12. Income Taxes

The Company provides for income taxes using an asset and liability approach, under which deferred income taxes are provided for based upon enacted tax laws and rates applicable to periods in which the taxes become payable.

For financial reporting purposes, income/ (loss) before income taxes includes the following components:


	Year Ended December 31,
	2019		2018 (As Restated)		2017 (As Restated)
United States	$	(511,165)	$	(180,245)	$	(281,009)
Foreign		9,691		18,792		10,457
	$	(501,474)	$	(161,453)	$	(270,552)

The provision for federal, state, and foreign income taxes consists of the following:


	Year Ended December 31,
	2019		2018 (As Restated)		2017 (As Restated)
Federal
Current	$	(1,308)	$	1,308	$	(722)
Deferred		(3,879)		(2,006)		(59,425)
State
Current		2,255		390		1,407
Deferred		(807)		2,339		(7,178)
Foreign
Current		5,770		3,435		5,794
Deferred		5,611		2,887		(944)
Income Tax Expense (Benefit)	$	7,642	$	8,353	$	(61,068)

The differences between income taxes expected by applying the U.S. federal statutory tax rate of 21% and the amount of income taxes provided for are as follows:


	Year Ended December 31,
	2019		2018 (As Restated)		2017 (As Restated)
Tax at statutory rate	$	(105,310)	$	(33,905)	$	(94,693)
Add (deduct)
State income taxes		(7,666)		(6,557)		(4,219)
Foreign income taxes		4,390		1,228		305
Nondeductible transaction costs		—		—		27,311
Nondeductible goodwill impairment		61,699		9,002		10,497
Permanent differences		1,275		2,542		438
Litigation settlement		3,310		608		415
Changes in valuation allowance		30,064		19,433		(6,159)
Unremitted earnings		1,604		4,735		—
Changes in U.S tax rates		—		—		(4,784)
Deemed mandatory repatriation		—		—		7,441
GILTI Inclusion		3,772		2,289		—
Expiration of tax attributes		10,807		8,353		—
Other		3,697		625		2,380
Income Tax Expense (Benefit)	$	7,642	$	8,353	$	(61,068)

The Tax Cuts and Jobs Act (“TCJA”) was signed by the President of the United States and enacted into law on December 22, 2017. This overhaul of the U.S. tax law made a number of substantial changes, including the reduction of the corporate tax rate from 35% to 21%, establishing a dividends received deduction for dividends paid by foreign subsidiaries to the U.S., elimination or limitation of certain deductions (interest, domestic production activities and executive compensation), imposing a mandatory tax on previously unrepatriated earnings accumulated offshore since 1986 and establishing global minimum income tax and base erosion tax provisions related to offshore activities and affiliated party payments.

The TCJA subjects a U.S. shareholder to tax on Global Intangible Low-taxed Income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for GILTI, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company has elected the accounting policy to recognize the tax expense related to GILTI in the year the tax is incurred as a period expense. At December 31 2019, the Company has included GILTI related to current-year operations in the amount of $18.0 million to compute the annual effective tax rate. At December 31, 2018, the Company had provided $2.3 million for tax impacts of GILTI.

Beginning in 2018, the TCJA also subjects a U.S. shareholder of a controlled foreign corporation to current tax on certain payments from corporations subject to U.S. tax to related foreign persons, also referred to as base erosion and anti-abuse tax ("BEAT"). The BEAT provisions in the Tax Reform Act eliminate the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum tax if greater than regular tax. The Company recorded zero tax expense related to BEAT for the year ended December 31, 2019. The Company had recorded $1.3 million tax expense related to BEAT for the year ended December 31, 2018.

The components of deferred income tax liabilities and assets are as follows:


	Year Ended December 31,
	2019		2018 (As Restated)
Deferred income tax liabilities:
Book over tax basis of intangible and fixed assets	$	(77,088)	$	(94,648)
Unremitted foreign earnings		(6,339)		(4,735)
Operating and finance right-of-use assets		(16,981)		—
Other, net	$	(2,571)	$	(4,079)
Total deferred income tax liabilities		(102,979)		(103,462)

Deferred income tax assets:
Allowance for doubtful accounts and receivable adjustments	$	1,498	$	1,676
Inventory		903		1,629
Accrued liabilities		11,608		9,433
Net operating loss and tax credit carryforwards		158,265		184,430
Tax deductible goodwill		8,066		3,147
Disallowed interest deduction		56,873		26,897
Operating and finance lease liabilities		18,127		—
Other, net		15,481		16,031
Total deferred income tax assets	$	270,820	$	243,243

Valuation allowance		(163,806)		(134,650)
Total net deferred income tax assets (liabilities)	$	4,036	$	5,131

Gross deferred tax assets are reduced by valuation allowances to the extent the Company determines it is not more-likely-than-not that the deferred tax assets are expected to be realized. At December 31, 2019, the Company recognized $163.8 million of valuation allowances against gross deferred tax assets primarily related to net operating loss and tax credit carryforwards. Of this amount, approximately $65.4 million and $5.8 million of the total valuation allowance relates to U.S. federal and state limitations on the utilization of net operating loss carryforwards due to numerous changes in ownership. Approximately $48.9 million and $7.2 million of the total valuation allowance relates to U.S. federal and state disallowed interest deductions pursuant to the TCJA. The remaining $37.6 million of the valuation allowance relates to non-limited U.S. and non-U.S. net operating losses, capital losses, and tax credits that are not expected to be realizable.

