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,
	2020			2019			2018
Current (benefit) provision
Federal	$	—		$	25		$	(29	)
State		(77	)		68			(17	)
Total current		(77	)		93			(46	)

Deferred provision (benefit)
Federal		27			88			15
State		4			(285	)		62
Total deferred		31			(197	)		77
Total (benefit) provision	$	(46	)	$	(104	)	$	31

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. The reconciliation of these differences is as follows:

	For the Years Ended December 31,
	2020			2019			2018
Computed expected income tax provision		21.0	%		21.0	%		21.0	%
State income taxes, net of federal income tax benefit		1.0			(0.7	)		19.0
Change in valuation allowance for deferred tax assets		17.0			(24.7	)		(43.5	)
Cumulative deferred adjustments		0.7			(1.1	)		--
Provision to return adjustments		0.5			1.3			(1.7	)
Other permanent differences		1.0			(3.8	)		6.1
Dividend and accretion on preferred stock		10.5			(35.8	)		45.4
Gain on redemption of preferred stock		(43.3	)		—			—
Section 162(m) limitation - covered employees		14.6			(6.9	)		5.1
Capitalization of IPO transaction costs		4.4			—			—
FIN 48 liability		0.2			(3.7	)		4.2
R&D credit		(12.4	)		19.0			(25.2	)
Non-controlling interest		(15.9	)		40.0			(40.1	)
Impact of Tax Act		—			—			11.4
		(0.7	)%		4.6	%		1.7	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2020 and 2019 are as follows (in thousands):

	December 31,
	2020			2019
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts	$	78		$	185
Allowance for inventory obsolescence and amortization		398			316
Accrued liabilities not currently deductible		2,204			1,649
Accrued compensation		1,161			1,655
Deferred rent		4,387			4,808
Section 163(j) interest limitation		306			804
Goodwill		41,534			—
Net operating loss carryforwards - federal		3,814			2,583
Net operating loss carryforwards - state		1,002			796
Federal tax credit		1,986			1,326
Total gross deferred tax assets		56,870			14,122
Less valuation allowance		(52,198	)		(7,206	)
Total deferred tax assets, net of valuation allowance		4,672			6,916
Deferred tax liabilities:
Amortization and depreciation		(4,471	)		(2,623	)
Unbilled accounts receivable, deferred for tax purposes		(853	)		(1,611	)
Goodwill basis adjustment and amortization		—			(2,886	)
Telos ID basis difference		—			(417	)
Total deferred tax liabilities		(5,324	)		(7,537	)
Net deferred tax liabilities	$	(652	)	$	(621	)

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

	Balance Beginning of Period		Additions		Recoveries			Balance End of Period

December 31, 2020	$	7,206	$	44,992	$	--		$	52,198
December 31, 2019	$	6,652	$	554	$	--		$	7,206
December 31, 2018	$	7,219	$	--	$	(567	)	$	6,652

In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted. The CARES Act, among other things, includes certain changes to U.S. tax law that impact the Company, including deferment of employer social security payments, modifications to interest deduction limitation rules, a technical correction to tax depreciation methods for certain qualified improvement property, and alternative minimum tax credit refund.

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 and we have considered the impact of each of these provisions as well as those under the CARES Act in our consolidated financial statements for the years ended December 31, 2020 and 2019.

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, 2020 and 2019. As a result of a full valuation allowance against our deferred tax assets and liabilities, a deferred tax liability related to goodwill remained on our consolidated balance sheets at December 31, 2020 and 2019.

We recorded deferred tax assets and liabilities related to the purchase of an additional 50% interest in the partnership Telos ID, including a deferred tax asset of $44.9 million for tax-deductible goodwill generated in the transaction. We also recorded a corresponding valuation allowance against the additional deferred taxes.

At December 31, 2020, for federal income tax purposes there was approximately a $18.2 million net operating loss available to be carried forward to offset future taxable income. Approximately $10.6 million of these net operating loss carryforwards expire between 2035 and 2037, the remaining will be carried forward indefinitely. As of December 31, 2020, there was approximately $2.5 million of research and development credit carryover which begins to expire in 2033. Certain tax attributes of the Company, including net operating losses and credits, would be subject to a limitation should an ownership change as defined under Section 382 of the Internal Revenue Code of 1986, as amended, occur. The limitations resulting from a change in ownership could affect the Company’s ability to utilize its tax attributes. A study was completed in 2020 which confirmed that no limitation applies to the Company's tax attributes as of December 31, 2020.

Under the provisions of ASC 740, we determined that there were approximately $763,000, $714,000, and $649,000 of unrecognized tax benefits as of December 31, 2020, 2019, and 2018, respectively. Included in the balance of unrecognized tax benefits as of December 31, 2020, 2019, and 2018 were $278,000, $369,000, and $369,000, respectively, of tax benefits that, if recognized, would impact the effective tax rate. Also included in the balance of unrecognized tax benefits as of December 31, 2020, 2019, and 2018 were $485,000, $345,000, and $280,000, respectively, of tax benefits that, if recognized, would not impact the effective tax rate due to the Company’s valuation allowance. The Company had accrued interest and penalties related to the unrecognized tax benefits of $241,000 and $304,000, which were recorded in other liabilities as of December 31, 2020 and 2019, 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, 2017 to 2020, has not been extended beyond the applicable statute of limitations. As of December 31, 2020, the Company is not under examination by any federal or state tax jurisdiction.

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

	2020			2019			2018
Unrecognized tax benefits, beginning of period	$	714		$	649		$	585
(Decrease) increase in prior year tax positions		(104	)		1			3
Increase related to current year tax positions		213			101			92
Decrease related to lapse of statutes		(60	)		(37	)		(31	)
Unrecognized tax benefits, end of period	$	763		$	714		$	649