(

)

Income Taxes

For the years ended

December 31, 2019,

2018,

and

2017,

income before income taxes consists of the following:

	2019		2018		2017
	(In thousands)
U.S. Operations	$	40,045	$	32,056	$	32,750
Foreign Operations		474		2,653		1,533
Income before income taxes	$	40,519	$	34,709	$	34,283

Income tax expense consisted of the following components:

	2019		2018			2017
	(In thousands)
Federal:
Current	$	5,574	$	2,144		$	10,947
Deferred		718		1,328			(1,596	)
Total	$	6,292	$	3,472		$	9,351

Foreign :
Current	$	94	$	882		$	387
Deferred		33		(178	)		704
Total	$	127	$	704		$	1,091

State :
Current	$	1,322	$	204		$	837
Deferred		372		282			61
Total	$	1,694	$	486		$	898

Total	$	8,113	$	4,662		$	11,340

Federal Tax Reform

December 22, 2017,

the Tax Cut and Jobs Act (the “Tax Act”) was enacted which, among other changes, reduced the U.S. federal corporate tax rate from

35%

21%

effective

January 1, 2018.

The Tax Act made broad and complex changes to the U.S. tax code. Based on the information available, and the current interpretation of the Tax Act, we made a reasonable estimate as of

December 31, 2017,

and recorded a provisional net tax benefit of

$1.9

million related to the remeasurement of the deferred tax assets and liabilities related to the following elements of the Tax Act:

●

Reduction in the U.S. Federal Corporate Tax Rate: The Tax Act reduced the corporate tax rate to

21%,

effective

January 1, 2018.

●

Availability of

100%

bonus depreciation on assets placed in service after

September 27, 2017.

●

Certain stock compensation plans potentially subject to limitations as to deductibility.

The above items were final as of

December 31, 2018,

and

material adjustments were made to the provisional amounts recorded as of

December 31, 2017.

Under the Tax Act, we were also subject to a

one

-time mandatory deemed repatriation tax on accumulated non-U.S. earnings, payable over

eight

years.

In addition, as a result of the Tax Act, we determined that we would

longer indefinitely reinvest the earnings of our Canadian subsidiary and recorded the withholding tax of

$706,000

associated with this planned repatriation in

December 2017.

December 2018,

the Canadian subsidiary declared a deemed dividend for

million to the Company. Withholding tax of

$150,000

was paid in

2018.

2019,

we recorded additional withholding tax of

$107,000

for the unremitted Canadian earnings.

The Tax Act subjects a U.S. corporation to tax on its Global Intangible Low Taxed Income (“GILTI”). Due to the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Tax Act. Under Generally Accepted Accounting Principles, we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense or factor such amounts into the measurement of deferred taxes. We elected the current period expense method and have

not

reflected any corresponding deferred tax assets and liabilities associated with the GILTI tax in the table of deferred tax assets and liabilities. GILTI tax has been recorded as current period expense of

$13,000

and

$40,000

2019

and

2018,

respectively.

We received notice in

December 2019,

that we met qualification requirements for the Nebraska Advantage

LB312

Act (“NAA”) related to certain investment and full-time equivalent employee thresholds in the year ended

2017.

NAA provides direct refunds of sales tax on qualified property, as well as investment credits and employment credits that can be claimed through credits of Nebraska income tax, employment tax, and sales tax on non-qualified property. We will receive direct refunds of Nebraska sales tax on qualified property incurred from

2014

2023.

Investment credits started to accumulate in

2014

and can be earned through

2023.

These credits can be claimed against Nebraska income taxes or through sales tax on non-qualified property through

2028.

The employment credits are earned from

2017

through

2023,

and they can be claimed against Nebraska payroll taxes through

2028.

December,

we recorded cumulative adjustments for direct refunds and credits earned through the year ending

December 31, 2019,

which reduced operating expenses by approximately

$1.9

million. In addition, income tax credits for the years

2017

2019

$24,000

were recorded as a reduction to income tax expense.

The difference between our income tax expense as reported in the accompanying consolidated financial statements and the income tax expense that would be calculated applying the U.S. federal income tax rate of

21%

for

2019

and

2018

and

35%

for

2017

pretax income was as follows:

	2019			2018			2017
	(In thousands)
Expected federal income taxes	$	8,509		$	7,285		$	11,999
Foreign tax rate differential		26			146			(131	)
State income taxes, net of federal benefit and state tax credits		1,344			376			608
Federal tax credits		(419	)		(150	)		(130	)
Uncertain tax positions		34			90			151
Nondeductible expenses (income) related to recapitalization		(24	)		151			504
Share based compensation		(1,579	)		(3,041	)		(1,564	)
Compensation limit for covered employees		--			--			955
Impact of 2017 Tax Act		--			--			(2,415	)
Tax depreciation method change		--			(308	)		--
Valuation allowance		--			--			535
Withholding tax on repatriation of foreign earnings		107			--			706
GILTI		13			40			--
Other		102			73			122
Total	$	8,113		$	4,662		$	11,340

Deferred tax assets and liabilities at

December 31, 2019

and

2018,

were comprised of the following:

	2019			2018
	(In thousands)
Deferred tax assets:
Allowance for doubtful accounts	$	35		$	41
Accrued expenses		537			424
Share based compensation		1,267			1,264
Accrued bonuses		120			198
Foreign tax credit from repatriation		535			535
Other		--			46
Gross deferred tax assets		2,494			2,508
Less valuation allowance		(535	)		(535	)
Deferred tax assets		1,959			1,973
Deferred tax liabilities:
Prepaid expenses		135			95
Deferred contract costs		990			786
Property and equipment		1,926			1,944
Intangible assets		5,553			4,919
Repatriation withholding		528			505
Unrealized translation gain on intercompany loan		214			--
Other		12			--
Deferred tax liabilities		9,358			8,249
Net deferred tax liabilities	$	(7,399	)	$	(6,276	)

In assessing the realizability of deferred tax assets, we consider whether it is more likely than

not

that some portion, or all, of the deferred tax assets will

not

be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider projected future taxable income, carry-back opportunities, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, we believe it is more likely than

not

that it will realize the benefits of these deductible differences excluding the foreign tax credit carryforward.

We had an unrecognized tax benefit at

December 31, 2019

and

2018,

$592,000

and

$554,000,

respectively, excluding interest of

$7,000

and

$6,000

December 31, 2019

and

2018,

respectively. Of these amounts,

$515,000

and

$482,000

December 31, 2019

and

2018,

respectively, represents the net unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate. The change in the unrecognized tax benefits for

2019

and

2018

is as follows:

	(In thousands)
Balance of unrecognized tax benefits at December 31, 2017	$	843
Reductions due to lapse of applicable statute of limitations		(35	)
Reductions due to tax positions of prior years		(66	)
Reductions due to settlement with taxing authorities		(300	)
Additions based on tax positions related to the current year		112
Balance of unrecognized tax benefits at December 31, 2018	$	554
Reductions due to lapse of applicable statute of limitations		(43	)
Reductions due to tax positions of prior years		--
Reductions due to settlement with taxing authorities		(300	)
Additions based on tax positions related to the current year		381
Balance of unrecognized tax benefits at December 31, 2019	$	592

We file a U.S. federal income tax return, various state jurisdictions returns and a Canada federal and provincial income tax return. All years prior to

2016

are now closed for US federal income tax and for years prior to

2016

for state income tax returns, and

exposure items exist for these years. The

2015

2019

Canada federal and provincial income tax returns remain open to examination.