In December 2017, H.R.1, also known as the Tax Cuts and Jobs Act ("Tax Reform"), was enacted in the U.S. Tax Reform significantly lowered the amount of our current and future income tax expense primarily due to the reduction in the U.S. statutory income tax rate from 35.0% to 21.0%. This provision went into effect on January 1, 2018 and required us to remeasure our deferred tax assets and liabilities. In connection with Tax Reform, during fiscal 2018, we recorded a net discrete tax benefit of $11,792,000, primarily related to the remeasurement of deferred tax liabilities associated with non-deductible amortization related to intangible assets. This remeasurement was recorded pursuant to ASC 740 "Income Taxes" ("ASC 740") and SEC Staff Accounting Bulletin ("SAB") 118, using estimates based on reasonable and supportable assumptions and available information as of such reporting date. In the event the Internal Revenue Service ("IRS") issues clarifying or interpretive guidance related to Tax Reform, it may result in a change to our estimated income tax. Beginning in fiscal 2019, Tax Reform resulted in the loss of our ability to take the domestic production activities deduction, which has been repealed, and also resulted in lower tax deductions for certain executive compensation expenses.

For fiscal 2020 and 2019, we were subject to a U.S. statutory income tax rate of 21.0%. For fiscal 2018, we were subject to a 35.0% statutory income tax rate with respect to the period August 1, 2017 through December 31, 2017 and a 21.0% statutory income tax rate with respect to the period January 1, 2018 through July 31, 2018, or a blended U.S. statutory income tax rate for fiscal 2018 of approximately 27.0%. As such, our effective tax rate for accounting purposes in fiscal 2018, excluding discrete items, was 27.0%.


	Fiscal Years Ended July 31,
	2020		2019	2018
Federal – current	$	1,053,000	(2,190,000)	367,000
Federal – deferred	721,000		4,782,000	(7,499,000)

State and local – current	1,137,000		1,715,000	440,000
State and local – deferred	(1,312,000)		(321,000)	1,115,000

Foreign – current	298,000		62,000	429,000
Foreign – deferred	393,000		(179,000)	5,000
Provision for (benefit from) income taxes	$	2,290,000	3,869,000	(5,143,000)


	Fiscal Years Ended July 31,
	2020					2019					2018
	Amount		Rate		Amount	Rate		Amount	Rate
Computed "expected" tax expense	$	1,955,000	21.0	%	6,071,000	21.0	%	6,615,000	27.0	%
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal benefit	(278,000)		(3.0)		967,000	3.3		1,193,000	4.8
Stock-based compensation	308,000		3.3		(44,000)	(0.1)		(1,112,000)	(4.5)
Research and experimentation credits	(1,210,000)		(13.0)		(1,129,000)	(3.9)		(678,000)	(2.8)
Foreign-derived intangible income deduction	(162,000)		(1.7)		(632,000)	(2.2)		—	—

Nondeductible transaction costs	301,000		3.2		394,000	1.4		—	—
Nondeductible executive compensation	595,000		6.4		330,000	1.1		(22,000)	(0.1)
Fines and penalties	189,000		2.0		2,000	—		1,000	—
Audit settlements	1,000		—		(2,081,000)	(7.2)		—	—
Remeasurement of deferred taxes	(135,000)		(1.5)		—	—		(11,317,000)	(46.0)
Foreign income taxes	453,000		4.9		5,000	—		(221,000)	(0.9)
Other, net	273,000		3.0		(14,000)	—		398,000	1.5
Provision for (benefit from) income taxes	$	2,290,000	24.6	%	3,869,000	13.4	%	(5,143,000)	(21.0)	%


	2020		2019
Deferred tax assets:
Inventory and warranty reserves	$	5,786,000	7,318,000
Compensation and commissions	3,210,000		3,548,000
Contract liabilities	—		5,331,000
Federal, state and foreign research and experimentation credits	19,656,000		18,183,000
Stock-based compensation	4,955,000		5,817,000
Foreign scientific research and experimental development expenditures	1,765,000		1,689,000
Federal, state and foreign net operating losses	3,942,000		6,248,000
Lease liabilities	7,335,000		—
Other	6,600,000		9,012,000
Less: valuation allowance	(11,471,000)		(12,568,000)
Total deferred tax assets	41,778,000		44,578,000
Deferred tax liabilities:
Plant and equipment	(801,000)		(1,362,000)
Lease right-of-use assets	(7,080,000)		—
Intangibles	(50,368,000)		(54,612,000)
Total deferred tax liabilities	(58,249,000)		(55,974,000)
Net deferred tax liabilities	$	(16,471,000)	(11,396,000)

At July 31, 2020, our net deferred tax liability of $16,471,000 includes $1,166,000 of foreign net deferred tax assets that were recorded as other assets, net in our Consolidated Balance Sheets. At July 31, 2019, our net deferred tax liability of $11,396,000 includes $1,085,000 of foreign net deferred tax assets that were recorded as other assets, net in our Consolidated Balance Sheets.

