NOTE 9—INCOME TAXES

Income (loss) before income taxes was as follows:


	Year Ended December 31,
(in thousands)	2019		2018
Domestic	$	2,075	$	(18,190)
Foreign		(720)		—
Income (loss) from continuing operations		1,355		(18,190)
Loss from discontinued operations		(234)		(15,002)
Income (loss) before income tax expense (benefit)	$	1,121	$	(33,192)

The following table summarizes the income tax expense (benefit) by jurisdiction:


	Year Ended December 31,
(in thousands)	2019		2018
Current:
State	$	61	$	(3)
Foreign		(642)		(522)
Total current		(581)		(525)
Deferred:
Federal		(88)		(7,044)
State		(396)		(194)
Foreign		—		6
Total deferred		(484)		(7,232)
Income tax expense (benefit)	$	(1,065)	$	(7,757)

Income tax expense (benefit) was allocated between continuing operations and discontinued operations as follows:


	Year Ended December 31,
(in thousands)	2019		2018
Continuing operations	$	333	$	(4,400)
Discontinued operations		(1,398)		(3,357)
Income tax expense (benefit)	$	(1,065)	$	(7,757)

Effective Tax Rate Reconciliation

The amount of the income tax expense (benefit) for continuing operations during the years ended December 31, 2019 and 2018 differs from the statutory federal income tax rate of 21% as follows:


	Year Ended December 31,
	2019				2018
(in thousands)	Amount		Percent		Amount		Percent
Tax expense (benefit) computed at the maximum U.S. statutory rate	$	284	21.0	%	$	(3,820)	21.0	%
Difference resulting from state income taxes, net of federal income tax benefits		(348)	(25.7)	%		(483)	2.7	%
State tax rate difference		43	3.2	%		—	—	%
Non-deductible expenses, other		130	9.6	%		136	(0.7)	%
Change in net operating loss carryforward		2,705	199.6	%		(581)	3.2	%
Change in valuation allowance		(1,534)	(113.2)	%		(2,136)	11.7	%
Change in foreign tax credits		2,288	168.9	%		1,811	(10.0)	%
Bankruptcy reorg costs		(2,533)	(187.0)	%		—	—	%
Other, net		(702)	(51.8)	%		673	(3.7)	%
Total tax expense (benefit)	$	333	24.6	%		(4,400)	24.2	%

Deferred Taxes

The significant components of deferred income tax assets and liabilities for continuing operations consisted of the following:


	December 31,
(in thousands)	2019		2018
Assets:
Cost in excess of identifiable net assets of business acquired	$	5,904	$	6,633
Reserves and other accruals		4,058		4,328
Tax credit carryforwards		5,289		7,819
Accrued compensation and benefits		1,940		1,946
State net operating loss carryforwards		12,815		10,843
Federal net operating loss carryforwards		47,679		47,382
Gain/loss on assets held for sale		1,434		1,393
Other		4,978		782
		84,097		81,126
Liabilities:
Indefinite life intangibles		(12,026)		(10,876)
Property and equipment		(319)		(248)
Net deferred tax assets		71,752		70,002
Valuation allowance for net deferred tax assets		(73,950)		(72,684)
Net deferred tax liability after valuation allowance	$	(2,198)	$	(2,682)

Tax Cuts and Jobs Acts of 2017

On December 22, 2017, the Tax Act was signed into law, making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a U.S. federal corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. For the year ended December 31, 2019, the Company recognized income tax expense of $0.3 million for a net increase in deferred tax liabilities related to an increase in indefinite-lived intangible deferred tax liabilities, partially offset by indefinite-lived deferred tax assets created by the 2017 Tax Act.

The Tax Act reduced the federal statutory corporate tax rate for the Company’s tax years beginning in 2018, which resulted in the re-measurement of the federal portion of the Company’s deferred tax assets and liabilities and related valuation allowances as of December 31, 2017. As of December 31, 2019 and 2018, the Company has a net deferred tax liability related to its continuing operations of $2.2 million and $2.7 million, respectively. The net deferred tax liabilities for the years ended December 31, 2019 and 2018 predominantly related to indefinite-lived intangibles deferred tax liabilities that cannot be used to offset deferred tax assets subject to valuation allowances. A net increase in valuation allowances related to continuing operations of $1.3 million as of December 31, 2019 was recorded against the gross deferred tax asset balances as of December 31, 2019.

The Company recorded a provisional liability of the transition tax of $2.6 million based on analysis of the amount of post-1986 earnings and profits of its foreign subsidiaries.

As of December 31, 2019, the Company would need to generate $287.1 million of future U.S. pre-tax income to realize its deferred tax assets.

Net Operating Losses and Tax Credit Carryforwards

As of December 31, 2019, the Company has state operating loss carryforwards of $277.7 million expiring between 2020 and 2039. The Company has $5.9 million of foreign operating loss carryforwards that will expire in 2039. The Company has $3.3 million in foreign tax credit carryforwards expiring between 2020 and 2027.

