Income Taxes

Income tax expense was as follows:



(in thousands)	For the Year Ended December 31,
	2018			2017
Current tax expense
Federal	$	198		$	127
State	27			77
Total current tax expense	$	225		$	204

Deferred tax (benefit) expense
Federal	(149		)	$	100
State	93			139
Total deferred tax (benefit) expense	(56		)	239
Total tax expense	$	169		$	443

The Company received net cash refunds for income taxes of $0.2 million and $6.3 million in 2018 and 2017, respectively.

A reconciliation between the Company’s effective tax rate on loss before income taxes and the statutory tax rate is as follows:



(in thousands)	For the Year Ended December 31,
	2018					2017
	Amount			Percent		Amount			Percent
Income tax benefit at federal statutory rate	$	(11,457	)	21.0	%	$	(16,037	)	34.0	%
State income tax benefit, net of federal tax effect	(1,762		)	3.2	%	(2,283		)	4.8	%
Non-deductible warrants expense	2,184			(4.0	)%	1,360			(2.9	)%
Other permanent differences	70			(0.1	)%	106			(0.2	)%
Research and development tax credits	(1,058		)	1.9	%	(426		)	0.9	%
Other tax credits	(934		)	1.7	%	(419		)	0.9	%
Tax reserve reassessment	196			(0.4	)%	104			(0.2	)%
Federal tax rate change	—			—	%	10,899			(23.1	)%
Change in valuation allowance	12,856			(23.5	)%	4,956			(10.4	)%
3PI Settlement	—			—	%	1,976			(4.2	)%
Other, net	74			(0.1	)%	207			(0.5	)%
Income tax expense	$	169		(0.3	)%	$	443		(0.9	)%

For the year ended December 31, 2018, the Company recognized a pretax loss of $54.6 million, which included $10.4 million of permanently excludable loss associated with the change in the valuation of the Weichai Warrant. For the year ended December 31, 2017, the Company recognized a pretax loss of $47.2 million, which included $4.0 million of permanently excludable loss associated with the change in the valuation of the Weichai Warrant.

On December 22, 2017, the President of the United States signed the Tax Act, which made broad and complex changes to the U.S. Tax Code, including, but not limited to, (i) reducing the U.S. federal corporate income tax rate from 34 percent to 21 percent, (ii) requiring companies to pay a one-time transitional tax on certain un-repatriated earnings of foreign subsidiaries, (iii) generally eliminating U.S. federal income tax on dividends from foreign subsidiaries of U.S. corporations, (iv) repealing the domestic production activity deduction, (v) providing for the full expensing of qualified property, (vi) adding a new provision designed to tax global intangible low-taxed income (“GILTI”), (vii) revising the limitation imposed on deductions for executive compensation paid by publicly traded companies, (viii) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be utilized, (ix) creating a base erosion-anti-abuse tax (“BEAT”), a new minimum tax on payments made by certain U.S. corporations to related foreign parties, (x) imposing a new limitation on the deductibility of interest expense, (xi) allowing for a deduction related to foreign-derived intangible income (“FDII”) and (xii) changing the rules related to the uses and limitations of net operating loss carryforwards generated in tax years beginning after December 31, 2017.

The Company calculated the impact of the Tax Act in accordance with its understanding of the act and guidance available as of December 31, 2017, and, as a result, recorded $10.9 million as additional income tax expense, offset with an $11.3 million tax benefit from the change in the valuation allowance in the fourth quarter of 2017, the period in which the legislation was enacted.

The Company generates R&D tax credits as a result of its R&D activities, which reduce the Company’s effective income tax rate. In general, these credits are general business credits and may be carried forward up to 20 years to be offset against future taxable income.

Significant components of deferred income tax assets and liabilities consisted of the following:



(in thousands)	As of December 31,
	2018			2017
Deferred tax assets:
Net operating loss carryforwards	$	19,006		$	15,399
Research and development credits	3,858			2,806
Other state credits	1,923			989
Inventory	2,203			2,560
Allowances and bad debts	840			596
Accrued warranty	5,732			3,387
Accrued wages and benefits	413			351
Other accrued expenses	5,281			2,906
Stock-based compensation	649			645
Capitalized research and development costs	770			1,090
Intangible amortization	2,240			1,734
Contract liabilities (deferred revenue)	495			339
Other	2,490			152
Total deferred tax assets	45,900			32,954
Valuation allowance	(44,405		)	(31,992		)
Total deferred tax assets, net of valuation allowance	$	1,495		$	962

Deferred tax liabilities:
Tax depreciation in excess of book depreciation on property, plant and equipment	(2,142		)	(1,665		)
Total deferred tax liabilities	$	(2,142	)	$	(1,665	)

Net deferred tax liability	$	(647	)	$	(703	)

The Company’s net deferred tax liability is presented as a separate line item in the Consolidated Balance Sheets.

