Income Taxes

Income tax expense (benefit) consists of:



	Fiscal Year Ended June 30,
	2017			2016			2015
	(in thousands)
Current:
Federal	$	31,149		$	21,855		$	24,658
State	2,615			1,652			1,639
Foreign	269			6,100			4,927
Total current	34,033			29,607			31,224
Deferred:
Federal	(3,832		)	3,990			2,165
State	(397		)	365			198
Foreign	2,445			(1,571		)	900
Total deferred	(1,784		)	2,784			3,263
Provision for income taxes	$	32,249		$	32,391		$	34,487

A reconciliation of the U.S. Federal income tax expense at a statutory rate of 35% to actual income tax expense, excluding any other taxes related to extraordinary gain is as follows:



	Fiscal Year Ended June 30,
	2017			2016			2015
	(in thousands)
U.S. Federal income tax at statutory rate	$	35,524		$	33,603		$	34,967
Increase (decrease) in income taxes due to:
State and local income taxes, net of Federal benefit	1,729			1,578			1,318
Tax credits	(1,430		)	(2,517		)	(1,435		)
Valuation allowance	444			541			582
Effect of foreign operations, net	(1,477		)	(1,150		)	(1,665		)
Stock compensation	(61		)	(62		)	(419		)
Capitalized acquisition costs	231			70			839
Nontaxable income	(4,437		)	—			—
Disallowed interest	2,011			571			—
Other	(285		)	(243		)	300
Provision for income taxes	$	32,249		$	32,391		$	34,487

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:



	June 30,
	2017			2016
	(in thousands)
Deferred tax assets derived from:
Allowance for accounts receivable	$	11,687		$	12,458
Inventories	5,235			4,799
Nondeductible accrued expenses	3,968			3,842
Net operating loss carryforwards	3,141			3,036
Tax credits	4,094			3,316
Timing of amortization deduction from goodwill	1,285			2,660
Deferred compensation	7,934			6,733
Stock compensation	5,424			6,014
Timing of amortization deduction from intangible assets	3,032			2,045
Total deferred tax assets	45,800			44,903
Valuation allowance	(3,473		)	(3,029		)
Total deferred tax assets, net of allowance	42,327			41,874
Deferred tax liabilities derived from:
Timing of depreciation and other deductions from building and equipment	(7,778		)	(6,827		)
Timing of amortization deduction from goodwill	(5,013		)	(5,815		)
Timing of amortization deduction from intangible assets	(2,053		)	(2,974		)
Total deferred tax liabilities	(14,844		)	(15,616		)
Net deferred tax assets	$	27,483		$	26,258

The components of pretax earnings are as follows:



	Fiscal Year Ended June 30,
	2017		2016		2015
	(in thousands)
Domestic	$	79,871	$	76,062	$	79,364
Foreign	21,624		19,948		20,542
Worldwide pretax earnings	$	101,495	$	96,010	$	99,906

As of June 30, 2017, there were (i) gross net operating loss carryforwards of approximately $1.4 million for state income tax purposes; (ii) foreign gross net operating loss carryforwards of approximately $9.3 million; (iii) state income tax credit carryforwards of approximately $1.4 million that will began to expire in 2019; and (iv) withholding tax credits of approximately $2.9 million; and (v) foreign tax credits of less than $0.3 million. The Company maintains a valuation allowance of $0.4 million for foreign net operating losses, a less than $0.1 million valuation allowance for state net operating losses, a $2.9 million valuation allowance for withholding tax credits and a $0.1 million valuation allowance for the notional interest deduction, where it was determined that, in accordance with ASC 740, it is more likely than not that they cannot be utilized.

The Company has provided for United States income taxes for the current earnings of its Canadian subsidiary. Earnings from all other geographies will continue to be considered retained indefinitely for reinvestment. The Company has not provided U.S. income taxes for undistributed earnings of foreign subsidiaries that are considered to be retained indefinitely for reinvestment. The distribution of these earnings would result in additional foreign withholding taxes and additional U.S. federal income taxes to the extent they are not offset by foreign tax credits. It has been the practice of the Company to reinvest those earnings in the business outside the United States. These undistributed earnings amounted to approximately $118.1 million at June 30, 2017. If these earnings were remitted to the United States, they would be subject to income tax. The tax, after foreign tax credits, is estimated to be approximately $20.6 million.

Financial results in Belgium for the year ended June 30, 2017 produced pre-tax loss of approximately $4.7 million. To the extent the Belgium business does not return to profitability as expected, this could affect the valuation of certain deferred tax assets. However, the Belgium business reported taxable income in the two prior years of the three prior years. In the judgment of management, the conditions that gave rise to the fiscal 2017 and 2016 losses are temporary and that it is more likely than not that the deferred tax asset will be realized.

During quarter ended June 30, 2017, a lawsuit filed by Scansource Brazil with the Brazilian Supreme Court in 2014 regarding the tax treatment of certain Brazilian state-provided tax benefits was settled in Scansource Brazil’s favor. As a result, Scansource Brazil was awarded and will recover a tax settlement. The Company has recorded, discrete to the quarter, the income tax benefit associated with that recovery equal to approximately $4.5 million.

As of June 30, 2017, the Company had gross unrecognized tax benefits of $2.2 million, $1.3 million of which, if recognized, would affect the effective tax rate. This reflects an increase of $0.1 million on a net basis over the prior fiscal year. The Company does not expect that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying Consolidated Income Statement. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheet. The total amount of interest and penalties accrued, but excluded from the table below were $1.1 million for the fiscal year ending June 30, 2017 and $1.2 million for the fiscal years ended June 30, 2016 and June 30, 2015, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	June 30,
	2017			2016			2015
	(in thousands)
Beginning Balance	$	2,148		$	1,301		$	1,153
Additions based on tax positions related to the current year	174			326			262
Additions for tax positions of prior years	—			658			—
Reduction for tax positions of prior years	(146		)	(137		)	(114		)
Ending Balance	$	2,176		$	2,148		$	1,301

The Company conducts business globally and, as a result, one or more of its subsidiaries files income tax returns in the United States federal, various state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in countries in which it operates. With certain exceptions, the Company is no longer subject to state and local, or non-United States income tax examinations by tax authorities for tax years before June 30, 2012.