NOTE 13 - INCOME TAXES

12 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

INCOME TAXES

Components of income (loss) before taxes:

	Year Ended December  31,
(in thousands)	2018	2017
U.S. operations	($137)	$3,817
Foreign operations	2,034	1,344
Total income (loss) before taxes	$1,897	$5,161

Income tax expense (benefit) consists of:

(in thousands)	Year Ended December  31,
Current tax expense (benefit)	2018	2017
U.S. federal	$5	($494)
State	20	8
Foreign	266	198
	291	(288)
Deferred tax expense (benefit) – U.S. federal	-	-
Total income tax expense (benefit)	$291	($288)

A reconciliation of our effective income tax and the U.S. federal tax rate is as follows:

	Year Ended December  31,
	2018	2017
(in thousands)
Statutory tax	$398	$1,755
State and foreign income tax, net of federal income tax benefit	(159)	83
Valuation allowance for deferred tax assets	245	(4,800)
Federal rate change	-	2,979
Foreign sourced deemed dividend income	-	1,145
Stock based compensation	(282)	(970)
AMT credit refund	-	(494)
Other	89	14
Total income tax expense (benefit)	$291	($288)

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets are presented below:

	Year Ended December  31,
	2018	2017
(in thousands)
Deferred income tax assets:
Allowance for doubtful accounts	$8	$11
Inventory and product return reserves	467	406
Compensation accruals	1,515	1,233
Accrued liabilities	321	236
Book-over-tax depreciation and amortization	21	33
Foreign net operating loss carryforwards	132	133
U.S. net operating loss carryforwards	2,345	2,761
U.S. credit carryforwards	2,161	2,017
	6,970	6,830
Valuation Allowance	(6,970)	(6,830)
Total Deferred Income Tax Assets	$ -	$ -

The valuation allowance for deferred tax assets increased $140,000 and decreased $4,418,000 during the years ended December 31, 2018 and 2017, respectively.  The net deferred tax assets have a full valuation allowance provided due to uncertainty regarding our ability to utilize such assets in future years.  This full valuation allowance evaluation is based upon our volatile history of losses and the cyclical nature of our industry and capital spending.  Credit carryforwards consist primarily of research and experimental and foreign tax credits.  We intend to continue to reinvest foreign earnings of our operating subsidiaries.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code.  For the year ending December 31, 2017, we had completed our accounting for the effects of the Act.  The changes that impacted our 2017 financial statements include: a federal corporate tax rate decrease from 34% to 21% for tax years beginning after December 31, 2017, the repeal of corporate Alternative Minimum Tax (AMT) for tax years after December 31, 2017, and a one-time tax on the mandatory deemed repatriation of cumulative foreign earnings of “post 1986 Earnings & Profits”.  We computed our 2017 provision for income taxes and as a result we recorded a net tax benefit of $531,000 on our income statement in the fourth quarter of 2017, the period in which the legislation was enacted, made up of $67,000 of additional tax relating to the “deemed repatriation” and recognizing a tax benefit of $598,000 related to refundable “Alternative Minimum Tax Credits” in carryforward. The deemed repatriation tax resulted in the utilization of $3.4 million of net operating loss carryforwards and generated $1.0 million of foreign tax credits, as well as corresponding valuation allowance adjustments.

As a result of the corporate income tax rate reduction from 34% to 21%, we revalued our net deferred tax assets at December 31, 2017, which resulted in a decrease of the net deferred tax assets and corresponding valuation allowance balance of $3.0 million.

U.S. net operating loss carryforwards are $10,568,000 at December 31, 2018 with expiration years from 2022 to 2034.  Utilization of net operating loss and credit carryforwards is subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended.

The gross changes in uncertain tax positions resulting in unrecognized tax benefits are presented below:

	Year Ended December  31,
	2018	2017
(in thousands)
Unrecognized tax benefits, opening balance	$272	$226
Prior period tax position increases	-	10
Additions based on tax positions related to current year	36	36
Unrecognized tax benefits, ending balance	$308	$272

Historically, we have incurred minimal interest expense and no penalties associated with tax matters.  We have adopted a policy whereby amounts related to penalties associated with tax matters are classified as general and administrative expense when incurred and amounts related to interest associated with tax matters are classified as interest income or interest expense.

Tax years that remain open for examination include 2015, 2016, 2017 and 2018 in the United States of America.  In addition, various tax years from 2001 to 2014 may be subject to examination in the event that we utilize the net operating losses and credit carryforwards from those years in our current or future year tax returns.