7.	Income Taxes

Significant components of the provision (benefit) for income taxes for continuing operations are as follows

(in thousands)	2016			2015		2014
Current:
U.S. Federal	$	11		$	5	$	(307	)
U.S. State		8			28		40
Foreign		3,793			1,956		4,088
Total current		3,812			1,989		3,821
Deferred:
U.S. Federal		91			89		112
U.S. State		47			49		(17	)
Foreign		(1,203	)		84		737
Total deferred		(1,065	)		222		832
	$	2,747		$	2,211	$	4,653

Income (loss) before income taxes from continuing operations consisted of the following

(in thousands)	2016			2015			2014
U.S.	$	(13,420	)	$	(5,214	)	$	1,076
Foreign		19,427			13,217			18,357
Total	$	6,007		$	8,003		$	19,433

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and tax purposes. Significant components of our deferred tax assets and liabilities were as follows:

(in thousands)	2016			2015
Deferred tax assets:
Inventory, receivable and warranty reserves	$	5,868		$	8,207
Net operating loss carryforwards		11,681			7,605
Tax credit carryforwards		13,715			12,291
Accrued employee benefits		5,002			4,993
Deferred profit and gain on facility sale		5,412			6,084
Stock-based compensation		4,189			4,443
Acquisition basis differences		1,334			1,544
Other		103			265
Gross deferred tax assets		47,304			45,432
Less valuation allowance		(44,731	)		(42,289	)
Total deferred tax assets		2,573			3,143
Deferred tax liabilities:
Depreciation and fixed asset related		53			227
Acquisition basis differences		7,423			8,904
Other		662			563
Total deferred tax liabilities		8,138			9,694
Net deferred tax liabilities	$	(5,565	)	$	(6,551	)

Companies are required to assess whether a valuation allowance should be recorded against their deferred tax assets (“DTAs”) based on the consideration of all available evidence, using a “more likely than not” realization standard. The

four

sources of taxable income that must be considered in determining whether DTAs will be realized are,

(1)

future reversals of existing taxable temporary differences (i.e. offset of gross deferred tax assets against gross deferred tax liabilities);

(2)

taxable income in prior carryback years, if carryback is permitted under the tax law;

(3)

tax planning strategies and

(4)

future taxable income exclusive of reversing temporary differences and carryforwards.

In assessing whether a valuation allowance is required, significant weight is to be given to evidence that can be objectively verified. We have evaluated our DTAs each reporting period, including an assessment of our cumulative income or loss over the prior

three

-year period and future periods, to determine if a valuation allowance was required. A significant negative factor in our assessment was Cohu's

three

-year cumulative U.S. loss history at the end of various fiscal periods including

2016.

As a result of our cumulative,

three

-year U.S. GAAP pretax loss from continuing operations of approximately

$17.6

million at the end of

2016,

and our U.S. loss in

2016,

we were unable to conclude at

December

31,

2016

that it was “more likely than not” that our U.S. DTAs would be realized. We will evaluate the realizability of our DTAs at the end of each quarterly reporting period in

2017

and should circumstances change it is possible the remaining valuation allowance, or a portion thereof, will be reversed in a future period.

Our valuation allowance on our DTAs at

December

31,

2016

and

December

26,

2015

was approximately

$44.7

million and

$42.3

million, respectively. The remaining gross DTAs for which a valuation allowance was not recorded are realizable through future reversals of existing taxable temporary differences.

As the realization of DTAs is determined by tax jurisdiction, the deferred tax liabilities recorded as part of the

2008

acquisition of Rasco, a German corporation, and the fiscal

2013

acquisition of Ismeca, a Swiss Corporation, were not a source of taxable income in assessing the realization of our DTAs in the U.S.

