Note 12. Income Taxes

Loss before provision for income taxes on the accompanying statements of operations and comprehensive loss included the following components (in thousands):

	Years Ended June 30,
	2018			2017			2016
Domestic	$	(30,747	)	$	(35,227	)	$	(32,710	)
Foreign		7,726			6,686			9,542
Total worldwide	$	(23,021	)	$	(28,541	)	$	(23,168	)

The provision for income taxes consisted of the following (in thousands):

	Years Ended June 30,
	2018		2017			2016
Current:
Federal	$	—	$	—		$	—
State		63		14			17
Foreign		785		1,292			2,723
Total current	$	848	$	1,306		$	2,740
Deferred:
Federal		—		—			—
State		—		—			—
Foreign		30		(268	)		(404	)
Total deferred		30		(268	)		(404	)
Total provision for income taxes	$	878	$	1,038		$	2,336

Income tax payable was $1.1 million, $1.2 million and $2.3 million at June 30, 2018, 2017 and 2016, respectively. A reconciliation of income taxes at the statutory federal income tax rate to the provision for income taxes included in the accompanying consolidated statements of operations and comprehensive loss is as follows (in thousands):

	Years Ended June 30,
	2018			2017			2016
U.S. federal taxes (benefit):
At federal statutory rate	$	(6,446	)	$	(9,988	)	$	(8,108	)
State tax, net of federal benefit		63			14			17
Share-based compensation expense		1,712			802			701
Debt extinguishment		967			—			338
Other non-deductible permanent items		702			771			877
Credits		(142	)		(359	)		(795	)
Foreign taxes		(1,295	)		(1,355	)		(1,084	)
Other		(228	)		83			20
Transition Tax		3,348			—			—
Tax Cuts and Jobs Act		54,072			—			—
Change in valuation allowance		(51,875	)		11,070			10,370
Total	$	878		$	1,038		$	2,336

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred tax assets were as follows (in thousands):

	June 30,
	2018			2017
Deferred tax assets:
Federal and state net operating losses	$	77,870		$	122,465
Accrued expenses and reserves		6,290			8,374
Deferred revenue		2,985			5,095
Credits		20,857			18,862
Share-based compensation expense		2,233			5,460
Capitalized research and development		3,988			7,441
Unicap		1,571			2,456
Fixed assets/intangibles		1,486			2,451
Other		1,650			1,334
Total deferred tax assets		118,930			173,938
Deferred tax liabilities:
Debt discount		—			(494	)
Section 481 adjustment		(239	)		(768	)
Total deferred tax liabilities		(239	)		(1,262	)
Valuation allowance		(117,674	)		(171,733	)
Net deferred tax assets	$	1,017		$	943

As of June 30, 2018, the Company had approximately $329.7 million and $146.8 million in federal and state net operating loss carryforwards, respectively. The federal and state carryforwards expire in varying amounts beginning in 2019 for both federal and state purposes. As of July 1, 2017, the Company adopted ASU 2016-09 and as a result recognized a stock compensation excess windfall that were converted into net operating losses deferred tax which did not materially affect the deferred tax balance.

In addition, as of June 30, 2018, the Company had federal and state research and development tax credits of approximately $18.9 million and $19.2 million, respectively. The federal research credits will begin to expire in 2019, the California research credits have no expiration date, and the other state research credits began to expire in 2014.

Under the Internal Revenue Code (“IRC”) Sections 382 and 383, annual use of our net operating loss and research tax credit carryforwards to offset taxable income may be limited based on cumulative changes in ownership. An analysis of the impact of this provision through March 31, 2016 has been performed and it was determined that, although ownership changes had occurred, the carryovers should be available for utilization by the Company before they expire, provided we generate sufficient future taxable income. There were no equity financings in the current fiscal year that would result in an ownership change under Section 382. The Company will continue to monitor the changes in equity that would affect the tax attributes as reported.

