Income Taxes

Income from continuing operations before taxes for the years ended December 31, 2013, 2012 and 2011 is as follows:



	2013		2012			2011
United States	$	48,964	$	62,204		$	63,575
Foreign	3,750		(365		)	2,847
	$	52,714	$	61,839		$	66,422

The provision (benefit) for income taxes for the years ended December 31, 2013, 2012 and 2011 is as follows:



	2013			2012			2011
Current:
Federal	$	14,575		$	21,072		$	19,246
State	2,145			2,080			1,246
Foreign	(70		)	678			785
	16,650			23,830			21,277
Deferred:
Federal	$	164		$	(2,276	)	$	169
State	(996		)	(796		)	326
Foreign	(3,522		)	(200		)	(19		)
	(4,354		)	(3,272		)	476
	$	12,296		$	20,558		$	21,753

Current income taxes payable were reduced from the amounts in the above table by $7.0 million, $4.6 million and $4.3 million in 2013, 2012 and 2011, respectively, equal to the direct tax benefit that we receive upon exercise of stock options by employees and directors. That benefit is allocated to stockholders’ equity. We have accrued for tax contingencies for potential tax assessments, and in 2013 we recognized a $1.3 million net decrease of accruals most of which relates to various federal, state and foreign tax reserves.

Reconciliations of the provision for income taxes at the statutory rate to our effective tax rate for the years ended December 31, 2013, 2012 and 2011 are as follows:



	2013					2012					2011
	Amount			Percent		Amount			Percent		Amount			Percent
Federal tax at the expected statutory rate	$	18,450		35.0	%	$	21,644		35.0	%	$	23,247		35.0	%
State income tax, net of federal effect	1,126			2.1	%	1,356			2.2	%	1,460			2.2	%
Tax credits	(1,974		)	(3.7	)%	(1,465		)	(2.4	)%	(1,171		)	(1.8	)%
Tax-exempt interest and dividends	—			—	%	(23		)	(0.1	)%	(45		)	(0.1	)%
Domestic production activities/other	(403		)	(0.8	)%	(1,559		)	(2.5	)%	(1,508		)	(2.3	)%
Foreign income tax	(4,903		)	(9.3	)%	605			1.0	%	(230		)	(0.3	)%
	$	12,296		23.3	%	$	20,558		33.2	%	$	21,753		32.7	%

Tax credits in 2013, 2012 and 2011 consist principally of research and developmental tax credits. The indirect effect of non-statutory stock options exercised on research and development tax credits and other tax credits were recorded as reductions of the effective tax provision.

The components of our deferred income tax provision for the years ended December 31, 2013, 2012 and 2011 are as follows:



	2013			2012			2011
Allowance for doubtful accounts	$	4		$	(59	)	$	(24	)
Inventory reserves	341			143			1,147
Accruals	(470		)	(2,375		)	(464		)
State income taxes	552			177			(7		)
Acquired future tax deductions	40			50			293
Depreciation and amortization	(3,850		)	(700		)	(205		)
Tax credits	(971		)	(508		)	(264		)
	$	(4,354	)	$	(3,272	)	$	476

The components of our deferred income tax assets (liabilities) at December 31, 2013 and 2012 are as follows:



	2013			2012
Current deferred tax assets:
State income taxes	$	298		$	437
Foreign	706			400
Accruals/other	1,973			1,881
Tax credits	276			441
Allowance for doubtful accounts	140			101
Inventory reserves	958			1,247
Current deferred tax asset before valuation allowance	$	4,351		$	4,507
Valuation allowance	—			(214		)
	4,351			4,293
Non-current deferred tax asset:
Foreign	$	1,338		$	983
Accruals/other	546			536
Depreciation and amortization	(429		)	(458		)
Tax credits state	6,063			4,927
Non-current deferred tax asset before valuation allowance	$	7,518		$	5,988
Valuation allowance	$	—		$	(346	)
	$	7,518		$	5,642
Non-current deferred tax liability:
State income taxes	$	(2,163	)	$	(1,751	)
Foreign	—			(2,301		)
Accruals/other	(186		)	(186		)
Depreciation and amortization	(5,906		)	(6,429		)
Acquired future tax deductions	(610		)	(515		)
Stock-based compensation	5,684			5,581
Foreign currency translation adjustments	(449		)	354
	$	(3,630	)	$	(5,247	)

Acquired future tax deductions are the tax benefits included in our consolidated income tax returns originating in Bio-Plexus, Inc., an entity purchased in 2002, prior to when we acquired the entity. They consist of: (a) the net tax benefit of items expensed for financial statement purposes but capitalized and amortized for tax purposes and (b) the tax benefited portion of Bio-Plexus’s NOL carry-forward which will be realized in approximately equal amounts over the next 10 years. Under Section 382 of the Internal Revenue Code, certain ownership changes limit the utilization of the NOL carry-forwards, and the amount of Bio-Plexus federal NOL carry-forwards recorded is the net federal benefit available.

We have tax credits that we expect to utilize in future periods that may be carried forward indefinitely. Tax benefits were recognized in 2013 for the 2012 federal research and developmental credits as a result of tax legislation enacted in 2013.

Our Mexican subsidiary recognized a one-time tax benefit as a result of new tax legislation enacted in 2013.

Foreign currency translation adjustments, and related tax effects, are an element of “other comprehensive income” and are not included in net income.

The realization of deferred tax assets is dependent on generating sufficient foreign taxable income in the years that the temporary difference becomes deductible. As of December 31, 2012, a valuation allowance related to a foreign tax loss carry-forward had been provided in the past for the portion of the deferred tax assets that we determined is more likely than not to remain unrealized based on estimated future taxable income and tax planning strategies. A valuation allowance of $0.6 million was recorded against its gross deferred tax asset balance as of December 31, 2012. Based on the results for the year ended December 31, 2013, sufficient taxable profits exist and are estimated for future years resulting in a reversal of this valuation allowance as of December 31, 2013. The valuation allowance is zero as of December 31, 2013.

Our estimate of undistributed earnings of our foreign subsidiaries for which no federal or state liability has been recorded cumulatively totaled $13.9 million at December 31, 2013 and $13.5 million at December 31, 2012. These undistributed earnings are considered to be indefinitely reinvested. However, if unanticipated distribution of those earnings were to occur in the form of dividends or otherwise, some portion of the distribution would be subject to both foreign withholding taxes and U.S. income taxes. In the event that our position in this regard changes, determining the potential amount of unrecognized deferred federal and state income tax liability and foreign withholding taxes is not practicable because of the complexities associated with its hypothetical calculation. However, unrecognized foreign tax credits would be available to reduce some portion of the federal liability.

We are subject to taxation in the United States and various states and foreign jurisdictions. Our United States federal income tax returns for tax years since 2010 are subject to examination by the Internal Revenue Service. Our principal state income tax returns for tax years since 2004 are subject to examination by the state tax authorities. The total gross amount of unrecognized tax benefits as of December 31, 2013 was $5.5 million that, if recognized, would impact the effective tax rate.

The following table summarizes our cumulative gross unrecognized tax benefits for 2013, 2012 and 2011:



	2013			2012			2011
Beginning balance	$	4,236		$	4,978		$	4,411
Increases (decreases) to prior year tax positions	391			156			494
Increases to current year tax positions	1,353			490			764
Decrease related to settlements	—			(230		)	(392		)
Decrease related to lapse of statute of limitations	(436		)	(1,158		)	(299		)
Ending balance	$	5,544		$	4,236		$	4,978