Note 9. Income Taxes

The provision (benefit) for income taxes attributable to income from operations includes the following (in thousands):

	For the Years Ended December 31,
	2018			2017			2016
Current (benefit) provision
Federal	$	(29	)	$	(86	)	$	114
State		(17	)		29			28
Total current		(46	)		(57	)		142

Deferred provision (benefit)
Federal		15			(2,622	)		155
State		62			(88	)		37
Total deferred		77			(2,710	)		192
Total provision (benefit)	$	31		$	(2,767	)	$	334

The provision for income taxes related to operations varies from the amount determined by applying the federal income tax statutory rate to the income or loss before income taxes, exclusive of net income attributable to non-controlling interest. The reconciliation of these differences is as follows:

	For the Years Ended December 31,
	2018	2017	2016
Computed expected income tax provision	21.0%	34.0%	34.0%
State income taxes, net of federal income tax benefit	(20.9)	0.9	0.8
Change in valuation allowance for deferred tax assets	47.7	(26.9)	(21.5)
Cumulative deferred adjustments	--	--	(0.3)
Provision to return adjustments	1.8	--	(0.4)
Other permanent differences	(12.2)	(1.3)	(1.8)
Dividend and accretion on preferred stock	(49.9)	(15.2)	(19.3)
FIN 48 liability	(4.6)	(0.9)	0.7
R&D credit	27.7	4.6	3.3
Impact of Tax Act	(12.5)	35.5	--
Other	--	1.5	(0.4)
	(1.9)%	32.2%	(4.9)%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2018 and 2017 are as follows (in thousands):

	December 31,
	2018			2017
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts	$	79		$	108
Allowance for inventory obsolescence and amortization		281			818
Accrued liabilities not currently deductible		1,634			1,657
Accrued compensation		1,206			735
Deferred rent		4,750			5,134
Telos ID basis difference		--			65
Section 163(j) interest limitation		246			--
Net operating loss carryforwards - federal		1,956			2,453
Net operating loss carryforwards - state		653			848
Federal tax credit		983			666
Total gross deferred tax assets		11,788			12,484
Less valuation allowance		(6,652	)		(7,219	)
Total deferred tax assets, net of valuation allowance		5,136			5,265
Deferred tax liabilities:
Amortization and depreciation		(2,237	)		(2,127	)
Unbilled accounts receivable, deferred for tax purposes		(955	)		(1,282	)
Goodwill basis adjustment and amortization		(2,713	)		(2,597	)
Telos ID basis difference		(49	)		--
Total deferred tax liabilities		(5,954	)		(6,006	)
Net deferred tax liabilities	$	(818	)	$	(741	)

The components of the valuation allowance are as follows (in thousands):

	Balance Beginning of Period		Additions		Recoveries			Balance End of Period

December 31, 2018	$	7,219	$	--	$	(567	)	$	6,652
December 31, 2017	$	10,499	$	--	$	(3,280	)	$	7,219
December 31, 2016	$	9,027	$	1,472	$	--		$	10,499

U.S. Tax Cuts and Jobs Act

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was enacted. The Tax Act made significant changes to the U.S. Internal Revenue Code including a number of changes that impact the Company, most notably a reduction to the U.S. federal corporate tax rate from 35% to 21%, effective January 1, 2018, and an indefinite carryforward period for net operating losses generated in taxable years beginning after December 31, 2017. As a result, we will be able to use our hanging credit deferred tax liability as a source of taxable income to support the indefinite-lived net operating losses created by the future reversal of our temporary differences. Accordingly, we re-measured our existing deferred tax assets and liabilities using the enacted tax rate, and adjusted the valuation allowance on our deferred taxes and recorded a decrease in deferred tax liabilities of $3.0 million, with a corresponding adjustment to deferred tax benefit for the same amount for the year ended December 31, 2017.

On December 22, 2017, Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. We re-measured our deferred tax assets and liabilities and adjusted the valuation allowance related to the hanging credit deferred tax liability and included these amounts in our consolidated financial statements for the year ended December 31, 2017. As of December 31, 2018, we have completed the accounting for all income tax effects of the Tax Act, and recorded a SAB 118 adjustment in the current period tax provision related to state conformity to the indefinite-lived net operating loss provision of the Tax Act.

Beginning January 1, 2018, we are subject to several provisions of the Tax Act including computations under Section 162(m) executive compensation limitation and Section 163(j) interest limitation rules which we have considered the impact of each of these provisions in our overall tax expense for the year ended December 31, 2018.

We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on available evidence, realization of deferred tax assets is dependent upon the generation of future taxable income. We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment. As such, we have determined that a full valuation allowance is required as of December 31, 2018 and 2017. As a result of a full valuation allowance against our deferred tax assets and liabilities, a deferred tax liability (hanging credit) related to goodwill remains on our consolidated balance sheet at December 31, 2018 and 2017.

At December 31, 2018, for federal income tax purposes there was approximately $9.3 million net operating loss available to be carried forward to offset future taxable income. These net operating loss carryforwards expire in 2037. In addition, there was approximately $60,000 of alternative minimum tax credit available to be carried forward indefinitely to reduce future regular tax liabilities until 2020, after which time it will be fully refundable in 2021, in accordance with the Tax Act.

Under the provisions of ASC 740-10, we determined that there were approximately $648,000 and $677,000 of unrecognized tax benefits, including $278,000 and $266,000 of related interest and penalties, required to be recorded in other liabilities as of December 31, 2018 and 2017, respectively. We believe that the total amounts of unrecognized tax benefits will not significantly increase or decrease within the next 12 months. The period for which tax years are open, 2015 to 2018, has not been extended beyond the applicable statute of limitations.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	2018			2017			2016
Unrecognized tax benefits, beginning of period	$	677		$	762		$	803
Gross decreases — tax positions in prior period		(63	)		(127	)		(66	)
Gross increases — tax positions in current period		92			77			46
Settlements		(58	)		(35	)		(21	)
Unrecognized tax benefits, end of period	$	648		$	677		$	762