Based on the available objective evidence and history of losses, the Company has established a 100% valuation allowance against the combined domestic net deferred tax assets of Accuray and TomoTherapy because of uncertainty surrounding the realization of such deferred tax assets.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017, the Tax Act, was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a 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. Based on the Company’s understanding of the Tax Act and current guidance available, there was no additional income tax expense resulting from the enactment of the Tax Act on the Company’s 2018 fiscal year end. As a result of the cumulative earnings in its foreign subsidiaries, the Company estimates it will have transition tax inclusion that will result in a reduction of its current year net operating loss. In December 2017, Staff Accounting Bulletin No. 118, or SAB 118, was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, additional analysis is necessary for certain aspects of the changes in tax law including the calculation of the transition tax, the deductibility of executive compensation and the impact on the various state tax filings. The amounts recorded were based on the Company's initial evaluation of the impacts of the Act, and these amounts are subject to change as the Company continues to refine and update the underlying data, calculations and assumptions used during the measurement period of up to one year under SAB 118. The Company expects to complete its analysis in fiscal 2019.

The Company has not provided for U.S. income taxes on certain undistributed earnings of its foreign subsidiaries because it intends to permanently re-invest these earnings outside the U.S. The cumulative amount of such undistributed earnings upon which no U.S. income taxes have been provided as of June 30, 2018 was $32.4 million.

Under ASC Topic 740, Accounting for Income Taxes, the enactment of the Tax Act also requires companies to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. Consequently, the Company accounted for a provisional estimated reduction of the U.S. deferred tax assets from $171.3 million to approximately $117.2 million with a corresponding decrease of $54.1 million to the Company’s valuation allowance. The Company expects the new law to significantly reduce its tax rate in future periods, and its tax footnote reflects the effects of a federal tax rate reduction net of its valuation allowance. In addition, the Company is still evaluating the realizability of certain deferred tax assets.

Beginning in fiscal 2019, companies may be subject to global intangible low tax income (“GILTI”), which is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations as well as the new base erosion anti-abuse tax (“BEAT”) under the Tax Act. GILTI will be effectively taxed at a tax rate of 10.5%. Due to the complexity of the GILTI tax rules, companies are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred or (2) factoring such amounts into a company’s measurement of its deferred taxes under the SAB 118. The Company has not yet made an election with respect to GILTI. The Company will continue to review the GILTI and BEAT rules to determine their applicability to the company as the rules become effective.

The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in thousands):

	Years Ended June 30,
	2018			2017			2016
Balance at beginning of year	$	15,819		$	16,643		$	17,023
Tax positions related to current year:
Additions		823			1,190			1,811
Tax positions related to prior years:
Additions		—			299			449
Reductions		(1,343	)		(2,313	)		(2,640	)
Balance at end of year	$	15,299		$	15,819		$	16,643

The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management regularly assesses the Company’s tax positions with respect to legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the Company does business. The reduction in prior year’s tax positions primarily relates to lapses of applicable statutes of limitations. The Company anticipates that except for $0.01 million in uncertain tax positions that may be reduced related to the lapse of various statutes of limitation, there will be no material changes in uncertain tax positions in the next 12 months. As of June 30, 2018, the amount of gross unrecognized tax benefits was $15.3 million of which $13.1 million would affect the Company’s effective tax rate if realized.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of June 30, 2018 and 2017, the Company had approximately $0.04 million and $0.2 million, respectively, of accrued interest and penalties related to uncertain tax positions.

The Company files income tax returns in the United States federal, various states and foreign jurisdictions. Due to tax attributes being carried forward and utilized during open years, the statute of limitations remains open for the U.S. federal jurisdiction and domestic states for tax years from 1999 and forward. The statutes of limitation with respect to the foreign jurisdictions where the Company files income tax returns vary from jurisdiction to jurisdiction and range from 4 to 10 years, and the material foreign jurisdictions are France, Switzerland, and Japan .

The Company is also subject to examination of its income tax returns by the Internal Revenue Service (IRS) and other tax authorities, and in some cases the Company has received additional tax assessments which have not been significant. During fiscal year 2017, the Company received tax assessments from the Swiss Vaud Canton tax administration for the 2013, 2015 and 2016 tax periods. The Swiss total assessment of $0.1 million was settled in 2017. In fiscal 2018, the Company was audited by the French tax authorities for the fiscal periods 2015, 2016 and 2017 with no material assessment.