We provide for income taxes under the provisions of ASC 740 which requires an asset and liability based approach in accounting for income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of them will not be realized. If management determines that it is more likely than not that some or all of its deferred tax assets will not be realized, a valuation allowance will be recorded against such deferred tax assets.

At July 31, 2020, we had federal alternative minimum tax credit carryforwards of $506,000, which are available to offset future federal income taxes. We have federal research and experimentation credits of $9,566,000 that will begin to expire in 2028. The timing and manner in which we may utilize tax credits in future tax years will be limited by the amounts and timing of future taxable income and by the application of the ownership change rules under Section 383 of the Internal Revenue Code.

We have state net operating loss carryforwards available of $2,451,000 which expire through 2039, utilization of which will be limited by the amounts and timing of future taxable income and by the application of the ownership change rules under Section 382 of the Internal Revenue Code. We believe that it is more likely than not that the benefit from certain state net operating loss carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $2,409,000 on the deferred tax assets relating to these state net operating loss carryforwards. We have state research and experimentation credit carryforwards of $7,620,000 expiring through 2039. We believe that it is more likely than not that the benefit from certain state research and experimentation credits will not be realized. In recognition of this risk, we have provided a valuation allowance of $7,140,000 on the deferred tax assets relating to these state credits.

At July 31, 2020, we had foreign deferred tax assets relating to net operating loss carryforwards of $1,491,000. These losses were generated by Solacom prior to being acquired by Comtech and will begin to expire in 2024. We believe that it is more likely than not that a portion of these net operating loss carryforwards may not be realized. In recognition of this risk, we have provided a valuation allowance of $656,000 on the deferred tax assets relating to these net operating loss carryforwards. We have foreign deferred tax assets relating to research and experimentation credits of $2,471,000 that will begin to expire in 2020. We believe that it is more likely than not that the benefit from certain foreign research and experimentation credits may not be realized. In recognition of this risk, we have provided a valuation allowance of $586,000 on the deferred tax assets relating to foreign research and experimentation credits. Our foreign earnings and profits are insignificant and, as such, we have not recorded any deferred tax liability on unremitted foreign earnings.

We must generate $174,900,000 of taxable income in the future to fully utilize our net deferred tax assets as of July 31, 2020. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.

At July 31, 2020 and 2019, total unrecognized tax benefits were $8,345,000 and $7,215,000, respectively, including interest of $75,000 and $12,000, respectively. At July 31, 2020 and 2019, $1,963,000 and 325,000, respectively, of our unrecognized tax benefits were recorded as non-current income taxes payable on our Consolidated Balance Sheets. The remaining unrecognized tax benefits of $6,382,000 and $6,890,000 at July 31, 2020 and 2019, respectively, were presented as an offset to the associated non-current deferred tax assets on our Consolidated Balance Sheets. Of the total unrecognized tax benefits, $7,700,000 and $6,670,000 at July 31, 2020 and 2019, respectively, net of the reversal of the federal benefit recognized as a deferred tax asset relating to state reserves, would favorably impact our effective tax rate, if recognized. Unrecognized tax benefits result from income tax positions taken or expected to be taken on our income tax returns for which a tax benefit has not been recorded in our consolidated financial statements. We do not expect that there will be any significant changes to our total unrecognized tax benefits within the next twelve months.

Our policy is to recognize potential interest and penalties relating to uncertain tax positions in income tax expense. The following table summarizes the activity related to our unrecognized tax benefits for fiscal years 2020, 2019 and 2018 (excluding interest):


	2020		2019	2018
Balance at beginning of period	$	7,203,000	9,137,000	8,586,000
Increase related to current period	684,000		893,000	645,000
Increase related to prior periods	464,000		17,000	49,000
Expiration of statute of limitations	(73,000)		(394,000)	(81,000)
Decrease related to prior periods	(8,000)		(2,450,000)	(62,000)
Balance at end of period	$	8,270,000	7,203,000	9,137,000

Our federal income tax returns for fiscal 2017 through 2019 are subject to potential future IRS audit. None of our state income tax returns prior to fiscal 2016 are subject to audit. None of TCS' state income tax returns prior to calendar year 2015 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.