INCOME TAXES

The U.S. operations of the Company are included in the consolidated U.S. federal income tax return of Holdings. However, for financial reporting purposes, the Company's U.S. provision for income taxes has been computed on the basis that the Company files separate consolidated U.S. federal income tax returns with its subsidiaries.

Income Tax Expense (Benefit)

Income (loss) before income taxes for our U.S. and foreign operations was comprised of the following (in thousands):



	Year Ended December 31,
	2017			2016			2015
U.S.	$	(39,082	)	$	(25,221	)	$	(20,234	)
Foreign	6,916			(2,599		)	(9,851		)
	$	(32,166	)	$	(27,820	)	$	(30,085	)

The provision (benefit) for income taxes was comprised of the following (in thousands):



	Year Ended December 31,
	2017			2016			2015
Current:
Federal	$	—		$	—		$	(4	)
State	26			96			132
Foreign	2,917			465			65
	2,943			561			193
Deferred:
Federal	(2,357		)	—			80,586
State	41			(53		)	1,119
Foreign	(1,312		)	(3,904		)	(1,993		)
	(3,628		)	(3,957		)	79,712
Tax provision (benefit):
Federal	(2,357		)	—			80,582
State	67			43			1,251
Foreign	1,605			(3,439		)	(1,928		)
	$	(685	)	$	(3,396	)	$	79,905

The differences between the U.S. federal income taxes computed at the statutory rate (35%) and the Company's income taxes for financial reporting purposes were as follows (in thousands):



	Year Ended December 31,
	2017			2016			2015
Statutory federal income tax	$	(11,258	)	$	(9,737	)	$	(10,530	)
Impact of U.S. tax reform	(2,366		)	—			—
Change in unrecognized tax positions	(341		)	(2,780		)	422
State income tax, less federal benefit	50			9			(6		)
Tax difference on foreign earnings	(562		)	225			871
Change in foreign taxes	—			—			415
Change in valuation allowance	13,535			8,606			88,737
Tax credits	—			—			(346		)
Non-deductible expenses	196			180			359
Other, net	61			101			(17		)
Income tax provision (benefit)	$	(685	)	$	(3,396	)	$	79,905

Under the accounting rules, companies are required to recognize the effects of changes in tax laws and tax rates on deferred tax assets and liabilities in the period in which the new legislation is enacted. The effects of the Tax Act on the Company as of December 31, 2017 included three major categories: (1) remeasurement of deferred taxes; (2) reassessment of the realizability of deferred tax assets; and (3) recognition of liabilities for taxes on mandatory deemed repatriation. As described further below, the Company recorded a total benefit to income taxes of $2.4 million in the year ended December 31, 2017. As the Company does not have all the necessary information to analyze all income tax effects of the Tax Act, this is a provisional amount which it believes represents a reasonable estimate of the accounting implications of this tax reform. The Company will continue to evaluate the Tax Act and adjust the provisional amounts as additional information is obtained. The ultimate impact of tax reform may differ from the provisional amounts due to changes in the Company’s interpretation and assumptions, as well as additional regulatory guidance that may be issued. The Company expects to complete its detailed analysis no later than the fourth quarter of 2018. Below is a brief description of each of the three categories of effects from U.S. tax reform and its impact on the Company.

Remeasurement of deferred taxes. Under the Tax Act, the U.S. corporate income tax rate was reduced from 35% to 21%. Accordingly, the Company remeasured its U.S. net deferred tax assets as of December 31, 2017 to a 21% rate resulting in a tax expense of $38.4 million. At the same time, we remeasured the valuation allowance recorded against our net deferred tax assets and recorded a tax benefit in an equal amount. Therefore, the net impact to tax expense was zero.

Reassessment of the realizability of deferred tax assets. The Tax Act eliminated the corporate alternative minimum tax (AMT) and allows for a refund of unutilized AMT credits. Prior to the Tax Act, the Company had an AMT credit of $2.5 million that had a full valuation allowance recorded against it. As a result of the Tax Act, the realizability of $2.4 million of the AMT credit is now assured and was recorded as a tax benefit as of December 31, 2017. The offset for this amount is recorded in notes and other receivables in the Consolidated Balance Sheet.

Liability for taxes due on mandatory deemed repatriation. Under the Tax Act, a company’s foreign earnings accumulated under the legacy tax laws are deemed to be repatriated into the United States. However, at December 31, 2017, the cumulative net earnings and profits associated with the Company’s foreign subsidiaries was a net loss; therefore, no tax expense was required to be recorded.

During 2016, Seitel Canada Ltd., a wholly-owned subsidiary of the Company (“Seitel Canada”), settled its outstanding appeal with Canada Revenue Agency related to certain royalty payments made to the Company’s U.S. entities for years 2003 to 2007 and a domestic audit for years 2011 to 2013. As a result of these settlements, the Company recorded a tax benefit of $2.3 million for the year ended December 31, 2016. The Company also recognized a $0.3 million and $0.4 million tax benefit for the years ended December 31, 2017 and 2016, respectively, due to the lapse in statute of limitations on previous uncertain tax positions.

