Note 18. Income Taxes

On December 22, 2017, the 2017 Tax Reform was enacted into law, which significantly revised the Internal Revenue Code of 1986, as amended. The 2017 Tax Reform includes, among other items, permanent reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%; and modifying or repealing many other business deductions and credits.

The Company has assessed the impacts of the changes from the 2017 Tax Reform and recorded a provisional non-cash net tax charge of $13.1 million for the year ended June 30, 2018. This provisional tax charge consists primarily of a re-measurement of the net U.S. deferred tax assets to the lower enacted U.S. corporate tax rate of 21%. While we have completed our provisional analysis of the income tax effects of the 2017 Tax Reform, the related tax charge may differ, possibly materially, due to further refinement of our calculations, changes in interpretations and assumptions that we have made, additional guidance that may be issued by regulatory bodies, and actions and related accounting policy decisions we may take as a result of the new legislation. We will complete our analysis during the one-year measurement period from the enactment of the law as provided for by SAB 118, and any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined.

The provision for income taxes consisted of the following for the fiscal years ended June 30:

(In thousands)	June 30, 2018			June 30, 2017			June 30, 2016
Current Income Tax Expense (Benefit)
Federal	$	(9,439	)	$	764		$	34,932
State and Local	1,152			638			1,887

Total Current Income Tax Expense (Benefit)	(8,287		)	1,402			36,819

Deferred Income Tax Expense (Benefit)
Federal	31,263			(2,210		)	(17,529		)
State and Local	(573		)	1,905			(1,968		)

Total Deferred Income Tax Expense (Benefit)	30,690			(305		)	(19,497		)

Total Income Tax Expense	$	22,403		$	1,097		$	17,322

A reconciliation of the differences between the effective rates and federal statutory rates was as follows:

	June 30, 2018		June 30, 2017		June 30, 2016

Federal income tax at statutory rate	28.1	%	35.0	%	35.0	%
State and local income tax, net	0.6	%	293.6	%	(0.1	)%
Nondeductible expenses	0.2	%	45.4	%	0.8	%
Foreign rate differential	0.4	%	49.9	%	0.5	%
Income tax credits	(1.4	)%	(160.9	)%	(3.0	)%
Domestic production activity deduction	(1.5	)%	—		(5.2	)%
Unrecognized tax benefits	(6.7	)%	—		—
Change in tax laws	25.6	%	—		—
Excess tax benefits on share-based compensation	(0.3	)%	(134.3	)%	—
Other	(1.2	)%	70.8	%	(0.1	)%

Effective income tax rate	43.8	%	199.5	%	27.9	%

The principal types of differences between assets and liabilities for financial statement and tax return purposes are accruals, reserves, impairment of intangibles, accumulated amortization, accumulated depreciation and share-based compensation expense. A deferred tax asset is recorded for the future benefits created by the timing of accruals and reserves and the application of different amortization lives for financial statement and tax return purposes. The Company’s deferred tax liability is mainly attributable to different depreciation methods for financial statement and tax return purposes. A deferred tax asset valuation allowance is established if it is more likely than not that the Company will be unable to realize certain of the deferred tax assets. As of June 30, 2018 and 2017, temporary differences which give rise to deferred tax assets and liabilities were as follows:

(In thousands)	June 30, 2018			June 30, 2017
Deferred tax assets:
Accrued expenses	$	1,085		$	1,869
Share-based compensation expense	4,158			6,031
Reserve for returns	9,342			15,032
Reserves for rebates	—			11,194
Reserves for accounts receivable and inventory	5,425			2,026
Intangible impairment	1,337			2,176
Federal net operating loss	402			736
State net operating loss	4,495			2,944
Impairment on Cody note receivable	1,175			1,913
Accumulated amortization on intangible assets	10,868			25,505
Settlement Liability	—			6,019
Foreign net operating loss	880			736
Other	404			290

Total deferred tax asset	39,571			76,471
Valuation allowance	(8,120		)	(6,391		)

Total deferred tax asset less valuation allowance	31,451			70,080

Deferred tax liabilities:
Prepaid expenses	118			267
Property, plant and equipment	9,231			16,807
Other	39			253

Total deferred tax liability	9,388			17,327

Net deferred tax asset	$	22,063		$	52,753

The net deferred tax asset as of June 30, 2018 and 2017 is reduced by a valuation allowance of $8.1 million and $6.4 million, respectively, which are primarily related to deferred tax assets for various states, the impairment on the Cody note receivable as well as foreign net operating losses. The Company increased the valuation allowance in Fiscal 2018 primarily related to an increase of state deferred tax assets.

The Company may recognize the tax benefit from an uncertain tax position claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (exclusive of interest and penalties) was as follows:

(In thousands)	Balance
Balance at June 30, 2016	$	6,244
Additions for tax positions of the current year	168
Additions for tax positions of prior years	16
Additions from acquisitions	—
Reductions for tax positions of prior years	—
Settlements	—
Lapse of statute of limitations	(486		)

Balance at June 30, 2017	$	5,942
Additions for tax positions of the current year	294
Additions for tax positions of prior years	700
Additions from acquisitions	—
Reductions for tax positions of prior years	—
Settlements	—
Lapse of statute of limitations	(4,399		)

Balance at June 30, 2018	$	2,537

The amount of unrecognized tax benefits at June 30, 2018, 2017 and 2016 was $2.5 million, $5.9 million and $6.2 million respectively, of which $2.3 million, $4.2 million and $4.4 million would impact the Company’s effective tax rate, respectively, if recognized.

The Company has not recorded any interest and penalties for the periods ended June 30, 2018, 2017 and 2016 in the statement of operations and no cumulative interest and penalties have been recorded either in the Company’s consolidated balance sheet as of June 30, 2018 and 2017. The Company will recognize interest accrued on unrecognized tax benefits in interest expense and any related penalties in operating expenses.

The Company files income tax returns in the United States federal jurisdiction and various states. The Company’s tax returns for Fiscal Year 2014 and prior generally are no longer subject to review as such years generally are closed. The Company’s Fiscal Year 2016 federal return is currently under examination by the Internal Revenue Service (“IRS”). The Company cannot reasonably predict the outcome of the examination at this time. In July 2018, the Company was notified that the IRS will also expand their examination to include the Company’s Fiscal 2015 and Fiscal 2017 federal returns.