Note 6. Income Taxes

Polaris’ income from continuing operations before income taxes was generated from its United States and foreign operations as follows (in thousands):



	For the Years Ended December 31,
	2013		2012		2011
United States	$	535,265	$	458,635	$	329,060
Foreign	39,164		21,208		17,566
Income from continuing operations before income taxes	$	574,429	$	479,843	$	346,626

Components of Polaris’ provision for income taxes for continuing operations are as follows (in thousands):



	For the Years Ended December 31,
	2013			2012			2011
Current:
Federal	$	167,690		$	169,833		$	113,406
State	12,942			15,366			10,629
Foreign	15,457			8,593			6,374
Deferred	(2,729		)	(26,259		)	(11,358		)
Total provision for income taxes for continuing operations	$	193,360		$	167,533		$	119,051

Reconciliation of the Federal statutory income tax rate to the effective tax rate is as follows:



	For the Years Ended December 31,
	2013		2012		2011
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	1.5		1.8		1.8
Domestic manufacturing deduction	(1.0	)	(1.5	)	(1.9	)
Research and development tax credit	(2.2	)	—		(0.8	)
Valuation allowance for foreign subsidiaries net operating losses	0.3		—		0.5
Other permanent differences	0.1		(0.4	)	(0.3	)
Effective income tax rate for continuing operations	33.7	%	34.9	%	34.3	%

In January 2013, the President of the United States signed the American Taxpayers Relief Act of 2012, which reinstated the research and development tax credit. As a result, the impact of both the 2012 and 2013 research and development tax credits were recorded in the 2013 tax provision.

Undistributed earnings relating to certain non-U.S. subsidiaries of approximately $75,487,000 and $56,812,000 at December 31, 2013 and 2012, respectively, are considered to be permanently reinvested; accordingly, no provision for U.S. federal income taxes has been provided thereon. If the Company were to distribute these earnings, it would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits reflecting the amounts paid to non-U.S. taxing authorities) and withholding taxes payable to the non-U.S. countries. Determination of the unrecognized deferred U.S. income tax liability related to these undistributed earnings is not practicable due to the complexities associated with this hypothetical calculation.

Polaris utilizes the liability method of accounting for income taxes whereby deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. The net deferred income taxes consist of the following (in thousands):



	December 31,
	2013			2012
Current deferred income taxes:
Inventories	$	6,306		$	7,277
Accrued expenses	87,157			78,164
Derivative instruments	(107		)	851
Total current	93,356			86,292
Noncurrent deferred income taxes:
Cost in excess of net assets of business acquired	(13,594		)	5,193
Property and equipment	(36,069		)	(21,656		)
Compensation payable in common stock	42,385			40,329
Net unrealized gains in other comprehensive income	143			(1,698		)
Net operating loss carryforwards	5,782			4,744
Valuation allowance	(5,059		)	(4,523		)
Total noncurrent	(6,412		)	22,389
Total net deferred income tax asset	$	86,944		$	108,681

At December 31, 2013, the Company had available unused international and acquired federal net operating loss carryforwards of $21,137,000. The net operating loss carryforwards will primarily expire at various dates from 2014 to 2020, with certain jurisdictions having indefinite carryforward terms.

Polaris classified liabilities related to unrecognized tax benefits as long-term income taxes payable in the accompanying consolidated balance sheets in accordance with ASC Topic 740. Polaris recognizes potential interest and penalties related to income tax positions as a component of the provision for income taxes on the consolidated statements of income. Reserves related to potential interest are recorded as a component of long-term income taxes payable. The entire balance of unrecognized tax benefits at December 31, 2013, if recognized, would affect the Company’s effective tax rate. The Company does not anticipate that total unrecognized tax benefits will materially change in the next twelve months. Tax years 2010 through 2013 remain open to examination by certain tax jurisdictions to which the Company is subject. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):



	For the Years Ended December 31,
	2013			2012
Balance at January 1,	$	6,704		$	7,341
Increases due to acquisition opening balance sheet positions	6,420			—
Gross increases for tax positions of prior years	561			83
Gross increases for tax positions of current year	3,755			938
Decreases due to settlements	(3,310		)	(1,658		)
Decreases for lapse of statute of limitations	(1,344		)	—
Currency translation effect on foreign balances	413			—
Balance at December 31,	13,199			6,704
Reserves related to potential interest at December 31,	1,093			359
Unrecognized tax benefits at December 31,	$	14,292		$	7,063