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,
	2014		2013		2012
United States	$	666,323	$	535,265	$	458,635
Foreign	32,994		39,164		21,208
Income from continuing operations before income taxes	$	699,317	$	574,429	$	479,843

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



	For the Years Ended December 31,
	2014			2013			2012
Current:
Federal	$	255,299		$	167,690		$	169,833
State	20,438			12,942			15,366
Foreign	21,584			15,457			8,593
Deferred	(52,033		)	(2,729		)	(26,259		)
Total provision for income taxes for continuing operations	$	245,288		$	193,360		$	167,533

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



	For the Years Ended December 31,
	2014		2013		2012
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	1.5		1.5		1.8
Domestic manufacturing deduction	(1.1	)	(1.0	)	(1.5	)
Research and development tax credit	(1.1	)	(2.2	)	—
Valuation allowance for foreign subsidiaries net operating losses	—		0.3		—
Other permanent differences	0.8		0.1		(0.4	)
Effective income tax rate for continuing operations	35.1	%	33.7	%	34.9	%

In December 2014, the President of the United States signed the Tax Increase Prevention Act, which retroactively reinstated the research and development tax credit for 2014. 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 $105,782,000 and $75,487,000 at December 31, 2014 and 2013, 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,
	2014			2013
Current deferred income taxes:
Inventories	$	9,034		$	6,306
Accrued expenses	104,279			87,157
Derivative instruments	864			(107		)
Total current	114,177			93,356
Noncurrent deferred income taxes:
Cost in excess of net assets of business acquired	(13,111		)	(13,594		)
Property and equipment	(28,921		)	(36,069		)
Compensation payable in common stock	58,446			42,528
Net operating loss carryforwards and impairments	12,693			5,782
Valuation allowance	(6,097		)	(5,059		)
Total noncurrent	23,010			(6,412		)
Total net deferred income tax asset	$	137,187		$	86,944

At December 31, 2014, the Company had available unused international and acquired federal net operating loss carryforwards of $32,640,000. The net operating loss carryforwards will expire at various dates from 2015 to 2033, 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, 2014, 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 2014 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,
	2014			2013
Balance at January 1,	$	13,199		$	6,704
Increases due to acquisition opening balance sheet positions	—			6,420
Gross increases for tax positions of prior years	55			561
Gross increases for tax positions of current year	1,456			3,755
Decreases due to settlements and other prior year tax positions	(2,346		)	(3,310		)
Decreases for lapse of statute of limitations	(1,586		)	(1,344		)
Currency translation effect on foreign balances	(942		)	413
Balance at December 31,	9,836			13,199
Reserves related to potential interest at December 31,	732			1,093
Unrecognized tax benefits at December 31,	$	10,568		$	14,292