Note 18. Income Taxes

The Company uses the liability method to account for income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities.

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 following table summarizes the components of the provision for income taxes for the fiscal years ended June 30:


	June 30,		June 30,		June 30,
(In thousands)	2019		2018		2017
Current Income Tax Expense (Benefit)
Federal	$	13,185	$	(9,439)	$	764
State and Local		(81)		1,152		638
Total Current Income Tax Expense (Benefit)		13,104		(8,287)		1,402
Deferred Income Tax Expense (Benefit)
Federal		(85,022)		31,263		(2,210)
State and Local		(2,220)		(573)		1,905
Total Deferred Income Tax Expense (Benefit)		(87,242)		30,690		(305)
Total Income Tax Expense (Benefit)	$	(74,138)	$	22,403	$	1,097

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


	June 30,		June 30,		June 30,
	2019		2018		2017

Federal income tax at statutory rate	21.0	%	28.1	%	35.0	%
State and local income tax, net	0.5	%	0.6	%	293.6	%
Nondeductible expenses	(0.1)	%	0.2	%	45.4	%
Foreign rate differential	(0.4)	%	0.4	%	49.9	%
Income tax credits	0.5	%	(1.4)	%	(160.9)	%
Domestic production activity deduction	—	%	(1.5)	%	—	%
Unrecognized tax benefits	0.1	%	(6.7)	%	—	%
Change in tax laws	—	%	25.6	%	—	%
Excess tax benefits on share-based compensation	(0.3)	%	(0.3)	%	(134.3)	%
Other	0.1	%	(1.2)	%	70.8	%
Effective income tax rate	21.4	%	43.8	%	199.5	%

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, 2019 and 2018, temporary differences which give rise to deferred tax assets and liabilities were as follows:


	June 30,		June 30,
(In thousands)	2019		2018
Deferred tax assets:
Accrued expenses	$	—	$	1,085
Share-based compensation expense		4,134		4,158
Reserve for returns		12,014		9,342
Reserves for rebates		—		—
Reserves for accounts receivable and inventory		8,208		5,425
Intangible impairment		—		1,337
Federal net operating loss		324		402
State net operating loss		6,479		4,495
Impairment on Cody note receivable		1,161		1,175
Accumulated amortization on intangible assets		76,401		10,868
Settlement Liability		—		—
Foreign net operating loss		1,792		880
Interest Carryforward		11,008		—
Other		2,506		404
Total deferred tax asset		124,027		39,571
Valuation allowance		(13,549)		(8,120)
Total deferred tax asset less valuation allowance		110,478		31,451
Deferred tax liabilities:
Prepaid expenses		182		118
Property, plant and equipment		991		9,231
Other		—		39
Total deferred tax liability		1,173		9,388
Net deferred tax asset	$	109,305	$	22,063

The net deferred tax asset as of June 30, 2019 and 2018 is reduced by a valuation allowance of $13.5 million and $8.1 million, respectively, which are primarily related to deferred tax assets for various states and foreign net operating losses.The federal and state and local tax deferred tax assets begin to expire in fiscal years 2026 and 2036, respectively. The Company increased the valuation allowance in Fiscal 2019 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, 2017	$	5,942
Additions for tax positions of the current year		294
Additions for tax positions of prior years		700
Lapse of statute of limitations		(4,399)
Balance at June 30, 2018	$	2,537
Additions for tax positions of the current year		244
Additions for tax positions of prior years		36
Lapse of statute of limitations		(618)
Balance at June 30, 2019	$	2,199

The amount of unrecognized tax benefits at June 30, 2019, 2018 and 2017 was $2.2 million, $2.5 million and $5.9 million respectively, of which $2.1 million, $2.3 million and $4.2 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, 2019, 2018 and 2017 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, 2019 and 2018. 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. In October 2018, the Company was notified that the Commonwealth of Pennsylvania will conduct a routine field audit of the Company’s Fiscal 2016 and Fiscal 2017 corporate tax returns.