INCOME TAXES

The Tax Cuts and Jobs Act of 2017 ("2017 Tax Act") was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The 2017 Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. We have not completed our determination of the accounting implications of the 2017 Tax Act on our tax accruals. However, we have reasonably estimated the effects of the 2017 Tax Act and recorded provisional amounts in our financial statements as of December 31, 2017. We recorded a provisional tax expense for the impact of the 2017 Tax Act of approximately $24.2 million. This amount is primarily comprised of the remeasurement of deferred income tax assets ("DTA's") resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35%. Changes that impact foreign earnings are not expected to have a material effect. As we complete our analysis of the 2017 Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes in the period in which the adjustments are made.

The significant components of our income tax expense (benefit) attributable to current operations for the periods stated were as follows:



	For the Year Ended December 31,
(Dollars in thousands)	2017			2016		2015
Income before income tax (expense) benefit	$	11,559		$	22,971	$	26,298
Current:
Federal tax	$	199		$	669	$	432
State tax	1,006			1,294		622
Foreign tax	270			103		16
Total current	1,475			2,066		1,070
Deferred:
Federal tax	26,348			6,811		(55,716		)
State tax	(787		)	41		1,020
Foreign tax	(171		)	74		(322		)
Total deferred	25,390			6,926		(55,018		)
Total income tax expense (benefit)	$	26,865		$	8,992	$	(53,948	)

Foreign income before income tax (expense) benefit is immaterial to consolidated income before income tax (expense) benefit.

The following table summarizes the principal elements of the difference between the United States Federal statutory rate of 35% and our effective tax rate:



Effective tax rate reconciliation	2017					2016						2015
(Dollars in thousands)
Income before income tax (expense) benefit	$	11,559				$	22,971					$	26,298
Income taxes computed at the Federal statutory rate	$	4,046		35.0	%	$	8,040	35.0	%			$	9,204		35.0	%
State income taxes, net of Federal benefit	472			4.1	%	867		3.8	%			1,021			3.9	%
Impact of 2017 Tax Act	24,235			209.7	%	—		—	%			—			—	%
Research and development and other tax credits	(1,775		)	(15.4	)%	—		—	%			—			—	%
Change in valuation allowance	—			—	%	—		—	%			(64,159		)	(244.0	)%
Other	(113		)	(1.0	)%	85		0.4	%			(14		)	(0.1	)%
Income tax expense (benefit)	$	26,865		232.4	%	$	8,992	39.1	%	1,787.3	%	$	(53,948	)	(205.1	)%

Income tax expense increased by $17.9 million for the year ended December 31, 2017 compared to the same period in 2016 due primarily to the write-off of DTA's as a result of the 2017 Tax Act partially offset by research and development and other tax credits. Our investment in research and development qualifies for the research and development income tax credit under Section 41 of the Internal Revenue Code. Unused research and development tax credits have a 20-year carryover and will provide future tax benefits once Spok’s net operating losses are fully utilized. The Company first applied this credit during 2017 and as a result has certain credits related to past periods. Research and development tax credits totaled $1.4 million in 2017 of which $0.6 million relates to prior periods.

The anticipated effective income tax rate is expected to continue to differ from the Federal statutory rate primarily due to the effect of state income taxes, the use of the research and development tax credit, permanent differences between book and taxable income and certain discrete items. The earnings of non-US subsidiaries are deemed to be indefinitely reinvested in non-US operations.

Income tax expense increased by $62.9 million for the year ended December 31, 2016 compared to the same period in 2015 due primarily to a reduction of the DTA valuation allowance of $64.2 million during 2015 that did not occur in 2016. During the year ended December 31, 2016, the US Court of Appeals for the Second Circuit affirmed a Tax Court Decision, unrelated to Spok, regarding the allocation of cancellation of debt income to tax attributes for a company that filed a Federal consolidated income tax return. This impacted the ultimate realization of certain of our net operating loss ("NOL") carryovers. Therefore, during the year ended December 31, 2016, we wrote off our valuation allowance of $50.0 million against the related Federal and State NOL DTAs. This had no impact on the 2016 income tax provision or net income.

The components of deferred income tax assets at December 31, 2017 and 2016 were as follows:



	December 31,
(Dollars in thousands)	2017			2016
Net operating losses and tax credits	$	26,296		$	45,947
Property and equipment	8,289			12,995
AMT minimum tax receivable	2,489			2,199
Accruals and accrued loss contingencies	4,833			6,723
Intangible assets	6,033			5,886
Gross deferred income tax assets	47,940			73,750
Deferred income tax liabilities:
Prepaid and other expenses	(261		)	(682		)
Gross deferred income tax liabilities	(261		)	(682		)
Net deferred income tax assets	$	47,679		$	73,068

Net Operating Losses

As of December 31, 2017, we had approximately $106.1 million of NOLs available to offset future taxable income. The Federal NOLs begin expiring in 2025 and will fully expire in 2029. We have an immaterial amount of foreign NOLs and tax credits available for future use.

Valuation Allowance

We assess the recoverability of our deferred income tax assets, which represent the tax benefits of future tax deductions, NOLs and tax credits, by considering the adequacy of future taxable income from all sources, including prudent and feasible tax planning strategies. This assessment is required to determine whether based on all available evidence, it is “more likely than not” (which means a probability of greater than 50%) that all or some portion of the DTAs will be realized in future periods. As of December 31, 2017 and 2016 we believe it is more likely than not that our DTAs will be realized in future periods and thus did not have a valuation allowance.

Income Tax Audits

Our Federal income tax returns have been examined by the Internal Revenue Service ("IRS") through December 31, 2008. The audits of the Federal returns for the years ended 2005 through 2008 resulted in no changes. The IRS also audited Amcom’s 2009 Federal tax return (pre-acquisition) with no changes. The 2015, 2016 and 2017 income tax returns of the Company have not been audited by the IRS and are within the statute of limitations (“SOL”).

We operate in all states and the District of Columbia and are subject to various state income and franchise tax audits. The states’ SOL varies from three to four years from the later of the due date of the return or the date filed. We usually file our Federal and all state and local income tax returns on or before September 15 of the following year; therefore, the SOL for those states with a three-year SOL is open for calendar years ending 2014 through 2017, and for the four year SOL states, the SOL is open for years ending from 2013 through 2017.