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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

2018

and

2017

consolidated statement of operations and our balance sheet as of

December 31, 2018

and

2017

were 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, at

December 31, 2017,

we recorded a provisional amount for the transition tax payable on those unremitted earnings. The provisional amount recorded, net of related foreign tax credits, was a tax of

$476.

During the

first

half of

2018

we completed the process of obtaining, preparing and analyzing the required information, including a Section

965

analysis and an earnings and profits study. As a result, we have determined that

transition tax is due, and, accordingly, during the

second

quarter of

2018

we reversed the

$476

that had been accrued in the

fourth

quarter of

2017.

Earnings before income taxes was as follows:

	Years Ended December 31,
	2018		2017
Domestic	$	3,647	$	2,580
Foreign		1,396		1,258
Total	$	5,043	$	3,838

Income tax expense (benefit) was as follows:

	Years Ended December 31,
	2018			2017
Current
Domestic – Federal	$	1,352		$	4,106
Domestic – state		190			175
Foreign		381			212
Total	$	1,923		$	4,493
Deferred
Domestic – Federal	$	103		$	(1,886	)
Domestic – state		(20	)		244
Foreign		-			12
Total		83			(1,630	)
Income tax expense	$	2,006		$	2,863

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, 2018

and

2017:

	December 31,
	2018			2017
Deferred tax assets:
Net operating loss (state and foreign)	$	299		$	444
Inventories		212			185
Accrued vacation pay and stock-based compensation		184			156
Tax credit carryforwards		81			206
Depreciation of property and equipment		-			97
Allowance for doubtful accounts		46			47
Accrued warranty		20			20
Acquisition costs		13			15
Other		18			15
Total		873			1,185
Valuation allowance		(241	)		(370	)
Deferred tax assets		632			815
Deferred tax liabilities:
Net intangible assets		(3,167	)		(3,421	)
Depreciation of property and equipment		(154	)		-
Deferred tax liabilities		(3,321	)		(3,421	)
Net deferred tax liabilities	$	(2,689	)	$	(2,606	)

The net change in the valuation allowance for the years ended

December 31, 2018

and

2017

was a decrease of

$129

and an increase of

$370,

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

not

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

2038.

An analysis of the effective tax rate for the years ended

December 31, 2018

and

2017

and a reconciliation from the expected statutory rate of

21%

(for

2018

) and

35%

(for

2017

) is as follows:

	Years Ended December 31,
	2018			2017
Expected income tax provision at U.S. statutory rate	$	1,059		$	1,343
Increase (decrease) in tax from:
Nondeductible expenses		1,466			2,463
Domestic tax expense, net of Federal benefit		310			791
Deemed dividend from foreign subsidiaries		175			423
NOL carryforwards utilized		118			36
Foreign income tax rate differences		90			(229	)
Restricted stock		67			(59	)
Global intangible low taxed income		57			-
Current year tax credits (foreign and research)		(553	)		(379	)
Federal transition tax payable		(476	)		476
Section 250 foreign derived intangible income deduction		(233	)		-
Changes in valuation allowance		(129	)		17
Federal tax rate changes		-			(1,843	)
Domestic production activities deduction		-			(290	)
Acquisition costs		-			142
Other		55			(28	)
Income tax expense	$	2,006		$	2,863

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, 2018

and

2017,

we did

not

have an accrual for uncertain tax positions.