Income Taxes

The components of income before income taxes and income tax expense for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):



	Years ended December 31,
	2017			2016			2015
Income before income taxes:
Domestic	$	2,901		$	13,988		$	18,656
Foreign	16,788			16,046			10,967
Total income before income taxes	$	19,689		$	30,034		$	29,623

Income tax expense (benefit):
Current:
Federal	$	3,210		$	5,511		$	6,802
State and local	256			1,152			1,418
Foreign	3,645			4,885			3,710
Total current	7,111			11,548			11,930
Deferred:
Federal	(241		)	(1,039		)	(198		)
State and local	(176		)	56			23
Foreign	104			(778		)	(921		)
Total deferred	(313		)	(1,761		)	(1,096		)
Total income tax expense	$	6,798		$	9,787		$	10,834

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. The sources and tax effects of the differences are as follows:



	December 31,
	2017		2016		2015
Federal income tax rate	35.0	%	35.0	%	35.0	%
State and local taxes net of federal benefit	0.2		2.4		3.2
Domestic production deduction	(1.1	)	(0.6	)	(0.6	)
Foreign tax rate differential	(8.8	)	(5.8	)	(4.3	)
Permanent differences	(6.2	)	4.8		2.1
Other	(0.9	)	(3.2	)	1.2
Tax Cuts and Jobs Act of 2017	16.3		—		—
Effective tax rate	34.5	%	32.6	%	36.6	%

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company has calculated its best estimate of the impact of the 2017 Tax Act in its year end income tax provision in accordance with its understanding of the 2017 Tax Act and guidance available as of the date of this filing, and as a result has recorded $3.2 million as an additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional tax benefit amount related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future is $1.4 million. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings is $4.6 million estimated on cumulative foreign earnings as of December 31, 2017 of $56.7 million. As we complete our analysis of the 2017 Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes in the period in which the adjustments are made.

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118") 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 Act. In accordance with SAB 118, the Company has determined that the $1.4 million deferred tax benefit recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the $4.6 million of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings are provisional amounts, and a reasonable estimate at December 31, 2017. Additional work is necessary to do a more detailed analysis of historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 in which the analysis is complete.

The 2017 Tax Act creates a new requirement that Global Intangible Low-Taxed Income (“GILTI”) earned by a controlled foreign corporation (“CFC”) must be included in the gross income of the U.S. shareholder. The Tax Act also imposes the Base Erosion and Anti-abuse Tax (“BEAT”) which applies a limited-scope minimum tax on large corporations. Because of the complexity of the new GILTI and BEAT tax rules, we are continuing to evaluate these provisions of the Tax Act and whether taxes due on future U.S. inclusions related to GILTI or BEAT should be recorded as a current-period expense when incurred, or factored into the company’s measurement of its deferred taxes. As a result, we have not included an estimate of the tax expense or benefit related to these items for the period ended December 31, 2017.

The increase in the effective income tax rate compared to 2016 is primarily due to the effect of the 2017 Tax Act, partially offset by a decrease in the effective rate due to an increase in foreign income taxed at lower rates and a decrease in U.S. income taxed a higher rates.

Uncertain Tax Positions

As of December 31, 2017 and 2016, we had no uncertain tax positions reflected on our consolidated balance sheet. The Company files income tax returns in U.S. federal, state and local jurisdictions, and various non-U.S. jurisdictions, and is subject to audit by tax authorities in those jurisdictions. Tax years 2014 through 2016 remain open to examination by these tax jurisdictions, and earlier years remain open to examination in certain of these jurisdictions which have longer statutes of limitations.

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Significant components of our deferred tax assets and liabilities are as follows (in thousands):



	December 31,
	2017			2016
Deferred tax assets:
Allowance for doubtful accounts	$	559		$	357
Accrued liabilities and other	2,173			3,156
Stock-based compensation expense	599			910
Net federal, state and foreign operating loss carryforwards	1,432			1,292
Foreign tax credit carryforwards	—			1,207
Deferred tax assets	4,763			6,922
Valuation allowance on deferred tax assets	(1,502		)	(1,320		)
Deferred tax liabilities:
Intangible assets, property and equipment, principally due to difference in depreciation and amortization	5,312			7,668
Net deferred tax liabilities	$	(2,051	)	$	(2,066	)

As of December 31, 2017, we had foreign and U.S. state net operating loss carryforwards of $7.3 million for tax purposes, which will be available to offset future taxable income. If not used, these carryforwards will expire beginning in 2018.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets may not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon these factors, management placed a valuation allowance of $1.5 million and $1.3 million as of the years ended December 31, 2017 and 2016, respectively, against certain deferred tax assets, including net operating loss carryforwards, due to the uncertainty of future profitability in foreign jurisdictions. Management believes it is more likely than not that the Company will realize the benefits of the remaining deferred tax assets. We remeasured our U.S. deferred tax assets and liabilities at the applicable tax rate of 21% in accordance with the 2017 Tax Act. The remeasurement resulted in a total decrease in our net deferred tax liabilities of $1.4 million.

Foreign Income

The 2017 Tax Act includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax. Notwithstanding the U.S. taxation of these amounts, we intend to continue to invest these earnings, as well as the capital invested in these subsidiaries, indefinitely outside of the U.S. and do not expect to incur any significant, additional taxes related to such amounts. The Company has not provided for any additional outside basis difference inherent in its foreign subsidiaries, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any additional outside basis difference in these entities is not practicable. In addition, the Company is still evaluating the impact of the one-time transition tax on the outside basis differences and cumulative temporary differences inherent in these subsidiaries as of December 31, 2017 and as a result, it is not practicable to provide the amount of any cumulative temporary differences related to unrecorded differences.