The net change during the year in the total valuation allowance was an increase of $29.2 million primarily related to the increase of net regular deferred tax assets and the increase of deferred tax assets related to disallowed interest deduction.

Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), limits the amount of U.S. tax attributes (net operating losses and tax credit carryforwards) following a change in ownership. The Company has determined that for the purpose of these provisions an ownership change occurred under Section 382 on April 3, 2014 and October 31, 2014 for BancTec, Inc. and its subsidiaries and RC4Capital, LLC and its subsidiaries (collectively, the “Pangea Group”) and on October 31, 2014 for the historic SourceHOV group (the "2014 Reorganization"). The Section 382 limitations significantly limit the pre-acquisition Pangea Group net operating losses. Accordingly, upon the October 31, 2014 change in control, most of the historic Pangea Group federal net operating losses were limited and a valuation allowance has been established against the related deferred tax assets. Following the filing of the October 31, 2014, Pangea Group federal tax returns and further Section 382 analysis, management finalized the amount of the limitation and as a result, approximately $3.5 million of the valuation allowance was released. Management has concluded that the U.S. tax attributes after Section 382 limitations were applied are more likely than not to be realized. With regard to Pangea Group's foreign subsidiaries, it was determined that most deferred tax assets are not likely to be realized and valuation allowances have been established. The Section 382 limit that applied to the historic SourceHOV group is greater than the net operating losses and tax credits generated in the predecessor periods. Therefore, no additional valuation allowances were established relating to Section 382 limitations other than the pre-2011 Section 382 limitations that applied.

Included in deferred tax assets are federal, foreign and state net operating loss carryforwards, federal capital loss carryforwards, federal general business credit carryforwards and state tax credit carryforwards due to expire beginning in 2020 through 2039. As of December 31, 2019, the Company has federal and state income tax net operating loss (NOL) carryforwards of $573.8 million and $421.5 million, which will expire at various dates from 2020 through 2039. Such NOL carryforwards expire as follows:


			State and Local
	Federal NOL		NOL
2020 – 2024	$	86,371	$	60,478
2025 – 2029		134,448		94,661
2030 – 2039		352,972		266,348
	$	573,791	$	421,487

As of December 31, 2019, the Company has foreign net operating loss carryforwards of $37.3 million, $1.2 million of which were generated by Exela Poland, and will expire in 2024, and the rest of which can be carried forward indefinitely.

Since the 2014 Reorganization did not result in a new tax basis of assets and liabilities for the Company, some of the goodwill continues to be deductible over the remaining amortization period for tax purposes. At December 31, 2019, approximately $41.4 million of the Company goodwill is tax deductible, $20.9 million of which is carried over from the 2014 Reorganization. Additionally, the Company has tax deductible goodwill of $17.0 million in connection with the TransCentra acquisition, and $3.5 million in connection with the Novitex acquisition. These amounts were related to the tax basis carried over from the seller in those acquisitions.

The Company adopted the provision of accounting for uncertainty in income taxes in ASC Topic 740. ASC 740 clarifies the accounting for uncertain tax positions in the Company's financial statements and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on tax returns. The total amount of unrecognized tax benefits at December 31, 2019 is $6.4 million, and if recognized $2.8 million would benefit the effective tax rate. Total accrued interest and penalties recorded on the Consolidated Balance Sheet were $2.1 million and $2.3 million at December 31, 2019 and 2018, respectively. The total amount of interest and penalties recognized in the Consolidated Statement of Operations at December 31, 2019 was $(0.2) million. The Company does not anticipate a significant change in the amount of unrecognized tax benefits during 2018.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:


	Year Ended December 31,
	2019		2018 (As Restated)		2017 (As Restated)
Unrecognized tax benefits—January 1	$	1,476	$	1,047	$	999
Gross increases—tax positions in prior period		1,378		301		48
Gross decreases—tax positions in prior period		(10)		—		—
Gross increases—tax positions in current period		1,470		128		—
Settlement		—		—		—
Lapse of statute of limitations		—		—		—
Unrecognized tax benefits—December 31	$	4,314	$	1,476	$	1,047

The Company files income tax returns in the U.S. and various state and foreign jurisdictions. The statute of limitations for U.S. purposes is open for tax years ending on or after December 31, 2015, However, NOLs generated in years prior to 2015 and utilized in future periods may be subject to examination by U.S. tax authorities. State jurisdictions that remain subject to examination are not considered significant. The Company has significant foreign operations in India and EMEA. The Company may be subject to examination by the India tax authorities for tax periods ending on or after March 31, 2013.

At December 31, 2019, the Company has not changed its prior indefinite reinvestment assertion on undistributed earnings related to certain foreign subsidiaries. Accordingly, no deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of approximately $105.2 million of undistributed earnings from these foreign subsidiaries as those earnings continue to be permanently reinvested. However, the Company does not indefinitely reinvest earnings in Canada, China, India, Mexico and Philippines. At December 31, 2019, the Company recorded $6.3 million of foreign withholding taxes on the undistributed earnings of these jurisdictions, $1.6 million of which was recorded in the Consolidated Statements of Operations at December 31, 2019 and $4.7 million was recorded at December 31, 2018.