Under the Internal Revenue Code, the amount of and the benefits from NOL and tax credit carryforwards may be limited or permanently impaired in certain circumstances. In addition, under the Tax Act, the amount of post 2017 NOLs that the Company is permitted to deduct in any taxable year is limited to 80% of its taxable income in such year, where taxable income is determined without regard to the NOL deduction itself. The Tax Act also generally eliminates the ability to carry back any NOL to prior taxable years, while allowing post 2017 unused NOLs to be carried forward indefinitely.

Valuation Allowances

The Company reviews, at least annually, the components of its deferred tax assets. This review is to ascertain that, based upon all of the information available at the time of the preparation of the financial statements, it is more likely than not, that the Company expects to utilize these deferred tax assets in the future. If the Company determines that it is more likely than not that these deferred tax assets will not be utilized, a valuation allowance is recorded, reducing the deferred tax asset to the amount expected to be realized. Many factors are considered in the determination that the deferred tax assets are more likely than not will be realized, including recent cumulative earnings, expectations regarding future taxable income, length of carryforward periods, and other relevant quantitative and qualitative factors. The recoverability of the deferred tax assets is determined by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings, and tax planning strategies.

As of December 31, 2019, the Company carries $12.0 million of deferred income tax liabilities related to indefinite-lived intangibles. Because NOLs generated in taxable years beginning after December 31, 2017 can be carried forward indefinitely under the Tax Act, based upon all of the information available at the time of the preparation of the financial statements, the Company concluded that it is more likely than not that the reversal of taxable temporary differences related to indefinite-lived intangible assets can be used as a source of future taxable income when assessing the realizability of these loss carryforwards that do not expire when they are in the same jurisdiction and of the same character. The Company also determined that it is more likely than not that the reversal of taxable temporary differences related to indefinite-lived intangible assets can be used as a source of future taxable income when assessing the realizability of deferred tax assets that upon reversal would give rise to NOLs that do not expire. As a result, the Company recorded income tax expense from continuing operations of $0.3 million for the year ended December 31, 2019, mainly attributable to the $1.2 million increase in the deferred tax liabilities related to the indefinite-lived intangibles, partially offset by $0.9 million additional indefinite-lived deferred tax assets generated in 2019. Among the $0.9 million, $0.1 million was related to the pre-tax losses generated by the Company’s U.S. business operations, specifically the indefinite-lived pre-tax losses generated after 2017, and $0.8 million was related to the interest expense disallowed after 2017 that can be carried forward indefinitely. The Company continues to have a full valuation allowance against its foreign deferred tax assets.

As of December 31, 2019 and 2018, the Company had valuation allowances for deferred tax assets related to its continuing operations in the amount of $74.0 million and $72.7 million, respectively.

Unremitted Earnings

The Company’s foreign subsidiaries may generate earnings that are not subject to U.S. income taxes so long as they are permanently reinvested in its operations outside of the U.S. Pursuant to ASC Topic No. 740-30, undistributed earnings of foreign subsidiaries that are no longer permanently reinvested would become subject to deferred income taxes.

Uncertain Tax Positions

A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows (in thousands):


	Year Ended December 31,
(in thousands)	2019		2018
Unrecognized tax benefits at January 1	$	3,095	$	3,328
Reductions to unrecognized tax benefits from lapse of statutes of limitations		(197)		(233)
Unrecognized tax benefits at December 31	$	2,898	$	3,095

Unrecognized tax benefits from discontinued operations at December 31	$	998	$	1,194
Unrecognized tax benefits from continuing operations at December 31		1,900		1,901
	$	2,898	$	3,095

As of December 31, 2019, the Company provided for a liability of $2.9 million for unrecognized tax benefits related to various federal, foreign and state income tax matters compared with a liability of $3.1 million for unrecognized tax benefits as of December 31, 2018. The Company has elected to classify interest and penalties related to uncertain income tax positions in income tax expense. As of December 31, 2019, the Company accrued $1.2 million for potential payment of interest and penalties, compared with $1.7 million accrued as of December 31, 2018.

As of each of December 31, 2019 and 2018, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.4 million. In 2020, the Company anticipates it will release less than $0.7 million of accruals of uncertain tax positions as the statute of limitations related to these liabilities will lapse in 2020.

The Company files a consolidated U.S. federal income tax return. Currently, the Company is not under examination for income tax purposes by any taxing jurisdiction. A presentation of open tax years by jurisdiction is as follows:


Tax Jurisdiction	Examination in Progress	Open Tax Years for Examination
United States	None	2006 to Present
Mexico	None	2014 to Present
China	None	2011 to 2017
The Netherlands	None	2016 to 2018