17. Income Taxes

Income Tax Expense

The components of the Company’s income before income taxes and our provision for (benefit from) income taxes consist of the following (in thousands):

	Years ended December 31,
	2015			2014			2013
Income (loss) before income taxes
Domestic	$	48,608		$	63,232		$	33,061
Foreign		(354	)		(1,727	)		(581	)
	$	48,254		$	61,505		$	32,480

	Years ended December 31,
	2015			2014			2013
Provision for (benefit from) income taxes:
Current provision:
Federal	$	14,572		$	18,301		$	8,024
State		3,635			3,895			1,581
Foreign		249			192			94
		18,456			22,388			9,699
Deferred provision:
Federal		(370	)		1,153			2,375
State		(33	)		122			115
Foreign		(557	)		(477	)		(284	)
		(960	)		798			2,206
Total provision	$	17,496		$	23,186		$	11,905

Deferred Tax Assets and Liabilities

Significant components of the Company’s deferred tax assets and liabilities consist of the following (in thousands):

	December 31,
	2015		2014
Deferred tax assets:
Net operating loss carry forward, foreign	$	1,567	$	2,292
Stock-based compensation expense		1,043		755
Foreign currency exchange		762		353
Accrued expenses and other		510		527
Inventory reserve		547		334
Tax credit carry forward		-		46
Deferred tax assets	$	4,429	$	4,307

	December 31,
	2015			2014
Deferred tax liabilities:
Acquisition-related Intangibles	$	(3,738	)	$	(4,827	)
Depreciation		(7,466	)		(7,221	)
Deferred tax liabilities	$	(11,204	)	$	(12,048	)

Net deferred tax liabilities	$	(6,775	)	$	(7,741	)

Tax Rate

The reconciliation between the U.S. federal statutory rate and our effective rate is summarized as follows:

	Years ended December 31,
	2015			2014			2013
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
State tax expense, net of federal benefit		4.8	%		4.9	%		4.8	%
Permanent items, including nondeductible expenses		(0.3	%)		0.1	%		(0.2	%)
State investment tax credit		0.0	%		(0.1	%)		(0.1	%)
Federal, state and foreign research and development credits		(0.4	%)		(0.7	%)		(0.5	%)
Foreign rate differential		0.1	%		0.2	%		0.1	%
Domestic production deduction		(2.9	%)		(1.7	%)		(2.4	%)
Effective income tax rate		36.3	%		37.7	%		36.7	%

As of December 31, 2015, the Company had NOL’s for income tax purposes in Italy of $6.3 million with no expiration date.

Accounting for Uncertainty in Income Taxes

The Company had no unrecognized tax benefits for the years ended December 31, 2015 and 2014, respectively. A reconciliation of the beginning and ending amount of our unrecognized tax benefits is summarized as follows (in thousands):

	Year ended December 31, 2013
Unrecognized tax benefit, beginning of year	$	56
Tax positions related to current year		-
Tax positions related to prior years		-
Statute expirations		(56	)
Unrecognized tax benefit, end of year	$	-

In the normal course of business, Anika and its subsidiaries may be periodically examined by various taxing authorities. The Company files income tax returns in the U.S. federal jurisdiction, in certain U.S. states, and in Italy. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate. The 2012 through 2015 tax years remain subject to examination by the IRS and other taxing authorities for U.S. federal and state tax purposes. The 2011 through 2015 tax years remain subject to examination by the appropriate governmental authorities for Italy.

The Company does not anticipate experiencing any significant increases or decreases in our unrecognized tax benefits within the twelve months following December 31, 2015.

The Company incurred expenses related to stock-based compensation in 2015, 2014, and 2013 of $2.2 million, $1.6 million, and $1.3 million, respectively. Accounting for the tax effects of certain stock-based awards requires that the Company establish a deferred tax asset as the compensation expense is recognized for financial reporting prior to recognizing the related tax deduction upon exercise of the awards. The gross tax benefit recognized in the consolidated statement of operations related to stock-based compensation totaled $1.1 million, $3.1 million, and $2.0 million in 2015, 2014, and 2013, respectively.

Upon the settlement of certain stock-based awards (i.e., exercise, vesting, forfeiture, or cancellation), the actual tax deduction is compared with cumulative financial reporting compensation cost and any excess tax deduction related to these awards is considered a windfall tax benefit. Such benefits are tracked in a “windfall tax benefit pool” to offset any future tax deduction shortfalls, and they will be recorded as increases to additional paid-in capital in the period when the tax deduction reduces income taxes payable. The Company follows the with-and-without approach for the direct effects of windfall/shortfall items and to determine the timing of the recognition of any related benefits. The Company recorded a net windfall of $0.9 million, $9.6 million and $0.9 million in 2015, 2014, and 2013, respectively.