Income Taxes

Income (loss) before income tax expense was as follows (in thousands):



	Year Ended December 31,
	2019			2018		2017
Domestic	$	(14,298	)	$	10,901	$	(9,064	)
Foreign	7,533			6,637		15,759
Income (loss) before income tax	$	(6,765	)	$	17,538	$	6,695

Income tax provision was as follows (in thousands):



	Year Ended December 31,
	2019			2018			2017
Current tax expense (benefit):
State	$	(1	)	$	9		$	—
Foreign	3,130			5,032			5,200
Current tax expense	3,129			5,041			5,200

Deferred tax expense (benefit):
Federal	4			—			—
Foreign	2,986			(1,441		)	(342		)
Deferred tax expense (benefit)	2,990			(1,441		)	(342		)
Income tax expense	$	6,119		$	3,600		$	4,858

The income tax provision differs from the amount computed by applying the statutory federal income tax rate to the loss before income tax as a result of the following differences (in thousands):



	Year Ended December 31,
	2019			2018			2017
Tax computed at federal statutory rate	$	(1,347	)	$	3,683		$	2,276
State tax, net of federal tax benefit	(133		)	27			(102		)
Permanent items	(1,493		)	545			1,078
Stock compensation	(1,241		)	(497		)	—
Foreign dividends and unremitted earnings	(352		)	159			796
Foreign rate differential	(308		)	(347		)	(1,897		)
Rate change due to tax reform	125			2,819			17,176
Federal credits	(611		)	(619		)	(302		)
Tax contingencies, net of reversals	1,888			2,140			592
Other	(351		)	(1,040		)	109
Valuation allowance	9,942			(3,270		)	(14,868		)
Income tax expense	$	6,119		$	3,600		$	4,858

The income tax expense recorded primarily relates to operations in China and Finland, which have income tax rates of 25% and 20%, respectively.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):



	Year Ended December 31,
	2019			2018			2017
Deferred tax assets:
Net operating loss carryforwards	$	23,114		$	16,407		$	21,626
Research and alternative minimum tax credits	5,022			4,501			3,635
Accrued expenses and other	3,671			2,806			1,891
Inventory	3,456			4,248			2,280
Property and equipment	887			1,334			1,644
Total gross deferred tax assets	36,150			29,296			31,076
Less valuation allowance	(35,545		)	(25,603		)	(28,873		)
Total deferred tax assets	605			3,693			2,203
Deferred tax liabilities
Intangible assets	(537		)	(579		)	(396		)
Total deferred tax liabilities	(537		)	(579		)	(396		)
Net deferred tax assets	$	68		$	3,114		$	1,807

Net deferred tax assets of $0.1 million, $3.1 million, and $1.8 million as of December 31, 2019, 2018 and 2017, respectively, are included in other assets within the consolidated balance sheet.

In evaluating its valuation allowance, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Due to uncertainty with respect to ultimate realizability of deferred tax assets, the Company has provided a valuation allowance against the U.S. and China deferred tax assets. The net change in the total valuation allowance during the years ended December 31, 2019, 2018 and 2017 were an increase of $9.9 million and decreases of $3.3 million and $14.9 million, respectively.

At December 31, 2019, the Company has U.S. and state net operating loss carryforwards of $95.8 million and $14.0 million, respectively. These net operating losses will expire between 2023 and 2039 if not used by the Company to reduce income taxes payable in future periods. The Company has U.S. and state research and development credits of $5.9 million and $13 thousand, respectively. These credits will begin to expire between 2020 and 2039 if not used by the Company to reduce income taxes payable in future periods.

Utilization of net operating loss carryforwards, credit carryforwards and certain deductions have been subject to annual limitations due to ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, substantial changes in the Company's ownership have required the Company to limit the amount of net operating loss and research and development credit carryforwards that were previously available to offset future taxable income. The Company has had three "change in ownership" events that limit the utilization of net operating loss carryforwards. The "change in ownership" events occurred twice in August of 2000 and in January of 2001, and resulted in net operating loss carryforward limitations of $17 thousand, $52 thousand, and $459 thousand for net operating losses generated prior to the change. Additional limitations on the use of these tax attributes could occur in the event of possible disputes arising in examination from various taxing authorities.

