Income Taxes

12 Months Ended

Dec. 31, 2019

Income from operations before taxes for the years ended December 31, 2019, 2018, and 2017, consisted of the following:


	For the Years Ended December 31,
	2019		2018		2017

U.S. operations	$	2,502	$	44,236	$	37,850
Foreign operations	3,365		5,293		5,502
Total	$	5,867	$	49,529	$	43,352

Income tax benefits (provision) components for the years ended December 31, 2019, 2018, and 2017, consisted of the following:


		For the Years Ended December 31,
		2019				2018				2017

Current provision:
	Federal	$	(303)			$	(1922)			$	(779)
	State	(906)				(2810)				(532)
	Foreign	(1,062)				(617)				(786)
Total current provision				(2,271)				(5,349)				(2,097)
Deferred benefit (provision):
	Federal	6,018				(5,296)				(25,919)
	State	1,699				184				(345)
	Foreign	2,607				121				109
Total deferred benefit (provision)				10,324				(4,991)				(26,155)
Total benefit (provision)				$	8,053			$	(10,340)			$	(28,252)

The following is a reconciliation of the income taxes computed using the federal statutory rate to the provision for income taxes for the years ended December 31, 2019, 2018, and 2017:


	For the Years Ended December 31,
	2019		2018		2017

Tax at statutory rate (21% for 2019 and 2018, 35% for 2017)	$	(1,232)	$	(10,401)	$	(15,173)
State tax, net of federal tax benefit	1,956		(2,830)		(1,217)
Non-deductible expense and other	(266)		(300)		(830)
Effect of IP shift	8,125		—		—
Restricted stock units	55		833		(831)
Foreign tax rate differential	(532)		615		1,248
Federal/state research	519		—		—
GILTI	(1,244)		(299)		—
Mandatory repatriation of foreign earnings	—		—		(547)
Return to provision adjustment	760		778		(212)
Reserve related to unrecognized tax benefits	330		598		107
Interest and penalties	(6)		(6)		(1)
Effect of federal rate change	—		—		(11,806)
Effect of state rate changes, net of federal tax benefit	(227)		732		1,010
Change in valuation allowance	(185)		(60)		—
Total reconciliation amount	$	8,053	$	(10,340)	$	(28,252)

The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities as of December 31, 2019 and 2018, are as follows:


		December 31,
		2019				2018

Deferred income tax assets:
	Allowance for doubtful accounts	$	225			$	141
	Property and equipment	—				145
	ROU asset	3,122				—
	Inventories	4,732				4,672
	Stock-based compensation	785				562
	Sales returns accrual	5,794				5,058
	Acquisition costs, net of amortization	91				107
	Intangible assets	6,434				4,087
	Goodwill	786				926
	HzO investment	1,028				1,048
	Celio investment	157				—
	Capital loss carry-over	—				191
	Net operating loss carryforward	—				19
	Federal and state credit carryforwards	497				2,070
	Other liabilities, including foreign	3,341				1,894
	Total gross deferred tax assets	26,992				20,920
	Valuation allowance	(1,670)				(1,517)
Total deferred income tax assets				25,322				19,403

Deferred income tax liabilities:
	Property and equipment	(355)				—
	Lease liability	(2,310)				—
Total deferred tax liabilities				(2,665)				—

Deferred income tax assets, net				$	22,657			$	19,403

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating the Company's ability to recover its deferred tax assets, the Company considers all available positive and negative evidence, including but not limited to scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The assumptions about future taxable income require the use of judgment and are consistent with the plans and estimates the Company is using to manage the underlying businesses. Additionally, the Company considers historical performance in its evaluation of the realizability of deferred tax assets, specifically, three years of cumulative operating income. Weighing both the positive and negative evidence, management concludes no additional valuation allowance needs to be recorded as of December 31, 2019. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize its deferred tax assets. Moreover, historical data provides evidence of sustained profitability.

Due to various factors, including but not limited to changes in the Irish tax laws, as well as the United States tax laws under the 2017 Tax Act, the Company’s existing intangible property structure was updated during 2019 including the intercompany transfer of intangible property among ZAGG entities in different taxing jurisdictions. As a result of this restructuring, various deferred tax assets were recognized in the period for the future tax benefits the Company expects to realize.

The Company recorded a full valuation allowance against a deferred tax asset generated by capital losses on its investment in HzO. HzO is a development stage enterprise and given current operations and uncertainty of future profitability, management has determined that it is more likely than not that the deferred tax asset will not be realizable. Given this, a full valuation allowance at December 31, 2019 and 2018 of $1,028 and $1,048, respectively, has been recorded against this deferred tax asset. In addition, at December 31, 2019 and 2018, the Company recorded a full valuation allowance against deferred tax assets resulting from an investment in Celio of $157 and $160, respectively. The Company released the valuation allowance, along with the deferred tax asset that was attributable to the capital loss carry-overs. Capital losses can only be carried over for 5 years after generation. The capital loss carry-over was generated in 2013, and therefore, the period for utilization has expired. A valuation allowance

as of December 31, 2019 and 2018 of $485 and $278 was recorded on California research and development credit carryforwards that were added upon the acquisition of mophie for the year ended December 31, 2017.

The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign operations that arose in 2019 and prior years as the Company considers these earnings to be permanently reinvested. Cash held by foreign entities that is considered permanently re-invested totaled $14,914 as of December 31, 2019. There were earnings and profits that resided in the Company’s foreign operations that were repatriated under recent U.S. tax reform; the impact of this repatriation was included in the provision and U.S. tax return for the year ended December 31, 2017. The Company considers these funds permanently re-invested.

The Company is subject to federal, state, and foreign tax authority income tax examinations from time to time. The Company remains subject to income tax examinations for each of its open tax years, which extend back to 2016 under most circumstances. Certain taxing jurisdictions may provide for additional open years depending upon their statutes or if an audit is ongoing.

The Company recognizes the impact of a tax position in the financial statements if that position is more likely than not of being sustained upon audit, based on the technical merits of the position. As of December 31, 2019 and 2018, the Company recorded a tax contingency of $1,068 and $1,398, respectively. The tax contingencies are primarily related to the Company's global tax strategy, certain transactions in foreign jurisdictions in prior periods, and research and development credits taken for federal and state purposes. Another component of the tax contingency relates to the mophie acquisition which relate to research and development credits taken for federal and state purposes. The tax contingencies, on a gross basis, are reconciled in the table below:


	December 31,
	2019		2018

Unrecognized tax benefits, as of January 1	$	1,398	$	2,278
Gross increases (decreases) – tax positions in current period	127		27

Gross increases (decreases) – lapse of statute	(457)		(907)
Total benefit	$	1,068	$	1,398

As of December 31, 2019, the Company's liability related to unrecognized tax benefits was $1,068 of which $1,068 would impact the Company’s effective tax rate if recognized.