638	$	2,370

The provision for income taxes consists of the following:



	Year Ended December 31,
	2013			2012			2011
	(in thousands)
Current
Federal	$	(40	)	$	(18	)	$	45
State	154			202			112
Foreign	452			147			259
Total current provision	566			331			416
Deferred
Federal	$	6		$	27		$	—
State	—			—			—
Foreign	(72		)	—			—
Total deferred provision (benefit)	(66		)	27			—
Total provision for income taxes	$	500		$	358		$	416

The reconciliation of the statutory federal income tax rate of 34.0% to the Company’s effective tax rate is as follows:



	Year Ended December 31,
	2013		2012		2011
Federal statutory rate	34.0	%	34.0	%	34.0	%
State taxes	4.9		5.4		3.5
Stock-based compensation	8.7		22.4		19.4
Foreign source income	0.5		(4.1	)	1.4
Change in valuation allowance	(27.3	)	(46.9	)	(44.0	)
Other	2.7		2.8		3.3
Provision for income taxes	23.5	%	13.6	%	17.6	%

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the Company’s deferred tax assets and liabilities are as follows:



	December 31,
	2013			2012
	(in thousands)
Deferred tax assets
Net operating loss carryforwards	$	18,894		$	19,658
Research and development credit carryforwards	5,189			4,055
Accrued liabilities	581			535
Deferred revenues	3,188			3,085
Deferred rent	210			153
Intangible assets	440			385
Stock-based compensation	1,714			843
Foreign	—			4
Other	521			403
Gross deferred tax assets	30,737			29,121
Valuation allowance	(27,181		)	(26,257		)
Net deferred tax assets	3,556			2,864
Deferred tax liabilities
Fixed assets	(3,484		)	(2,854		)
Intangible assets	(34		)	(27		)
Total deferred tax liabilities	(3,518		)	(2,881		)
Net deferred tax assets (liabilities)	$	38		$	(17	)

Current and non-current deferred tax assets and liabilities included in the consolidated balance sheets are recorded as follows:



	December 31,
	2013			2012
	(in thousands)
Current deferred tax assets	$	113		$	106
Current deferred tax liabilities	—			—
Noncurrent deferred tax assets	72			—
Noncurrent deferred tax liabilities	(147		)	(123		)
Net deferred tax assets (liabilities)	$	38		$	(17	)

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. As of December 31, 2013, we have provided a valuation allowance for our deferred tax assets that we believe are not more likely than not realizable. The valuation allowance increased by $0.9 million for 2013 and decreased by $0.5 million for 2012.

At December 31, 2013, the Company had federal and state net operating loss carryforwards of approximately $51.4 million and $21.9 million respectively, available to reduce federal and state taxable income. The Company’s federal net operating losses expire in the years 2021 to 2033, and its state net operating losses expire from 2014 to 2033. Utilization of the Company’s net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss carryforwards before utilization. As of December 31, 2013, the Company had federal and state research and development credits of $4.3 million and $4.6 million, respectively. Federal research and development credits expire in the years 2022 to 2033. State research and development credits do not expire.

U.S. income taxes were not provided on undistributed earnings from investments in non-U.S. subsidiaries as the Company intends to continue to reinvest the earnings of these foreign subsidiaries indefinitely. The Company’s share of undistributed earnings of foreign subsidiaries that could be subject to additional U.S. income tax if remitted was approximately $8.5 million and $8.2 million as of December 31, 2013 and 2012, respectively. Determination of the amount of unrecognized deferred tax liability for temporary differences related to investments in these non-U.S. subsidiaries that are essentially permanent in duration is not practicable.

The evaluation of a tax position is a two-step process. The first step requires the Company to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. The second step requires the Company to recognize in the financial statement each tax position that meets the more likely than not criteria, measured at the amount of benefit that has a greater than fifty percent likelihood of being realized.

A reconciliation of the Company’s unrecognized tax benefits is as follows:



	Year Ended December 31,
	2013			2012			2011
	(in thousands)
Unrecognized tax benefits beginning balance	$	2,647		$	2,792		$	2,648
Gross increase for tax positions of prior years	241			—			87
Gross decrease for tax positions of prior years	—			(46		)	(120		)
Gross increase for tax positions of current year	446			140			242
Settlements	—			(106		)	—
Lapse of statute of limitations	(79		)	(133		)	(65		)
Total unrecognized tax benefits	$	3,255		$	2,647		$	2,792

The unrecognized tax benefits, if recognized and in absence of full valuation allowance, would impact the income tax provision by $1.0 million, $1.0 million and $1.2 million as of December 31, 2013, 2012 and 2011, respectively.

The Company has elected to include interest and penalties as a component of income tax expense. The amounts were not material for 2013, 2012 and 2011.

The Company files income tax returns in the United States, including various state jurisdictions. The Company’s subsidiaries file tax returns in various foreign jurisdictions. The tax years 2008 to 2013 remain open to examination by the major taxing jurisdictions in which the Company is subject to tax, with the exception of France which remains open to examination for the 2011 through 2013 tax years only. As of December 31, 2013, the Company was not under examination by the Internal Revenue Service or any state tax jurisdictions.

On January 2, 2013, the American Taxpayer Relief Act of 2012 (H.R. 8) was signed into law which retroactively extends the federal research and development credit from January 1, 2012 through December 31, 2013.