INCOME TAXES

Income (loss) before income tax expense (benefit) consists of the following:



	Years ended December 31,
	2016			2015			2014
Domestic	$	(1,527	)	$	(144	)	$	12,877
Foreign	14,153			12,950			24,645
Income before income taxes	$	12,626		$	12,806		$	37,522

The components of the income tax expense (benefit) for income taxes are as follows:



	Years ended December 31,
	2016			2015			2014
Current:
Federal	$	409		$	199		$	3,780
State	40			78			367
Foreign	3,482			562			4,433
Current income tax expense	3,931			839			8,580
Deferred:
Federal	(2,357		)	88			306
State	(229		)	9			30
Foreign	174			(943		)	(5,043		)
Deferred income tax benefit	(2,412		)	(846		)	(4,707		)
Income tax expense (benefit)	$	1,519		$	(7	)	$	3,873

Reconciliations of the income tax expense at the U.S. federal statutory income tax rate compared to our actual income tax expense (benefit) are summarized below:



	Years ended December 31,
	2016			2015			2014
Tax expense at statutory rate of 34%	$	4,427		$	4,354		$	12,757
State income taxes, net of federal benefit	(50		)	54			425
Foreign tax rate difference	(1,939		)	(3,708		)	(2,917		)
Research and development credit	(917		)	(853		)	(583		)
Change in valuation allowance	162			(28		)	(5,392		)
Equity based compensation	(255		)	54			880
Manufacturing credit	(61		)	11			(721		)
Other	152			109			(576		)
Income tax expense (benefit)	$	1,519		$	(7	)	$	3,873

The components of our net deferred income tax asset and liabilities are as follows:



	As of December 31,
	2016			2015
Net deferred income tax asset - Current
Warranty cost	$	1,121		$	657
Bad debt reserve	(159		)	21
Inventory reserve	456			774
Unearned service revenue	4,934			4,319
Other, net	1,213			2,021
Net deferred income tax asset - Current	$	7,565		$	7,792
Net deferred income tax asset - Non-current
Depreciation	$	(6,799	)	$	(5,658	)
Goodwill amortization	(2,279		)	(2,076		)
Employee stock options	4,501			3,664
Unearned service revenue	2,155			2,337
Tax Credits	2,035			—
Loss carryforwards	8,005			6,568
Deferred income tax asset - Non-current	7,618			4,835
Valuation Allowance	(876		)	(785		)
Net deferred income tax asset - Non-current	$	6,742		$	4,050
Net deferred income tax liability - Non-current
Intangible assets	$	(1,409	)	$	(686	)

The effective income tax rate for 2016, 2015, and 2014 includes a reduction in the statutory corporate tax rates for our operations in Switzerland. The aggregate dollar effect of this favorable tax rate was approximately $1.0 million, or $0.06 per share, in the year ended December 31, 2016, $2.7 million, or $0.16 per share, in the year ended December 31, 2015, and $1.9 million, or $0.11 per share, in the year ended December 31, 2014.

Our domestic entities had deferred income tax assets in the amount of $7.8 million and $5.2 million as of December 31, 2016 and December 31, 2015, respectively. At December 31, 2016 and 2015, our foreign subsidiaries had deferred tax assets primarily relating to net operating losses of $6.4 million and $6.6 million, respectively, some of which expire in the next 1 to 9 years and others which can be carried forward indefinitely. The valuation allowance for deferred tax assets as of December 31, 2016 and 2015 was $0.9 million and $0.8 million, respectively. The net change in the total valuation allowance for each of the years ended December 31, 2016, 2015 and 2014, was a $0.1 million increase, and a $1.0 million and $5.0 million decrease, respectively. During the year ended December 31, 2014, we identified certain immaterial errors related to deferred tax assets and the related valuation allowance. As a result, we decreased deferred tax assets and the related valuation allowance by $4.7 million each to correct the gross-up error as of December 31, 2014. We believe this error was not material to the consolidated financial statements of any prior interim or annual periods and that the correction of the error was not material to the 2014 consolidated financial statements.

The valuation allowance as of December 31, 2016 and 2015 was primarily related to foreign net operating loss carryforwards that, in the judgment of management, were not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected taxable income, and tax-planning strategies in making this assessment. The primary change impacting the valuation allowance for the year ended December 31, 2016 related to changes in foreign statutory tax rates.

We have not recognized any U.S. tax expense on undistributed international earnings, as we intend to reinvest the earnings outside the U.S. for the foreseeable future. Our net undistributed international earnings were approximately $131.4 million and $119.5 million at December 31, 2016 and 2015, respectively.

Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of a global business, there are many transactions for which the ultimate tax outcome is uncertain. We review our tax contingencies on a regular basis and make appropriate accruals as necessary.

As of December 31, 2016 and 2015, our unrecognized tax benefits totaled $0.3 million, which includes approximately $0.03 million of interest and penalties. We estimate that the unrecognized tax benefits will not change significantly within the next year.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	Years ended December 31,
	2016		2015		2014
Balance at January 1,	$	265	$	265	$	265
Additions based on tax positions related to the current year	—		—		—
Additions for tax positions of prior years	59		—		—
Reductions for tax positions of prior years	—		—		—
Settlements	—		—		—
Balance at December 31,	$	324	$	265	$	265

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The table below summarizes the open tax years and ongoing tax examinations in major jurisdictions as of December 31, 2016:



Jurisdiction	Open Years	Examination in Process
United States - Federal Income Tax	2013-2016	2014
United States - various states	2012-2016	N/A
Germany	2010-2016	2010-2012
Switzerland	2016	N/A
Singapore	2012-2016	N/A

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $0.3 million. We do not currently anticipate that the total amount of unrecognized tax benefits will result in material changes to our financial position. We are subject to income taxes at the federal, state and foreign country level. Our tax returns are subject to examination at the U.S. federal level from 2013 forward and at the state level are subject to a three to four year statute of limitations depending on the state. In the fourth quarter of 2016, the Internal Revenue Service notified the Company of an examination of its 2014 U.S. Federal Income Tax return. To date, no examination procedures have been performed or issues identified.