18. Income Taxes

The Company accounts for income taxes under the asset and liability method; under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when these differences reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.

For financial reporting purposes, loss before income taxes, includes the following components (in thousands):


	For the year ended
	December 31, 2018		December 31, 2017
Domestic	$	(130,609)	$	(7,352)
Foreign		916		(437)
Loss before income taxes	$	(129,693)	$	(7,789)

Benefit for Income Taxes

The benefit for income taxes is as follows (in thousands):


	For the year ended
	December 31, 2018		December 31, 2017
Current:
Federal	$	—	$	(1,056)
State		712		229
Foreign		—		43
		712		(784)
Deferred:
Federal		(3,415)		(4,425)
State		(1,100)		(178)
Foreign		(2,124)		56
		(6,639)		(4,547)
Total	$	(5,927)	$	(5,331)

Income tax benefit for the years ended December 31, 2018 and 2017, respectively, differ from the amounts computed by applying the U.S. statutory income tax rate of 21% (in 2018) and 34% (in 2017) to pretax loss as follows (in thousands):


	Year ended December 31,
	2018		2017
U.S. Federal (benefit) provision
At statutory rate	$	(27,235)	$	(2,649)
State taxes		(358)		34
Federal Valuation allowance		23,792		(8,431)
Foreign tax adjustments		(2,332)		81
Disallowed interest expense		—		190
Federal tax rate change		—		7,338
Permanent Adjustments		236		—
Effect of uncertain tax positions		(30)		10
Book income from pre-transaction period		—		(1,932)
Other		—		28
Total	$	(5,927)	$	(5,331)

The effective tax rate from continuing operations was a benefit of 4.6% of pre tax loss for the year ended December 31, 2018 compared to a benefit of 68.4% for the year ended December 31, 2017. The difference in the effective tax rate for the year ended December 31, 2018, as compared to the year ended December 31, 2017, was primarily due to the impact of the Tax Act recorded in 2017 as discussed below and valuation allowance movement in 2018.

US Tax Reform

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code that affected the Company’s financial results for the year ended December 31, 2017, including, but not limited to: (1) requiring a one-time transition tax (payable over eight years) on certain un-repatriated earnings of foreign subsidiaries; (2) a future reduction of the U.S. federal corporate tax rate from 34% to 21% effective January 1, 2018, that reduced the current value of the Company’s deferred tax assets and liabilities; (3) bonus depreciation that allows for full expensing of qualified property placed in service after September 27, 2017. In addition, the Tax Act established new tax laws that may affect the Company’s financial results for the years ending after December 31, 2017, including, but not limited to: (1) a reduction of the U.S. federal income tax rate from 34% to 21%; (2) limitation of the deduction for interest expense; (3) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (4) a new provision designed to tax global intangible low-taxed income; (5) limitations on the deductibility of certain executive compensation; and (6) limitations on the use of Foreign Income Tax Credit to reduce the U.S. income tax liability.

Pursuant to the Staff Accounting Bulletin published by the Securities and Exchange Commission on December 22, 2017, addressing the challenges in accounting for the effects of the Tax Act in the period of enactment, companies reported provisional amounts for those specific income tax effects of the Tax Act for which the accounting was incomplete, but a reasonable estimate could be determined. Those provisional amounts were subject to adjustment during a measurement period of up to one year from the enactment date (measurement-period adjustment). Pursuant to this guidance, the estimated impact of the Tax Act was based on a preliminary review of the new tax law and projected future financial results and was subject to revision based upon further analysis and interpretation of the Tax Act and to the extent that actual results differed from projections available at that time.

In 2018, the Company completed its accounting with respect to the Tax Act and did not make any measurement period adjustments to the initial tax benefit of $6.3 million recorded in 2017.

Reduction of U.S. Federal Corporate Tax Rate: The Tax Act reduced the corporate tax rate to 21%, effective January 1, 2018. Consequently, we recorded a decrease related to deferred tax assets and liabilities with a corresponding net adjustment to deferred income tax benefit for the year ended December 31, 2017. We did not make any measurement-period adjustments related to this item in 2018. Our accounting for this element of the Tax Act is complete.

Valuation Allowances: The Company must assess whether its valuation allowance analyses are affected by the various aspects of the Tax Act. We did not make any measurement-period adjustments related to this item in 2018. Our accounting for this element of the Tax Act is complete.

Global Intangible Low-Taxed Income (GILTI) Policy Election: The FASB allows companies to adopt an accounting policy to either recognize deferred tax for GILTI or treat such tax cost as a current period expense when incurred. The Company has adopted an accounting policy to treat taxes due on GILTI as a current period expense.

