Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes ("ASC 740"), under which deferred tax assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and their respective tax bases.

The (benefit) provision for income taxes consisted of the following components for the years ended December 31, 2018, 2017 and 2016 (in thousands):



	Year Ended December 31,
	2018			2017		2016
Current income tax expense (benefit):
Federal	(781		)	3,076		477
State	180			62		159
Foreign	4,581			4,078		5,972
Total current income tax expense	3,980			7,216		6,608
Deferred income tax expense (benefit):
Federal	(3,250		)	1,959		4,165
State	(62		)	1,575		414
Foreign	(1,129		)	538		(353		)
Total deferred income tax expense	(4,441		)	4,072		4,226
(Benefit) provision for income taxes	$	(461	)	$	11,288	$	10,834

The (benefit) provision for income taxes for the years ended December 31, 2018, 2017 and 2016 differs from the amount computed by applying the U.S. federal income tax rate of 21% to pretax income (loss) because of the effect of the following items (in thousands):



	Year Ended December 31,
	2018			2017			2016
Tax (benefit) provision at U.S. federal income tax rate	$	(16,093	)	$	9,706		$	5,175
State income taxes, net of federal income tax effect	(307		)	883			447
Federal, state and international deferred tax rate change	1,135			(5,119		)	—
Transition tax	(924		)	5,323			—
Effect of non-US operations	(2,424		)	(2,228		)	(781		)
Nontaxable contingent liability fair value changes and goodwill impairment	11,254			237			3,578
Research and development credit	(40		)	(38		)	(140		)
Change in valuation allowances	3,973			2,103			2,206
Prior year provision to return adjustment	942			(581		)	(137		)
Write-off of deferred taxes and tax receivables	431			70			193
Nondeductible expense and other	468			932			293
Tax reform global intangible low-taxed income	1,124			—			—
(Benefit) provision for income taxes	$	(461	)	$	11,288		$	10,834

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the Company's tax assets and liabilities for financial reporting purposes and the amounts used for income tax return reporting purposes. At December 31, 2018 and 2017, the Company’s deferred tax assets and liabilities consisted of the following (in thousands):



	December 31,
	2018			2017
Deferred tax assets:
Inventory reserve	$	992		$	700
Other reserves and allowances	3,470			370
Income tax basis in excess of financial statement basis in intangible assets	1,085			1,669
Deductible stock-based compensation	3,257			3,687
Net operating loss carryforward	18,836			13,669
Tax credit carryforwards	500			428
	28,140			20,523
Valuation allowance	(13,946		)	(10,711		)
Total deferred tax assets	14,194			9,812

Deferred tax liabilities:
Prepaid & other expenses	(284		)	(265		)
Fixed assets	(4,826		)	(4,946		)
Intangible assets	(16,067		)	(15,953		)
Total deferred tax liabilities	(21,177		)	(21,164		)

Net deferred tax liability	$	(6,983	)	$	(11,352	)

The realizability of deferred income tax assets is based on a more likely than not threshold. If it is determined that it is more likely than not that deferred income tax assets will not be realized, a valuation allowance must be established against the deferred income tax assets. Realization of deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance the Company considers historical taxable income along with other positive and negative evidence in assessing the realizability of its deferred tax assets. The Company’s accounting policy is to consider deferred tax liabilities related to indefinite-lived intangible assets as a source of future taxable income when assessing the realizability of its indefinite-lived deferred tax assets.

For the years ended December 31, 2018 and 2017, the Company recorded additional valuation allowances of $3.2 million and $2.4 million, respectively, related to operating losses for certain foreign locations.

As of December 31, 2018, the Company has gross federal and state net operating loss (“NOLs”) carryforwards of $16.3 million and $1.3 million, respectively. Of the $16.3 million federal NOL carryforwards, $15.7 million was generated in 2018 with an indefinite carryover to offset eighty percent of taxable income in a future period based on new legislation. The Internal Revenue Code imposes an annual limitation on the utilization of net operating loss carryforwards related to acquired corporations based on a statutory rate of return (usually the “applicable federal funds rate” as defined in the Internal Revenue Code) and the value of the corporation at the time of a “change in ownership” as defined by Section 382. The Company’s total federal NOL as of December 31, 2018 includes $0.6 million of NOLs from acquired corporations. These acquired NOLs have an annual limitation under Section 382 of the Internal Revenue Code of $0.2 million and begin to expire in 2023. Of the $1.3 million state NOL carryforwards, $1.0 million was generated in 2018. These state NOL carryforwards begin to expire in 2022.

As of December 31, 2018, the Company had tax effected NOLs in Argentina, Chile, China, Czech Republic, France, Germany, Italy, Japan, and Mexico of $0.3 million, $1.0 million, $0.5 million, $1.0 million, $7.9 million, $0.9 million, $0.4 million, $0.4 million, and $0.3 million, respectively, which have an indefinite carryover period.

A reserve for an uncertain tax position was recorded during prior years as a result of certain intercompany charges and expenses and as a result of a sale of intellectual property between the Company's subsidiaries. The following table summarizes the Company's uncertain tax positions (in thousands):



	Uncertain tax positions
Balance at December 31, 2017	$	499
Additions (subtractions) based on tax positions related to the current year	—
Additions (subtractions) based on tax positions related to the prior year	—
Interest and penalties	23
Balance at December 31, 2018	$	522

As of December 31, 2017 and 2016, the Company had recorded uncertain tax positions of $0.5 million and $0.5 million, respectively, of which a nominal amount related to interest and penalties. The Company anticipates $0.2 million of its uncertain tax positions to reverse within the next twelve months. The gross unrecognized tax benefits, if recognized, would impact the effective tax rate by less than 1% as of December 31, 2018.

The Company's intention is to indefinitely reinvest all undistributed earnings of its foreign subsidiaries in accordance with ASC 740. Deferred income taxes were not calculated on undistributed earnings (deficit) of foreign subsidiaries.

The Company's (loss) income before taxes for its foreign operations was $(31.6) million, $14.4 million and $13.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.

On December 22, 2017, the U.S. government enacted comprehensive Federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Act”). Certain impacts of the new legislation would have generally required accounting to be completed and incorporate into the Company's 2017 year-end financial statements, however in response to the complexities of this new legislation, the SEC issued guidance to provide companies with relief. The SEC provided up to a one-year window for companies to finalize the accounting for the impacts of this new legislation. The Company finalized its accounting for the new provisions during the fourth quarter of 2018. The 2018 impact from finalizing the accounting for the new provisions was a net tax benefit of $0.9 million.

The Company operates under a grant of income tax exemption in Puerto Rico, that became effective for certain operations occurring during the period ending December 31, 2018 and should remain in effect for 20 years as long as specific requirements are satisfied. The impact of this income tax exemption grant decreased foreign taxes by $2.0 million for 2018. The benefit of the tax exemption on diluted earnings per share was $0.04 per share.