Income Taxes

12 Months Ended

Dec. 31, 2019

The components of loss or income before income taxes are as follows:



	For the years ended December 31,
	2019			2018		2017
United States	$	11,994		$	31,205	$	39,370
Foreign	(38,102		)	5,320		6,423
	$	(26,108	)	$	36,525	$	45,793

The income tax benefit or expense consisted of the following amounts:



	For the years ended December 31,
	2019			2018			2017
Current:
Federal	$	—		$	—		$	(1,101	)
Foreign	(3,599		)	(3,023		)	(1,731		)
State and local taxes	(3,186		)	(2,583		)	(2,317		)
	$	(6,785	)	$	(5,606	)	$	(5,149	)
Deferred:
Federal	$	(1,495	)	$	6,249		$	(75,928	)
Foreign	7,321			1,290			1,631
State and local taxes	7,585			(2,730		)	(280		)
	13,411			4,809			(74,577		)
	$	6,626		$	(797	)	$	(79,726	)

The reconciliation between the United States federal statutory rate of 21% for the year ended December 31, 2019 and 2018, and 35% for the years ended December 31, 2017, respectively, to the Company's effective rates are as follows:



	For the years ended December 31,
	2019		2018		2017
U.S. Federal statutory tax rate	21	%	21	%	35	%
Statutory permanent items	(3	)%	3	%	9	%
Effect of the Tax Cuts and Jobs Act	—	%	—	%	152	%
Equity-based compensation	19	%	(43	)%	(24	)%
Acquisition costs	—	%	4	%	—	%
Officers' compensation	(7	)%	3	%	1	%
Interest	(10	)%	1	%	—	%
State and local taxes, net of federal benefit	13	%	12	%	5	%
International tax (reflects effect of losses for which tax benefit not realized)	(9	)%	4	%	(4	)%
Uncertain tax positions	2	%	2	%	—	%
Tax credits	1	%	(2	)%	(2	)%
Valuation reserve for income taxes and other	—	%	—	%	(3	)%
Tax rate change	—	%	—	%	3	%
Other	(2	)%	(3	)%	2	%
Effective tax rate	25	%	2	%	174	%

For the year ended December 31, 2019, the Company's overall effective tax rate was different from the statutory rate of 21% primarily as a result of a permanent benefit related to the equity based stock compensation and an interested related adjustment in the United Kingdom.

For the year ended December 31, 2018, the Company's overall effective tax rate was different from the statutory rate of 21% primarily as a result of the increase in the state provision along with the permanent benefit related to the equity-based stock compensation and its related state impact.

For the year ended December 31, 2017, the Company's overall effective tax rate was different from the statutory rate of 35% primarily due to the impact of tax reform enacted in the United States on December 22, 2017 reducing the corporate tax rate from 35% to 21% beginning January 1, 2018. This resulted in an expense of $69,378 attributable to the re-measurement of the Company's deferred tax assets as of December 31, 2017.

The temporary differences which gave rise to the Company's net deferred tax assets consisted of the following:



	December 31, 2019			December 31, 2018
Assets and liabilities:
Accounts receivable and inventory allowances	$	1,044		$	839
Deferred rent	1,833			1,212
Acquired intangible assets and property and equipment	(35,524		)	(56,801		)
Accrued expenses	7,964			7,344
Research and development	1,170			991
Stock option compensation	17,979			14,741
Capital leases	—			(38		)
Cumulative translation adjustments	40			170
Deferred revenue	7,471			5,355
Derivatives	3			142
Prepaid expense	(15,569		)	(13,312		)
Convertible debt and capped call	(7,934		)	—
Net operating loss carryforwards	149,848			165,732
	128,325			126,375
Valuation allowance	(19,978		)	(23,815		)
Deferred tax assets, net, non-current	$	108,347		$	102,560

Deferred tax assets and valuation allowance

Net deferred tax balance. As of December 31, 2019 and 2018, we recorded a net deferred tax asset, net of valuation allowance of $108,347 and $102,560, respectively. The Company believes that the net operating losses related to one of its United Kingdom subsidiaries, Vonage Limited, and certain U.S. states may not be realizable under a "more likely than not" measurement and as such, a valuation allowance has been established to reduce the asset accordingly.

NOL carryforwards. As of December 31, 2019, the Company has U.S. Federal and state NOL carryforwards of $509,313 and $237,667, respectively, which expire at various times through 2037. We have Non-US NOLs of $165,104 primarily related to the United Kingdom which has no expiration date. Under Section 382 of the Internal Revenue Code, if we undergo an “ownership change” which is generally defined as a greater than 50% change by value in our equity ownership over a three-year period, our ability to use our pre-change of control NOLs and other pre-change tax attributes against our post-change income may be limited. The Section 382 limitation is applied annually so as to limit the use of our pre-change NOLs to an amount that generally equals the value of our stock immediately before the ownership change multiplied by a designated federal long-term tax-exempt rate. At December 31, 2019, there were no limitations on the use of our NOLs except for certain of the NOLs of Vocalocity, which the Company has reflected in the deferred tax asset.

Valuation allowance. As of December 31, 2019 and 2018, the Company's valuation allowance was $19,978 and $23,815, respectively, primarily consisting of NOLs associated with Vonage Limited, NVM and state NOLs for certain legal entities.

Uncertain tax benefits

The Company had uncertain tax benefits of $914 and $1,107 as of December 31, 2019 and 2018, respectively. The Company recognizes interest and penalties related to uncertain tax benefits in income tax expense. The Company incurred interest expense or penalties of $60, $68, and $61 for the years ended December 31, 2019, 2018, and 2017, respectively.

The following table reconciles the total amounts of uncertain tax benefits:



	As of December 31,
	2019			2018
Balance as of January 1	$	1,107		1,086
Increase due to current year positions	155			1,107
Decrease due to prior year positions	(243		)	(1,086		)
Decrease due to settlements and payments	(86		)	—
Decrease due to lapse of applicable statute of limitations	(71		)	—
Increase due to foreign currency fluctuation	52			—
Uncertain tax benefits as of December 31	$	914		$	1,107

Tax jurisdictions

Business is conducted in various countries throughout the world and is subject to tax in numerous jurisdictions. A significant number of tax returns that are filed are subject to audit by various Federal, state and local tax authorities. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2015. With few exceptions, state and local income tax examinations are no longer open for years before 2014.