GILTI is a part of the enacted tax reform where U.S. Shareholders of controlled foreign corporations (“CFCs”) are required to include in income the aggregate amount of “tested income” generated by its CFCs. In addition, a deduction of 50% of GILTI inclusion is available to offset taxable income after the use of net operating losses. The Company has CFCs operating in foreign jurisdictions that would be impacted by this aspect of tax reform. For the year ended December 31, 2018, the Company’s CFCs had a net “tested income” of approximately $0.8 million. As a result, there is $0.8 million GILTI inclusion in the current year.

As a part of the enacted tax reform, changes were made to the current deductibility of business interest expense. Under the Tax Act, generally interest expense is limited to 30% of adjusted taxable income (taxable income adjusted for depreciation, amortization, or interest). Starting in 2022, depreciation and amortization are no longer removed to arrive at adjusted taxable income, which will serve to lower the allowable deduction of interest expense. An analysis was performed and it is estimated that this limitation will continue in future years, which may limit the Company’s ability to utilize the carried forward disallowed interest deductions. As such, a valuation allowance was recorded against the carryforward amount.

Deferred Tax Assets and Liabilities

Deferred income taxes represent the future tax benefits and expense associated with the utilization or reversal of loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets for federal and state income taxes are as follows (in thousands):


	As of December 31,
	2018		2017
Deferred tax assets:
Federal and state NOL carryforward	$	31,157	$	9,889
Fixed assets		3		462
Accruals		27,946		682
Stock-based compensation		1,639		454
Inventory		667		835
Other intangibles		18,566		9,151
Allowance for customer credits and doubtful accounts		—		843
Deferred rent		—		985
Contribution carryforward		103		—
Business interest limitation		9,844		—
Deferred state income tax		309		231
Other		1,032		186
Total gross deferred tax assets		91,266		23,718
Less: valuation allowance		(77,864)		(19,975)
Total deferred tax assets	$	13,402	$	3,743

Deferred tax liabilities:
Indefinite lived intangibles	$	(10,696)	$	(9,382)
Fixed Assets		(2,586)		—
Prepaids		(120)		(90)
Debt discount		—		(921)
Total gross deferred tax liabilities		(13,402)		(10,393)
Net deferred tax liabilities	$	—	$	(6,650)

Realization of our deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. Because of our lack of U.S. earnings history, the net U.S. deferred tax assets have been fully offset by a valuation allowance. In 2018, this included a full valuation allowance against its indefinite lived assets, including non-expiring net operating losses and disallowed interest expense, which are in excess of its indefinite lived intangibles. The valuation allowance increased by $57.9 million during the year ended December 31, 2018.

In general, it is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. Historically, the Company has not made a provision for U.S. income tax with respect to accumulated earnings of foreign subsidiaries where the foreign investment of such earnings is essentially permanent in duration. Generally, such amounts would become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. The Company has not provided U.S. taxes on unremitted earnings of its foreign subsidiaries as it has an accumulated deficit in earnings and profits and thus, no earnings to remit.

Net Operating Loss and Tax Credit Carryforwards

As of December 31, 2018, the Company had a net operating loss carryforward for federal income tax purposes of approximately $102.8 million, portions of which will begin to expire in 2018. Federal NOLs generated in 2018 and beyond have no expiration and can be carried forward indefinitely. We had a total state net operating loss carryforward of approximately $90.4 million, which will begin to expire in 2019. We had a foreign net operating loss carryforward of $13.7 million that has no expiration date. Utilization of some of the federal and state net operating loss and credit carryforwards are subject to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of net operating losses and credits before utilization. The net operating losses are presented net of any expirations associated with such limitations.

Unrecognized Tax Benefits

The Company utilizes a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

The Company’s unrecognized tax benefits were acquired as part of purchase accounting in Fiscal 2016. The Company’s policy is to include interest and penalties related to unrecognized tax benefits, if any, within the income tax benefit in the consolidated statements of operations and comprehensive income (loss). If the Company is eventually able to recognize the uncertain positions, the Company’s effective tax rate would be reduced. The Company currently has a full valuation allowance against the net deferred tax assets which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future. Any adjustments to the uncertain tax positions would result in an adjustment to the net operating income (loss) or tax credit carry forwards rather than resulting in a cash outlay.

At December 31, 2018 and 2017, the Company had $0.1 million and $0.1 million of certain unrecognized tax benefits, included as a component of accounts payable and accrued expenses within the accompanying consolidated balance sheets, respectively. The Company has the following activity relating to unrecognized tax benefits (in thousands):


	Year Ended December 31,
	2018			2017
Beginning balance	$	119	$	81
Gross increase - tax positions in prior periods		—		38
Lapse in statutes of limitations		(30)		—
Ending balance	$	89	$	119

Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, we do not anticipate any significant changes to unrecognized tax benefits over the next 12 months.

The Company files income tax returns in the U.S. federal jurisdiction and in various state and local jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examination by taxing authorities for years prior to 2014. The Company is currently under examination by the Internal Revenue Service for the pre-acquisition years ended November 30, 2015 and December 31, 2015. The Company believes that any adjustments expected to result from this examination have been adequately reserved for.