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INCOME TAXES

We are subject to Federal and certain state income taxes. In addition, we are taxed in certain foreign countries.

As previously discussed in Note

December 22, 2017

the President of the United States signed into law the Tax Act.

The

two

principal elements of the Tax Act impacting our

2017

consolidated statement of operations and our balance sheet as of

December 31, 2017

are the reduction in the corporate tax rate from

35%

21%

and the

one

-time transition tax that is imposed on the previously unremitted earnings of our foreign subsidiaries.

As a result of the legislative changes enacted, we were required to revalue our deferred tax assets and liabilities to the new rate of

21%

as of

December 31, 2017,

which resulted in our recording a current period tax benefit of

$1,743

in our

2017

consolidated statement of operations and a corresponding reduction in the amount of the net deferred tax liability. Due to the complexities involved in determining the previously unremitted earnings of our foreign subsidiaries, we are still in the process of obtaining, preparing and analyzing the required information. We have recorded a provisional amount for the transition tax payable on those unremitted earnings. The provisional amount recorded, net of related foreign tax credits, is a tax of approximately

$476.

The rate of tax paid is

14%

of the foreign earnings.

Earnings before income taxes was as follows:

	Years Ended December 31,
	2017		2016
Domestic	$	2,580	$	3,345
Foreign		1,258		862
Total	$	3,838	$	4,207

Income tax expense (benefit) was as follows:

	Years Ended December 31,
	2017			2016
Current
Domestic -- Federal	$	4,106		$	1,295
Domestic -- state		175			74
Foreign		212			45
Total	$	4,493		$	1,414
Deferred
Domestic -- Federal	$	(1,886	)	$	(39	)
Domestic -- state		244			10
Foreign		12			164
Total		(1,630	)		135
Income tax expense	$	2,863		$	1,549

Deferred income taxes reflect the net tax effect of net operating loss and tax

credit carryforwards as well as temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following is a summary of the significant components of our deferred tax assets and liabilities as of

December 31, 2017

and

2016:

	December 31,
	2017			2016
Deferred tax assets:
Net operating loss (state and foreign)	$	444		$	71
Tax credit carryforwards		206			-
Inventories		185			182
Accrued vacation pay and stock-based compensation		156			161
Depreciation of property and equipment		97			580
Allowance for doubtful accounts		47			55
Accrued warranty		20			9
Acquisition costs		15			28
Intangibles		-			311
Other		15			7
Total		1,185			1,404
Valuation allowance		(370	)		-
Deferred tax assets		815			1,404
Deferred tax liabilities:
Net intangible assets		(3,421	)		(212	)
Unremitted earnings of foreign subsidiaries		-			(82	)
Deferred tax liabilities		(3,421	)		(294	)
Net deferred tax assets (l iabilities)	$	(2,606	)	$	1,110

The net change in the valuation allowance for the years ended

December 31, 2017

and

2016

was an increase of

$370

and a decrease of

$15,

respectively. In assessing the ability to realize the deferred tax assets, we consider whether it is more likely than n

ot that some portion or all of the deferred tax assets will

not

be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. In order to fully realize the total deferred tax assets, we will need to generate future taxable income prior to the expiration of net operating loss and tax credit carryforwards which expire in various years through

2037.

An analysis of the effective tax rate for the years ended

December 31, 2017

and

2016

and a reconciliation from the expected statutory rate o

35%

(for

2017

) and

34%

(for

2016

) is as follows:

	Years Ended December 31,
	2017			201 6
Expected income tax provision at U.S. statutory rate	$	1,343		$	1,430
Increase (decrease) in tax from:
Federal tax rate changes		(1,843	)		-
Current year tax credits (foreign and research)		(379	)		(140	)
Domestic production activities deduction		(290	)		(112	)
Foreign income tax rate differences		(229	)		(258	)
Restricted stock		(59	)		-
Nondeductible expenses		2,463			14
Domestic tax expense, net of Federal benefit		791			55
Federal transition tax payable		476			-
Deemed dividend from foreign subsidiaries		423			396
Acquisition costs		142			-
NOL carryforwards utilized		36			180
Changes in valuation allowance		17			(15	)
Other		(28	)		(1	)
Income tax expense	$	2,863		$	1,549

In accounting for income taxes, we follow the guidance in ASC Topic

740

(Income Taxes) regarding the recognition and measurement of uncertain tax positions in our financial statements. Recognition involves a determination of whether it is more likely than

not

that a tax position will be sustained upon examination with the presumption that the tax position will be examined by the appropriate taxing authority having full knowledge of all relevant information. Our policy is to record interest and penalties associated with unrecognized tax benefits as additional income taxes in the statement of operations. As of

December 31, 2017

and

2016,

we did

not

have an accrual for uncertain tax positions.

We file U.S. income tax returns and multiple state and foreign income tax returns. With few exceptions, the U.S. and state income tax returns filed for the tax years ending on

December 31, 2015

and thereafter are subject to examination by the relevant taxing authorities. During the

first

quarter of

2017,

the U.S. taxing authority completed an examination of our federal income tax return for the year ended

December 31, 2014

and there were

changes to the tax return as originally filed.