The following table presents a reconciliation of the changes in the unrecognized tax benefit (in thousands):



Balance at December 31, 2016	$	2,050
Additions based on tax positions related to the current year	365
Additions for tax positions of prior years	99
Other	3
Balance at December 31, 2017	$	2,517
Additions based on tax positions related to the current year	3,398
Additions for tax positions of prior years	92
Reductions for tax positions of prior years	(49		)
Reductions as a result of a lapse of applicable statute of limitations	(5		)
Other	(66		)
Balance at December 31, 2018	$	5,887
Additions based on tax positions related to the current year	2,925
Additions for tax positions of prior years	2
Reductions as a result of a lapse of applicable statute of limitations	(22		)
Other	(52		)
Balance at December 31, 2019	$	8,740

At December 31, 2019, the Company has $8.7 million of unrecognized tax benefits (excluding interest and penalties). Of this amount, $3.5 million is recorded in non-current income taxes payable and $5.3 million is recorded as an offset to non-current deferred tax assets on the accompanying consolidated balance sheet. The $5.3 million of unrecognized tax benefit in non-current deferred tax assets is entirely offset by a full valuation allowance in both the U.S. and China. Of the Company's unrecognized tax benefits, $8.7 million, if recognized, would impact the effective tax rate. At December 31, 2018, the Company had recorded $3.5 million of unrecognized tax benefits in non-current income taxes payable and $2.4 million of unrecognized tax benefits recognized as an offset to noncurrent deferred tax assets on the accompanying consolidated balance sheet. The Company does not expect a significant decrease to the total amount of unrecognized tax benefits within the next twelve months.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company has recognized penalties and interest during the years ended December 31, 2019, 2018 and 2017, of $0.3 million, $0.4 million, and $0.4 million, respectively. At December 31, 2019 and 2018 interest and penalties associated with unrecognized tax benefits were $1.6 million and $1.3 million, respectively.

At December 31, 2019, the Company's tax years 2016 through 2019, 2015 through 2019, and 2009 through 2019, remain open for examination in the federal, state and foreign jurisdictions, respectively. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where net operating losses and credits were generated and carried forward, and to make adjustments up to the net operating loss and credit carryforward amounts. The Company is not currently under federal, state, or foreign examination.

2017 Tax Act

In December 2017, the Tax Cuts and Jobs Act (the 2017 Tax Act) introduced significant changes to U.S. income tax law. Effective 2017, the 2017 Tax Act included a one-time transition tax on certain foreign earnings and the acceleration of depreciation for certain assets placed into service after September 27, 2017. Effective 2018, the 2017 Tax Act reduced the U.S. statutory tax rate from 34% to 21%, and created new taxes on certain foreign-sourced earnings, repealed the domestic manufacturing deduction, and placed additional limitations on executive compensation and limitations on the deductibility of interest.

The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with Staff Accounting Bulletin No. 118 (SAB 118), which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act was signed into law. As such, the Company's 2017 financial results reflected the income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 was complete and provisional amounts for those specific income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 was incomplete but a reasonable estimate could be determined. The accounting for the income tax effects of the 2017 Tax Act is considered complete at December 31, 2018, with no material changes to the amounts recorded in 2017.

The changes to existing U.S. tax laws as a result of the 2017 Tax Act, which have the most significant impact on the Company's federal income taxes are as follows:

Reduction of the U.S. Corporate Income Tax Rate

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company's deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 34% to 21%, resulting in a $16.1 million increase in income tax expense for the year ended December 31, 2017 and a corresponding decrease in net deferred tax assets as of December 31, 2017. These adjustments were fully offset with a corresponding adjustment to the valuation allowance.

Transition Tax on Foreign Earnings

The Company recognized a provisional income tax expense of $1.1 million for the year ended December 31, 2017 related to the one-time transition tax on certain foreign earnings. This resulted in a corresponding decrease in deferred tax assets due to the utilization of net operating loss carryforwards. This amount was finalized within the measurement period in accordance with SAB 118 and did not have a material impact to our consolidated financial statements.