NOTE 10—INCOME TAXES

The domestic and foreign components of income before provision for income taxes are as follows for the years ended December 31:

	2017		2016		2015
Domestic	$	69,347	$	69,159	$	54,150
Foreign		4,639		5,348		9,450
Income before income taxes	$	73,986	$	74,507	$	63,600

Income tax expense consisted of the following for the years ended December 31:

	2017			2016			2015
Current:
Federal	$	12,995		$	12,979		$	14,797
State		3,243			3,514			2,669
Foreign		1,476			1,932			1,475
Total current		17,714			18,425			18,941
Deferred:
Federal		(9,425	)		8,872			4,562
State		2,749			1,222			512
Foreign		72			(596	)		216
Total deferred		(6,604	)		9,498			5,290
Income tax expense	$	11,110		$	27,923		$	24,231

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes.

Deferred tax assets (liabilities) consisted of the following at December 31:

	2017			2016
Deferred Tax Assets
Allowance for bad debt	$	1,003		$	1,008
Accrued paid time off		1,624			2,592
Accrued bonus		—			55
Foreign net operating loss (NOL) carry forward		1,301			1,371
Federal/state net operating loss (NOL) carry forward		507			3,010
Stock option compensation		2,726			4,292
Deferred rent		3,355			5,423
Deferred compensation		3,238			3,662
Foreign tax credits		505			2,631
State tax credits		1,785			1,784
Federal tax credits		—			225
Foreign exchange		2,051			5,349
Accrued liabilities and other		3,272			3,378
		21,367			34,780
Less: Valuation Allowance		(1,636	)		(1,131	)
Total Deferred Tax Assets		19,731			33,649

Deferred Tax Liabilities
Retention		(1,375	)		(1,684	)
Prepaid expenses		(1,045	)		(1,654	)
Payroll taxes		(489	)		(617	)
Unbilled revenue		(5,407	)		(8,728	)
Depreciation		(4,773	)		(6,664	)
Amortization		(39,993	)		(51,842	)
Deferred gain and other		—			(1,574	)
Total Deferred Tax Liabilities		(53,082	)		(72,763	)
Total Net Deferred Tax Liability	$	(33,351	)	$	(39,114	)

On December 20, 2017, the U.S. Congress passed the “Tax Cuts and Jobs Act” (the “Tax Act”), which was signed into law on December 22, 2017 and is generally effective beginning January 1, 2018. The Company will be impacted in several ways as a result of the Tax Act, including, but not limited to, provisions which include a permanent reduction in the U.S. federal corporate income tax rate from 35% to 21%, the revaluation of deferred tax assets and liabilities required as a result of the tax rate change and the application of a mandatory one-time “transition tax” on unremitted earnings of certain foreign subsidiaries that were previously tax deferred.

The Company has not completed the accounting for the tax effects of enactment of the Tax Act; however, in certain cases, as described below, the Company has made a provisional estimate of the effects on our existing deferred tax balances and the one-time transition tax. The Company has recognized the provisional estimate as a reduction in the provision for income taxes, which is included as a component of income tax expense from continuing operations.

The Company re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Tax Act and refining estimates, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Pursuant to SAB 118, the provisional amount recorded related to the re-measurement of the deferred tax balances was a net tax benefit of $17.6 million.

The one-time “transition tax” is based on the Company’s total post-1986 earnings and profits (E&P) which the Company has previously deferred from US income taxation. Pursuant to SAB 118, the Company recorded a provisional estimate of approximately $1.4 million, net of related foreign tax credits, for the one-time transition tax liability for the Company’s foreign subsidiaries, resulting in an increase in income tax expense. The Company has not yet completed the calculation of the total post-1986 foreign E&P and related foreign tax pools for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount, as well as the related foreign tax credit utilization, may change when the Company finalizes the calculation of post-1986 foreign E&P and related foreign tax pools that were previously deferred from US federal taxation and once the Company finalizes the amounts held in cash or other specified assets. Similarly, our cumulative foreign tax credit carry forward balance as of December 31, 2017 and any valuation allowance required (as applicable) may also change. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax and any additional outside basis difference inherent in these entities as these amounts continue to be permanently reinvested in foreign operations. The impact of the transition tax is a preliminary estimate and will not be finalized until the later part of 2018.

At both December 31, 2017 and 2016, the Company had net operating loss (“NOL”) carry-forwards for foreign income taxes of approximately $4.1 million and $4.1 million, respectively, all of which may be carried forward indefinitely.

