Income Taxes

12 Months Ended

Dec. 31, 2018

INCOME TAXES

Income Tax Expense

Income from continuing operations before income taxes was as follows (in thousands):



	Year Ended December 31,
	2018		2017		2016
U.S.	$	19,109	$	34,259	$	50,651
Non-U.S.	1,892		1,446		930
	$	21,001	$	35,705	$	51,581

Income tax expense from continuing operations was as follows (in thousands):



	Year Ended December 31,
	2018			2017			2016
Current:
U.S. federal	$	1,750		$	14,409		$	6,765
U.S. state	477			1,887			318
Non-U.S.	435			330			118
Total current	2,662			16,626			7,201
Deferred:
U.S. federal	2,235			(9,418		)	8,130
U.S. state	1,059			819			1,037
Non-U.S.	(65		)	53			112
Total deferred	3,229			(8,546		)	9,279
	$	5,891		$	8,080		$	16,480

Following is a reconciliation of the U.S. statutory federal income tax rate with our effective income tax rate for continuing operations:



	Year Ended December 31,
	2018		2017		2016
U.S. statutory income tax rate	21.0	%	35.0	%	35.0	%
State tax, net of U.S. federal tax benefit	5.7		5.0		2.4
Non-U.S. income taxes	0.1		(0.1	)	0.3
Nondeductible operating expenses	3.1		0.8		0.3
Research and development credit	(3.1	)	(1.5	)	(1.0	)
Change in deferred tax measurement rate⁽¹⁾	0.1		(15.3	)	(0.1	)
Change in uncertain tax positions	0.8		0.8		(5.1	)
Excess tax benefits from stock plans	(0.7	)	(2.1	)	—
Change in valuation allowance	1.8		0.1		0.2
Other	(0.7	)	(0.1	)	(0.1	)
Effective income tax rate	28.1	%	22.6	%	31.9	%

⁽¹⁾ Effective income tax rate for 2017 includes impacts related to the Tax Cuts and Jobs Act (the “TCJA”).

On December 22, 2017, the TCJA was enacted and provided significant changes to the U.S. Internal Revenue Code. As a result, and in accordance with SAB 118, we made an effort to reasonably estimate the impact of the TCJA on our operating results and recorded certain income tax effects as provisional as of December 31, 2017. Those provisional amounts were subject to adjustment during a measurement period until the accounting under ASC 740 was complete. Upon further analysis of our transition tax calculation during 2018, we recorded an increase to the provisional amount of less than $0.1 million, which equates to a less than 1.0% impact to the effective tax rate, in 2018. This amount is included as a component of income tax expense from continuing operations. Our accounting for the income tax effects of the TCJA was completed as of December 31, 2018.

Deferred Income Taxes

Individually significant components of deferred income tax assets and liabilities were as follows (in thousands):



	As of December 31,
	2018			2017
Deferred income tax assets:
Accrued liabilities	$	2,453		$	3,000
Allowance for doubtful accounts	23			12
Inventory valuation	424			254
Capitalized indirect inventory costs	442			383
Stock-based compensation expense	811			897
Deferred rent	520			588
Net operating loss carryforward	1,137			1,715
Basis difference on long-lived assets	608			548
Credit carryforward	747			634
Other	219			179
Gross deferred income tax assets	7,384			8,210
Valuation allowance	(1,247		)	(914		)
Deferred income tax assets, net of valuation allowance	6,137			7,296
Deferred income tax liabilities:
Prepaid advertising	(674		)	(370		)
Other prepaids	(762		)	(610		)
Basis difference of long-lived assets	(16,474		)	(14,856		)
Other	(4		)	(18		)
Deferred income tax liabilities	(17,914		)	(15,854		)
Net deferred income tax liabilities	$	(11,777	)	$	(8,558	)

Our net deferred income tax assets (liabilities) were recorded on our consolidated balance sheets as follows (in thousands):



	As of December 31,
	2018			2017
Deferred income tax assets, non-current (recorded in "other assets")	111			—
Deferred income tax liabilities, non-current	(11,888		)	(8,558		)
Net deferred income tax liabilities	$	(11,777	)	$	(8,558	)

We account for income taxes based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. We have recorded a valuation allowance to reduce our deferred income tax assets to the amount we believe is more likely than not to be realized. Evaluating the need for, and amount of, a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence on a jurisdiction-by-jurisdiction basis. Such judgments require us to interpret existing tax law and other published guidance as applied to our circumstances. As part of this assessment, we consider both positive and negative evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which the strength of the evidence can be objectively verified. Based on our analysis during the fourth quarter of 2018, we determined that $0.2 million of valuation allowance was necessary against the U.S state net operating loss carryforward deferred tax assets, and, accordingly, the amount is included as a component of income tax expense from continuing operations in 2018.

As of December 31, 2018, we had a valuation allowance against net deferred income tax assets of $1.2 million. Of the valuation allowance, $0.9 million primarily relates to domestic state tax credit carryforwards and state net operating loss carryforwards as we currently do not anticipate generating income of appropriate character to utilize those deferred tax assets. The remainder of $0.3 million relates to foreign net operating loss carryforwards. Should it be determined in the future that it is more likely than not that our domestic deferred income tax assets will be realized, an additional valuation allowance would be released during the

period in which such an assessment is made. There have been no material changes to our foreign operations since December 31, 2017, and, accordingly, we maintain our existing valuation allowance on foreign deferred income tax assets in such jurisdictions at December 31, 2018.

Income Tax Carryforwards

As of December 31, 2018, we had the following income tax carryforwards (in millions):



	Amount		Expires in
Net operating loss carryforwards
U.S. state	$	21.5	2019 - 2031
China	$	0.5	2020 - 2022
Income tax credit carryforwards
U.S. Federal	$	—	2018 - 2035
U.S. state	$	1.0	2019 - 2031

The timing and manner in which we are permitted to utilize our net operating loss carryforwards may be limited by Internal Revenue Code Section 382, Limitation on Net Operating Loss Carry-forwards and Certain Built-in-Losses Following Ownership Change.

Unrecognized Tax Benefits

Following is a reconciliation of gross unrecognized tax benefits from uncertain tax positions, excluding the impact of penalties and interest (in thousands):



	2018			2017			2016
Balance, January 1	$	2,194		$	1,970		$	2,519
Additions for tax positions taken in prior years	41			38			21
Reductions for tax positions taken in prior years	(4		)	(5		)	(523		)
Additions for tax positions related to the current year	116			211			83
Lapses of statutes of limitations	(12		)	(11		)	(130		)
Other	(5		)	(9		)	—
Balance, December 31	$	2,330		$	2,194		$	1,970

Of the $2.3 million of gross unrecognized tax benefits from uncertain tax positions outstanding as of December 31, 2018, $2.1 million would affect our effective tax rate if recognized.

We recorded tax-related interest and penalty expense (benefit) of $0.3 million, $0.3 million and $(1.9) million in 2018, 2017 and 2016, respectively. We had a cumulative liability for interest and penalties related to uncertain tax positions as of December 31, 2018 and 2017 of $1.3 million and $1.0 million, respectively.

Our U.S. federal income tax returns for 2009 through 2018 are open to review by the U.S. Internal Revenue Service. Our state income tax returns for 2007 through 2018 are open to review, depending on the respective statute of limitation in each state. In addition, we file income tax returns in several non-U.S. jurisdictions with varying statutes of limitation.

As of December 31, 2018, we believe it is reasonably likely that, within the next twelve months, $0.1 million of the previously unrecognized tax benefits related to certain non-U.S. filing positions may be recognized due to the expirations of the statutes of limitations.