Note 8. Income Taxes

For the years ended December 31, 2019 and 2018, Income before provision for income taxes, includes the following components (amounts in thousands):


	2019		2018
Domestic income	$	21,695	$	9,797
Foreign loss		(13,080)		(10,323)
Income before provision for income taxes	$	8,615	$	(526)

For the years ended December 31, 2019 and 2018, income tax expense is comprised of the following (amounts in thousands):


	2019		2018
Current income tax expense	$	8,493	$	9,231
Deferred income tax		3,593		1,040
Income tax expense	$	12,086	$	10,271

Current tax expense for the years ended December 31, 2019 and 2018, includes foreign withholding tax of $1.4 million and $1.5 million, respectively.

For the years ended December 31, 2019 and 2018, the reconciliation of income tax (benefit) expense computed at the U.S. federal statutory rates to income tax expense is (amounts in thousands):


	2019		2018
Income tax (benefit) expense at federal statutory rate-US Only	$	1,810	$	(108)
Income tax expense at federal statutory rate-Foreign Only		3,637		3,832
Permanent items		184		836
Return to provision true-ups -Current/ Deferred		301		(51)
Foreign rate differential		(2,284)		(141)
Foreign tax credits		(5,501)		(7,890)
Foreign valuation allowance		10,007		9,429
Change in FTC valuation allowance		3,785		4,141
Revaluation of Puerto Rico deferred taxes		(1,361)		—
Foreign withholding taxes		1,449		1,499
Deferred foreign tax credit offset		(421)		(873)
State taxes and state rate change		480		374
Puerto Rico tax rate change		—		(722)
UTP adjustment		—		(55)
Income tax expense	$	12,086	$	10,271

The effective tax rate for the period ending December 31, 2019, excluding our share of the operating results from our equity investment in Canal 1 and return to provision adjustments, was 30%.

The 2017 Tax Cuts and Jobs Act (“Jobs Act”) enacted on December 22, 2017. The Jobs Act revised the U.S. corporate income tax by lowering the statutory corporate tax rate from 35% to 21% in 2018. The Company generates income in higher tax rate foreign locations, which result in foreign tax credits. The lower federal corporate tax rate reduces the likelihood or our utilization of foreign tax credits created by income taxes paid in Puerto Rico and Latin America, resulting in a valuation allowance. Additionally, the Company evaluated the potential interest limitation established under the tax act and determined that no limitation would affect the 2019 provision for income taxes.

For the year ended December 31, 2019, the items that significantly affect the differences between the tax provision calculated at the statutory federal income tax rate, are the continued impact of the Tax Act that reduced the federal tax rate to 21%, resulting in a valuation allowance on foreign tax credit carryforwards generated in 2019 of $3.8 million and the loss on the Company’s equity investment in Canal 1, which created a deferred tax asset, requiring an additional $10 million valuation allowance. In 2019, the Company qualified for Puerto Rico tax incentive in connection with local programming, and as a result, the company revalued certain deferred tax assets and liabilities, resulting in a net reduction of deferred tax liabilities of $1.4 million. Additionally, the increase in deferred tax liabilities in Puerto Rico increased the offsetting deferred tax asset in the U.S.

For the year ended December 31, 2018, the items that significantly affect the differences between the tax provision calculated at the statutory federal income tax rate, are the continued impact of the Tax Act that reduced the federal tax rate to 21%, resulting in a valuation allowance on foreign tax credit carryforwards generated in 2018 of $4.1 million and the loss on the Company’s equity investment in Canal 1, which created a deferred tax asset, requiring an additional $9.4 million valuation allowance. Additionally, increase in deferred tax liabilities in Puerto Rico increased the offsetting deferred tax asset in the U.S.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities calculated for financial reporting purposes and the amounts calculated for preparing its income tax returns in accordance with tax regulations and the net tax effects of operating loss and tax credits carried forward. Net deferred tax liabilities consist of the following components as of December 31, 2019 and 2018 (amounts in thousands):


	2019		2018
Deferred tax assets:
Allowances for doubtful accounts	$	776	$	820
Deferred branch tax benefit		11,813		11,801
Deferred revenue		109		84
NOL credit and other carryovers		274		204
Fixed assets		94		51
Accrued expenses		1,455		1,123
Foreign tax credit		18,497		14,729
Stock compensation		3,634		3,613
Pension		360		196
Interest rate swap		178		—
Intangibles		1,354		1,447
Equity method gains and losses		21,976		12,900
Other DTA		38		17
Less: Foreign income valuation allowance		(22,570)		(12,546)
Less: Foreign tax credit valuation allowance		(18,497)		(14,729)
Total deferred tax assets		19,491		19,710
Deferred tax liabilities:
Prepaid expenses		(504)		(404)
Intangibles		(15,496)		(15,788)
Interest rate swap		—		(365)
Property and equipment		(8,225)		(6,678)
Amortization expense		(13,389)		(11,705)
Total deferred tax liabilities		(37,614)		(34,940)
	$	(18,123)	$	(15,230)

The deferred tax amounts mentioned above have been classified on the accompanying consolidated balance sheets at December 31, 2019 and 2018 as follows (amounts in thousands):


	2019		2018
Non-current assets	$	1,208	$	4,290
Non-current liabilities	$	19,331	$	19,520

At December 31, 2019 and 2018, the Company has foreign tax credit carryforwards for U.S. federal purposes and foreign minimum credits totaling $18.5 million and $14.7 million, respectively, which expire during the years 2021 through 2028. In addition, the impact of foreign tax credits and related valuation allowance had an impact on the tax rate. These tax credits were generated on revenues earned by our channels for airing content in Puerto Rico, and Latin America. The realization of deferred tax assets depends on the generation of sufficient taxable income of the appropriate character and in the appropriate taxing jurisdiction during the future periods in which the related temporary differences become deductible. A valuation allowance is provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized. As the Jobs Act significantly reduced the U.S. tax rate to 21%, the Company anticipates generating excess foreign tax credits and would not be able to use its historic foreign tax credits before they expire. As a result, in 2019 and in 2018, the Company recorded a valuation allowance against our foreign tax credits of $18.5 million and $14.7 million, respectively. In addition, the Canal 1 operations incurred losses in 2019 and 2018, and the Company concluded that it is more likely than not to use the created deferred tax assets and recorded a valuation allowance of $22.6 million and $12.5 million against the balance at December 31, 2019 and 2018, respectively. The Company has foreign net operating losses carryforwards related to its Canal 1 investment totaling $0.8 million and $0.6 million, at December 31, 2019 and 2018, respectively, which expire beginning in 2029.

Upon audit, taxing authorities may prohibit the realization of all or part of an uncertain tax position. The Company regularly assesses the outcome of potential examinations in each of the tax jurisdictions when determining the adequacy of the amount of unrecognized tax benefit recorded. The Company recognizes interest and penalties related to uncertain tax positions, if any, in income tax expense. As of December 31, 2019 and 2018, the Company has no uncertain tax position reserves.