The reconciliation of income tax computed at the U.S. federal statutory tax rate to the provision for income taxes for continuing operations is as follows:

(in thousands)	2016			2015			2014
Tax provision at U.S. 35% statutory rate	$	2,102		$	2,801		$	6,802
State income taxes, net of federal tax benefit		168			(152	)		119
Settlements, adjustments and releases from statute expirations		(312	)		(104	)		(65	)
Federal tax credits		(183	)		(221	)		(244	)
Stock-based compensation on which no tax benefit provided		168			156			160
Change in valuation allowance		2,430			2,181			437
Non-deductible transaction costs		463			-			-
Foreign income taxed at different rates		(2,378	)		(2,601	)		(2,151	)
Other, net		289			151			(405	)
	$	2,747		$	2,211		$	4,653

State income taxes, net of federal benefit, have been reduced by research tax credits totaling approximately

$0.2

million,

$0.4

million and

$0.5

million in

2016,

2015

and

2014,

respectively.

December

31,

2016,

we had federal, state and foreign net operating loss carryforwards of approximately

$31.0

million,

$22.2

million and

$0.2

million, respectively, that expire in various tax years beginning in

2018

through

2036

or have no expiration date. We also have federal and state tax credit carryforwards at

December

31,

2016

of approximately

$8.2

million and

$13.6

million, respectively, certain of which expire in various tax years beginning in

2017

through

2036

or have no expiration date. The federal and state loss and credit carryforwards are subject to annual limitations under Sections

382

and

383

of the Internal Revenue Code and applicable state tax law.

U.S. income taxes have not been provided on approximately

$49

million of accumulated undistributed earnings of certain foreign subsidiaries, as we currently intend to indefinitely reinvest these earnings in operations outside the U.S. We repatriated

$17.4

million from our Singapore subsidiary in

2016

due to the reduction in business activity of that operation. Our intent is to continue to indefinitely reinvest the remaining funds in our foreign operations and we have no current plans that would require us to repatriate these funds to the U.S. It is not practicable to estimate the amount of tax that might be payable if some or all of such earnings were to be remitted.

We have certain tax holidays with respect to our operations in Malaysia and the Philippines. These holidays require compliance with certain conditions and expire at various dates through

2023.

The impact of these holidays was an increase in net income of approximately

$1.0

million or

$0.04

per share in

2016,

$0.8

million, or

$0.03

per share, in

2015

and not significant in

2014.

A reconciliation of our gross unrecognized tax benefits, excluding accrued interest and penalties, is as follows:

(in thousands)	2016			2015			2014
Balance at beginning of year	$	10,444		$	10,841		$	10,483
Gross additions for tax positions of current year		125			215			761
Gross additions for tax positions of prior years		58			248			365
Reductions due to lapse of the statute of limitations		(446	)		(243	)		(587	)
Foreign exchange rate impact		(106	)		(617	)		(181	)
Balance at end of year	$	10,075		$	10,444		$	10,841

If the unrecognized tax benefits at

December

31,

2016

are ultimately recognized, approximately

$5.2

million

($5.6

million at

December

26,

2015)

would result in a reduction in our income tax expense and effective tax rate. It is reasonably possible that our gross unrecognized tax benefits as of

December

31,

2016

could decrease in

2017

by approximately

$0.8

million as a result of the expiration of certain statutes of limitations.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense. Cohu had approximately

$1.2

million and

$1.4

million accrued for the payment of interest and penalties at

December

31,

2016

and

December

26,

2015,

respectively. Interest expense, net of accrued interest reversed, was not significant in

2016,

$0.1

million in

2015

and not significant in

2014.

Our U.S. federal and state income tax returns for years after

2012

and

2011,

respectively, remain open to examination, subject to the statute of limitations. Net operating loss and credit carryforwards arising prior to these years are also open to examination if and when utilized. The statute of limitations for the assessment and collection of income taxes related to our foreign tax returns varies by country. In the foreign countries where we have significant operations these time periods generally range from

four

ten

years after the year for which the tax return is due or the tax is assessed.