At December 31, 2017, the Company had NOL carry-forwards for state income tax purposes of approximately $8.5 million, which expire in 2034. The Company acquired these NOLs as a result of its purchase of Olson in November 2014. Internal Revenue Code Section 382 imposes an annual limitation on the use of a corporation’s NOLs, tax credits and other carryovers after an “ownership change” occurs. Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change NOLs and credits. In general, the annual limitation is determined by multiplying the value of the corporation’s stock immediately before the ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Any unused portion of the annual limitation is available for use in future years until such NOLs are scheduled to expire (in general, NOLs may be carried forward 20 years). The Company presently estimates that it will be able to fully utilize the remaining acquired NOLs prior to their expiration.

At December 31, 2017, the Company had gross state income tax credit carry-forwards of approximately $2.8 million, which expire between 2017 and 2026. A deferred tax asset of approximately $1.8 million (net of federal benefit) has been established related to these state income tax credit carry-forwards as of December 31, 2017.

The need to establish valuation allowances for deferred assets is based on a more-likely-than-not threshold that the benefit of such assets will be realized in future periods. Appropriate consideration has been given to all available evidence, including historical operating results, projections of taxable income, and tax planning alternatives. The Company concluded that a valuation allowance of approximately $1.1 million and $1.1 million was required for tax attributes related to specified foreign jurisdictions as of December 31, 2017 and 2016, respectively, and an additional $0.5 million valuation allowance was recorded against our US foreign tax credit carry forwards as a result of enactment of the Tax Act as of December 31, 2017. Due to the interplay of the “transition tax” referenced above and the utilization of foreign tax credits, the amount of valuation allowance recorded against our US foreign tax credit carry forwards as of December 31, 2017 is subject to change once the Company finalizes its calculations.

The total amount of unrecognized tax benefits as of December 31, 2017 and 2016, was $0.8 million and $1.2 million, respectively. Included in the balance as of December 31, 2017 and 2016, were $0.7 million and $1.0 million, respectively, of tax positions that, if recognized, would impact the effective tax rate.

The unrecognized tax benefit reconciliation, excluding penalty and interest, is as follows:

Unrecognized tax benefits at January 1, 2015	$	702
Decrease attributable to settlements		(174	)
Increase attributable to tax positions taken during a prior period		12
Decrease attributable to lapse of statute of limitations		(140	)
Unrecognized tax benefits at December 31, 2015	400
Increase attributable to tax positions taken during a prior period		925
Decrease attributable to lapse of statute of limitations		(140	)
Unrecognized tax benefits at December 31, 2016		1,185
Decrease attributable to lapse of statute of limitations		(365	)
Unrecognized tax benefits at December 31, 2017	$	820

The Company’s policy is not to recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. The Company had approximately $0.2 million and $0.2 million of accrued penalty and interest at December 31, 2017 and 2016, respectively.

The Company’s 2013 to 2016 tax years remain subject to examination by the Internal Revenue Service for federal tax purposes. Certain significant state and foreign tax jurisdictions are also either currently under examination or remain open under the statutes of limitation and subject to examination for the tax years from 2013 to 2016.

Although the Company believes it has adequately provided for all uncertain tax positions, amounts asserted by taxing authorities could be greater than the Company’s accrued position. Accordingly, additional provisions on federal, state and foreign income tax related matters could be recorded in the future as revised estimates are made or the underlying matters are effectively settled or otherwise resolved. Conversely, the Company could settle positions with the tax authorities for amounts lower than have been accrued. The Company believes it is reasonably possible that, during the next 12 months, the Company’s liability for uncertain tax positions may decrease by approximately $0.7 million.

The Company’s provision for income taxes differs from the federal statutory rate. The differences between the statutory rate and the Company’s provision are as follows:

	2017			2016			2015
Taxes at statutory rate		35.0	%		35.0	%		35.0	%
State taxes, net of federal benefit		4.4	%		3.9	%		3.9	%
Foreign tax rate differential		(0.3	)%		(0.1	)%		(0.3	)%
Tax legislation		(22.6	)%		—			—
Other permanent differences		0.7	%		0.8	%		1.9	%
Prior year tax adjustments		(0.3	)%		(1.0	)%		(1.9	)%
Unrecognized tax benefits		0.1	%		1.0	%		—
Valuation allowance		0.7	%		(0.3	)%		—
Equity-based compensation		(2.1	)%		(1.0	)%		—
Tax credits		(0.6	)%		(0.8	)%		(0.5	)%
Taxes at effective rate		15.0	%		37.5	%		38.1	%