Income Taxes

Our pre-tax income attributable to foreign operations was not material. The provision for income tax (benefit) expense consisted of the following:



	(In thousands) Years Ended December 31,
	2019			2018			2017
Current tax expense
Federal	$	5,802		$	474		$	2,387
State	1,067			1,260			525
	6,869			1,734			2,912
Deferred tax (benefit) expense
Federal	(650		)	(789		)	(15,515		)
State	(917		)	291			135
	(1,567		)	(498		)	(15,380		)
Income tax expense (benefit)	$	5,302		$	1,236		$	(12,468	)

On December 22, 2017, the U. S. enacted the Tax Cuts and Jobs Act (the “2017 Tax Act”) which, among a broad range of tax reform measures, reduced the U.S. corporate tax rate from 35.0% to 21.0% effective January 1, 2018. The reduction in the corporate tax rate required the federal portion of our deferred tax assets and liabilities at December 31, 2017 to be re-measured at the enacted tax rate expected to apply when the temporary differences are to be realized or settled using 21.0%. As a result, we recorded a provisional deferred income tax benefit of $13.0 million related to the re-measurement for the year ended December 31, 2017. SEC Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), allowed us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the 2017 Tax Act was passed late in the fourth quarter of 2017, and ongoing tax guidance and accounting interpretation were expected during 2018, we considered the accounting of the deferred tax re-measurement and other items to be incomplete as of December 31, 2017. Based on our review of proposed tax regulations and related guidance issued and available as of December 22, 2018, we determined that no refinements were needed to the tax positions and provisional amounts recorded in the fourth quarter of 2017 and finalized the accounting of the tax effects of the 2017 Tax Act as of December 31, 2018.

We recognized net income tax benefits from deductions of share-based payments in excess of compensation cost recognized for financial reporting purposes of $0.8 million, $0.2 million, and $0.6 million for the years ended December 31, 2019, 2018, and 2017, respectively.

Deferred tax (liabilities) assets were comprised of the following:



	(In thousands) December 31,
	2019			2018
Deferred tax assets:
Accrued expenses	$	776		$	704
Allowance for doubtful accounts	314			267
Contract overrun reserves	1,004			1,263
Deferred compensation	94			302
Employment-related accruals	5,049			4,252
Environmental reserves	494			479
Federal tax credit carryforwards	84			288
Inventory reserves	2,334			1,757
Pension obligation	2,552			2,324
Federal and state net operating loss carryforwards	6,251			51
State tax credit carryforwards	8,900			9,075
Stock-based compensation	1,672			1,661
Workers’ compensation	43			51
Other	1,409			1,538
Total gross deferred tax assets	30,976			24,012
Valuation allowance	(9,375		)	(9,083		)
Total gross deferred tax assets, net of valuation allowance	21,601			14,929
Deferred tax liabilities:
Deferred revenue	(256		)	(649		)
Depreciation	(8,852		)	(7,951		)
Goodwill	(4,109		)	(3,963		)
Intangibles	(24,749		)	(19,905		)
Prepaid insurance	(346		)	(223		)
Total gross deferred tax liabilities	(38,312		)	(32,691		)
Net deferred tax liabilities	$	(16,711	)	$	(17,762	)

We have federal and state tax net operating losses of $22.5 million and $26.5 million, respectively, as of December 31, 2019. The federal net operating losses acquired from the acquisition of Nobles are subject to an annual limitation under Internal Revenue Code Section 382; however, we expect to fully realize them under ASC Subtopic 740-10 before they begin to expire in 2033. The state net operating loss carryforwards include $16.9 million that is not expected to be realized due to various limitations and has been reduced by a valuation allowance. If not realized, the state net operating loss carryforwards will begin to expire in 2027.

We have federal and state tax credit carryforwards of $0.1 million and $12.8 million, respectively, as of December 31, 2019. A valuation allowance of $10.7 million has been provided on state tax credit carryforwards that are not expected to be realized under ASC Subtopic 740-10. If not realized, the federal and state tax credit carryforwards will begin to expire in 2020.

We believe it is more likely than not that we will generate sufficient taxable income to realize the benefit of the remaining deferred tax assets.

The principal reasons for the variation between the statutory and effective tax rates were as follows:



	Years Ended December 31,
	2019	2018	2017
Statutory federal income tax rate	21.0%	21.0%	35.0%
State income taxes (net of federal benefit)	3.6	5.3	2.5
Foreign derived intangible income deduction	(1.2)	—	—
Qualified domestic production activities	—	—	(2.6)
Stock-based compensation expense	(2.1)	(1.9)	(8.2)
Research and development tax credits	(7.8)	(32.0)	(50.6)
Other tax credits	—	(1.2)	(7.5)
Changes in valuation allowance	(1.6)	0.7	10.6
Non-deductible book expenses	3.9	8.2	1.1
Changes in deferred tax assets	(2.2)	12.1	15.4
Re-measurement of deferred taxes for 2017 Tax Act	—	—	(171.3)
Changes in tax reserves	1.2	1.2	11.4
Other	(0.8)	(1.4)	0.4
Effective income tax (benefit) rate	14.0%	12.0%	(163.8)%

As a result of the 2017 Tax Act, we began utilizing the enacted U.S. corporate rate of 21.0% for the tax year 2018 and beyond.

Our total amount of unrecognized tax benefits was $5.7 million, $5.3 million, and $5.3 million at December 31, 2019, 2018, and 2017, respectively. We record interest and penalty charge, if any, related to uncertain tax positions as a component of tax expense and unrecognized tax benefits. The amounts accrued for interest and penalty charges as of December 31, 2019, 2018, and 2017 were not significant. If recognized, $4.0 million would affect the effective income tax rate. As a result of statute of limitations set to expire in 2020, we expect decreases to our unrecognized tax benefits of approximately $2.0 million in the next twelve months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:



	(In thousands) Years Ended December 31,
	2019			2018			2017
Balance at January 1,	$	5,283		$	5,271		$	3,036
Additions for tax positions related to the current year	408			419			422
Additions for tax positions related to prior years	—			92			1,953
Reductions for tax positions related to prior years	(28		)	(499		)	(99		)
Reductions for lapse of statute of limitations	—			—			(41		)
Balance at December 31,	$	5,663		$	5,283		$	5,271

We file U.S. Federal and state income tax returns. We are subject to examination by the Internal Revenue Service (“IRS”) for tax years after 2015 and by state taxing authorities for tax years after 2014. While we are no longer subject to examination prior to those periods, carryforwards generated prior to those periods may still be adjusted upon examination by the IRS or state taxing authorities if they either have been or will be used in a subsequent period. We believe we have adequately accrued for tax deficiencies or reductions in tax benefits, if any, that could result from the examination and all open audit years.