In preparing the Consolidated Statements of Operations, the Company has assessed the likelihood that its deferred income tax assets will be realized from future taxable income. In evaluating the ability to recover its deferred income tax assets, the Company considers all available evidence, positive and negative, including the Company’s operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred income tax assets will not be realized. The Company exercises significant judgment in determining its income tax expense, its deferred income tax assets and liabilities, and its future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred income tax assets.

Although the Company believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of each reporting date, the Company considers new evidence, both positive and negative, that could impact the Company’s view with regard to future realization of deferred tax assets.

During the second quarter of 2016, the Company considered both the positive and the negative evidence available in order to assess the realizability of its deferred tax assets. As a result of this evaluation, the Company concluded that the negative evidence outweighed the positive evidence and recorded a full valuation allowance of $17.8 million against its net deferred tax assets. The Company continues to maintain a full valuation allowance of $44.4 million and $32.0 million on its deferred tax assets as of December 31, 2018 and 2017, respectively. The Company’s net deferred tax liability of $0.6 million and $0.7 million as of December 31, 2018 and 2017, respectively, represents the deferred tax liability related to indefinite-lived assets which cannot serve as a source of income for the realization of deferred tax assets.

As of December 31, 2018, the Company has, on a tax-effected basis, $5.8 million in R&D and state tax credit carryforwards which begin to expire in 2020. The Company has $13.6 million and $5.4 million of federal and state (tax effected, net of federal tax benefit) that are available to offset taxable income in the future. The federal and state net operating loss carryforwards begin to expire in 2037 and 2026, respectively. As of December 31, 2018, there was no annual limitation on the Company’s ability to use U.S. federal net operating losses to reduce future income taxes. However, the Company may be subject to substantial annual limitations provided by the Internal Revenue Code (the “IRC”) if an “ownership change,” as defined in Section 382 of the IRC, occurs with respect to the Company’s capital stock. On April 23, 2019, Weichai exercised the Weichai Warrant resulting in the Company issuing 4.0 million shares of the Company’s Common Stock and Weichai becoming the owner of 51.5% of the outstanding shares of the Company's Common Stock. The Company believes that this will constitute an “ownership change” as defined in Section 382 of the IRC and is currently quantifying the potential impact.

The change in unrecognized tax benefits excluding interest and penalties were as follows:



(in thousands)	For the Year Ended December 31,
	2018			2017
Balance at beginning of year	$	1,307		$	1,202
Additions based on tax positions related to the current year	193			105
Reductions for tax positions of prior years	(79		)	—
Balance at end of year	$	1,421		$	1,307

The Company recognizes interest and penalties related to unrecognized tax benefits in Income tax expense. As of December 31, 2018 and 2017, the amount accrued for interest and penalties was not material. The Company reflects the liability for unrecognized tax benefits as Other noncurrent liabilities in its Consolidated Balance Sheets. The amounts included in "reductions for tax positions of prior years" represent decreases in the unrecognized tax benefits relating to settlements reached with taxing authorities during each year shown.

As of December 31, 2018, the Company believes the liability for unrecognized tax benefits, excluding interest and penalties, could decrease by $0.1 million in 2019 due to lapses in the statute of limitations. Due to the various jurisdictions in which the Company files tax returns, it is possible that there could be other significant changes in the amount of unrecognized tax benefits in 2019, but the amount cannot be estimated.

With few exceptions, the major jurisdictions subject to examination by the relevant tax authorities and open tax years, stated as the Company’s fiscal years, are as follows:



Jurisdiction	Open Tax Years
U.S. Federal	2014	-	2018
U.S. States	2013	-	2018

The Company is currently under federal income tax audit for tax years 2014, 2015 and 2016. The Company is currently under Illinois income tax audit for tax years 2013 and 2014.