ECHELON CORP - 10-K filing on 2014-03-10

Income Taxes

12 Months Ended

Dec. 31, 2013

10. Income Taxes

The provision for income taxes attributable to continuing operations is based upon income (loss) before income taxes from continuing operations as follows (in thousands):



	Year ended 31 December
	2013			2012			2011
Domestic	$	(18,037	)	$	(13,614	)	$	(13,782	)
Foreign	(70		)	652			1,111
	$	(18,107	)	$	(12,962	)	$	(12,671	)

The provision for income taxes consists of the following (in thousands):



	Year ended 31 December
	2013		2012		2011
Federal:
Current	$	—	$	—	$	—
Deferred	—		—		—
Total federal provision	—		—		—
State:
Current	17		5		4
Deferred	—		—		—
Total state provision	17		5		4
Foreign:
Current	294		214		325
Deferred	—		—		—
Total foreign provision	294		214		325
Total income tax expense (benefit)	$	311	$	219	$	329

The provision for income taxes differs from the amount estimated by applying the statutory Federal income tax rate to loss before taxes as follows (in thousands):



	Year ended 31 December
	2013			2012			2011
Federal tax at statutory rate of 35%	$	(6,156	)	$	(4,537	)	$	(4,435	)
State taxes, net of federal benefit	17			5			3
U.S.-Foreign rate differential	342			87			(46		)
Change in Valuation Allowance	6,969			4,530			4,825
Research and Development credits	(1,241		)	—			—
Others	380			134			(18		)
Total income tax expense	$	311		$	219		$	329

As of December 31, 2013 and 2012, a valuation allowance has been recorded against 100% of gross deferred tax assets as a result of uncertainties regarding the realization of the asset balance. As of December 31, 2013 and 2012, the Company had no significant deferred tax liabilities. The components of the net deferred income tax asset are as follows (in thousands):



	Year ended 31 December
	2013			2012
Net operating loss carry forwards	$	60,961		$	55,669
Tax credit carry forwards	26,869			24,826
Fixed and intangible assets	7,246			7,486
Capitalized research and development costs	58			58
Reserves and other cumulative temporary differences	19,380			20,910
Gross deferred income tax assets	114,514			108,949
Valuation allowance	(114,514		)	(108,949		)
Net deferred income tax assets	$	—		$	—

As of December 31, 2013, part of the Company's valuation allowance on deferred tax assets pertains to certain tax credits and net operating loss carry forwards. In the future, it will reduce the valuation allowance associated with these credits and losses upon the earlier of the period in which it utilizes them to reduce the amount of income tax it would otherwise be required to pay on its income tax returns, or when it becomes more likely than not that the deferred tax assets are realizable. In addition, the Internal Revenue Code of 1986, as amended, contains provisions that limit the net operating loss and credit carryforwards available for use in any given period upon the occurrence of certain events, including a significant change in ownership interests. The Company performed an analysis of the ownership changes in 2001. Since that time, some ownership changes may have occurred, which could cause certain of the Company's net operating loss and credit carryforwards to be limited in future periods.

As of December 31, 2013, the Company had net operating loss carryforwards of $199.6 million for federal income tax reporting purposes and $85.7 million for state income tax reporting purposes, which expire at various dates through 2033. Of these amounts, a significant portion represents federal and state tax deductions from stock-based compensation. The tax benefit from these deductions will be recorded as an adjustment to additional paid-in capital in the year in which the benefit is realized. In addition, as of December 31, 2013, the Company had approximately $11.4 million and $15.3 million of tax credit carryforwards for research expenditures for federal and California purposes, respectively. The federal research tax credits will expire at various dates if not utilized by 2033 and the state tax credit can be carried over indefinitely. In accordance with current Internal Revenue Code rules, federal net operating loss carryforwards must be utilized in full before federal research and development tax credits can be used to offset current tax liabilities. As a result, depending on the Company's future taxable income in any given year, some or all of the federal research tax credits, as well as portions of the Company's federal and state net operating loss carryforwards, may expire before being utilized.

Amounts held by foreign subsidiaries are generally subject to United States income taxation on repatriation to the United States. The Company currently intends to permanently reinvest its undistributed earnings from its foreign subsidiaries outside the United States and United States income taxes have not been provided on cumulative total earnings of $10.8 million. It is not practicable to determine the income tax liability that might be incurred if these earnings were to be distributed.

The following is a rollforward of the Company's uncertain tax positions for the years ended December 31, 2013 and 2012 (in thousands):



	Year ended 31 December
	2013			2012
Balance as of the beginning of the year	$	3,382		$	4,355
Tax positions related to current year:
Additions	31			80
Reductions	—			—
Tax positions related to prior years:
Additions	—			—
Reductions	(571		)	(405		)
Settlements	—			—
Lapses in statute of limitations	(704		)	(648		)
Balance as of the end of the year	$	2,138		$	3,382

Included in the balance of total unrecognized tax benefits at December 31, 2013 are potential benefits of $575,000, which if recognized, would affect the effective rate on income from continuing operations.

On December 31, 2013, the Company had accrued interest and penalties related to the uncertain tax benefits of approximately $134,000. During 2013, the Company decreased the prior year balance by $6,000 due to both lapses in statute and change of methodology.

The Company is subject to taxation in the United States and various state and foreign jurisdictions. In the United States, the tax years from 1994 remain open to examination by federal and most state tax authorities due to certain net operating loss and credit carryforward positions. In the foreign jurisdictions, the number of tax years open to examination by local tax authorities ranges from three to six years.