Deferred Tax Asset/Liability

The components of the net deferred income tax asset (liability) reflected in the Company's consolidated balance sheets at December 31, 2017 and 2016 were as follows (in thousands):



	Deferred Tax Assets (Liabilities)
	December 31,
	2017			2016
Deferred tax assets:
Depreciation and amortization	$	7,354		$	10,210
Deferred revenue	1,808			2,115
Net operating loss carryforwards	50,353			74,656
Alternative minimum tax credit carryforward	167			2,523
Accrued expenses and other	2,328			7,891
Total deferred tax assets	62,010			97,395
Deferred tax liabilities:
Depreciation and amortization	(1,785		)	(3,315		)
Intangible assets	(189		)	(487		)
Deferred expenses and other	(129		)	(138		)
Total deferred tax liabilities	(2,103		)	(3,940		)
Valuation allowance:
Beginning balance	(95,412		)	(88,737		)
Decrease (increase) during the period	34,349			(6,675		)
Total valuation allowance	(61,063		)	(95,412		)
Net deferred tax liability	$	(1,156	)	$	(1,957	)
Deferred income taxes have been classified in the consolidated balance sheet as:
Deferred income tax asset	$	203		$	257
Deferred income tax liability	(1,359		)	(2,214		)
Net deferred income tax liability	$	(1,156	)	$	(1,957	)

During 2017, the Company’s valuation allowance provided against its U.S. net deferred tax assets decreased by $34.3 million primarily due to (i) remeasurement of the Company’s net deferred tax assets due to the Tax Act resulting in a decrease in the valuation allowance of $38.4 million; (ii) reassessment of the realizability of its AMT credit due to the Tax Act resulting in a decrease in the valuation allowance of $2.4 million; (iii) an additional valuation allowance of $13.0 million primarily due to U.S. net operating losses generated in 2017; (iv) an adjustment of $4.8 million to reduce the valuation allowance as a result of the expiration and forfeiture of stock options in 2017; and (v) decrease in the valuation allowance of $1.7 million related to a U.S. deferred tax asset associated with uncertain tax positions that were adjusted due to a lapse in the statute of limitations and the Tax Act. At December 31, 2017, the Company continues to provide a full valuation allowance against its U.S. federal tax assets and the majority of its state net deferred tax assets. The most significant piece of negative evidence considered in making this assessment was the pretax book losses for the years ended December 31, 2015, 2016 and 2017 which resulted in a cumulative pretax book loss as of December 31, 2017. Available positive evidence considered did not outweigh this negative evidence as of December 31, 2017. However, the amount of the deferred tax assets considered realizable could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present. During 2016, the Company’s valuation allowance increased by $8.6 million primarily due to U.S. net operating losses generated in 2016 partially offset by a $2.0 million decrease in the valuation allowance related to a U.S. deferred tax asset associated with uncertain tax positions that were adjusted due to the settlement with Canada Revenue Agency by Seitel Canada.

As of December 31, 2017, the Company has a U.S. federal net operating loss (NOL) carryforward of approximately $228.5 million which can be used to offset U.S. income taxes payable in future years. This U.S. NOL carryforward will expire in periods beginning 2027 through 2037. As of December 31, 2017, the Company has an AMT credit carryforward of approximately $0.2 million which can be used to offset regular U.S. federal income taxes payable in future years and which has an indefinite carryforward period. As of December 31, 2017, the Company has a Colorado state NOL carryforward of approximately $5.4 million which can be used to offset Colorado state income taxes payable in future years. This state NOL carryforward will expire in periods beginning 2028 through 2037.

Uncertain Tax Positions

The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes,” which prescribes a minimum recognition threshold a tax position must meet before being recognized in the financial statements. A reconciliation of the beginning and ending gross unrecognized tax benefits was as follows (in thousands):



	Year Ended December 31,
	2017			2016			2015
Balance at beginning of year	$	493		$	4,618		$	5,274
Additions (reductions) based on prior year tax positions	—			(2,156		)	197
Reductions related to settlements with taxing authorities	—			(1,783		)	—
Reductions as a result of a lapse of statute of limitations	(250		)	(449		)	—
Foreign currency translation	36			263			(853		)
Balance at end of year	$	279		$	493		$	4,618

As of December 31, 2017, the total $0.3 million of unrecognized tax benefits would impact the effective income tax rate, if recognized in future periods.

Uncertain tax positions are reflected as income tax assets and liabilities. Income tax-related interest and penalty expenses are recorded as a component of income tax expense. As of December 31, 2017, we had $0.1 million of accrued interest and no accrued penalties. As of December 31, 2016, we had $0.4 million of accrued interest and no accrued penalties. Income tax expense (benefit) for each of the years ended December 31, 2017 and 2016 included a $0.1 million benefit related to interest on unrecognized tax benefits whereas the year ended December 31, 2015 included a $0.5 million expense related to interest on unrecognized tax benefits.

With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2014, 2014 and 2010, respectively.