INCOME TAXES

On December 22, 2017, the United States (“U.S.”) enacted significant changes to the U.S. tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”). The Tax Act included significant changes to existing tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income (“Transition Tax”), deductions, credits and business-related exclusions.

On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. The Company did not record additional provisional income tax given the Company has full valuation allowances on its deferred tax assets and liabilities and the net operating loss generated in 2017.

Accordingly, the Company’s income tax provision as of December 31, 2018 and 2017 reflects (i) the current year impacts of the U.S. Tax Act on the estimated annual effective tax rate and (ii) the following discrete items resulting directly from the enactment of the Tax Act based on the information available, prepared, or analyzed (including computations) in reasonable detail:

(a) The Tax Act reduced the U.S. federal corporate tax rate from 35% to 21%. The impact from the permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% is effective January 1, 2018. The Company adjusted the deferred tax asset and liabilities and the corresponding valuation reserve as a result of the reduction in the U.S. federal corporate tax rate.

The Tax Act created a new requirement that certain income (commonly referred to as “GILTI”) earned by controlled foreign corporations (CFC’s) must be included currently in the gross income of the CFC’s U.S. shareholder. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). Our selection of an accounting policy of the new GILTI tax rules will depend on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. The Company has included an estimate of the GILTI tax in the Company’s annualized effective tax rate used to determine tax expense for the years ended December 31, 2019 and 2018.

Within the calculation of the Company’s annual effective tax rate the Company has used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, and the FASB and/or various other taxing jurisdictions. For example, the Company anticipates that the state jurisdictions will continue to determine and announce their conformity to the Tax Act which could have an impact on the annual effective tax rate.

The components of income (loss) before taxes for the years ended December 31 are as follows:



Origin of income before taxes	2019			2018			2017
United States	$	(5,387	)	$	3,277		$	(9,821	)
Foreign	(2,378		)	(3,272		)	(1,208		)
Income (Loss) before income taxes	$	(7,765	)	$	5		$	(11,029	)

Significant components of income tax benefit (expense) for the years ended December 31 are as follows:



	2019			2018			2017
Current:
Federal	$	—		$	(18	)	$	111
State	(14		)	(13		)	—
Foreign	—			—			(65		)
Total current	(14		)	(31		)	46
Deferred:
Federal	—			(2		)	534
Foreign	—			—			—
Total deferred	—			(2		)	534
Income tax benefit (expense)	$	(14	)	$	(33	)	$	580

A reconciliation between the provision for income taxes calculated at the U.S. federal statutory income tax rate and the consolidated income tax expense in the consolidated statements of operations for the years ended December 31 is as follows:



	2019		2018		2017
Provision at the U.S. federal statutory rate	21.0	%	21.0	%	34.0	%
State taxes, net of federal benefit	2.7	%	(86.5	)%	—	%
Foreign tax rate differential	—	%	(2,210.3	)%	(0.9	)%
Valuation allowance	(29.2	)%	(7,152.8	)%	15.0	%
Federal tax rate change	—	%	—	%	(43.9	)%
Other true up	1.6	%	8,904.9	%	—	%
Intangible assets impairment and other non-deductibles	2.3	%	2,194.6	%	(1.8	)%
Other	1.8	%	(994.6	)%	2.1	%
Income tax benefit (expense) effective rate	0.2	%	676.3	%	4.5	%

The deferred tax assets and liabilities at December 31 are as follows:



	2019			2018
Deferred tax assets:
Stock compensation expense	$	1,882		$	1,867
Goodwill	1,490			1,927
Royalty accruals	560			484
Bad debt allowance	466			345
Net operating loss carryforwards	9,146			6,654
Credit carry-forwards	814			685
Inventory reserve	243			277
Depreciation	502			515
Other	340			539
Total deferred tax assets	15,443			13,293
Deferred tax liabilities:
Intangible assets	(220		)	(283		)
Other	—			(137		)
Total deferred tax liabilities	(220		)	(420		)
Net deferred tax asset before valuation allowance	15,223			12,873
Valuation allowances for deferred tax assets	(15,394		)	(13,044		)
Net deferred tax liability	$	(171	)	$	(171	)

The change in the valuation allowance for deferred tax assets for the years ended December 31 is as follows:



Year	Balance at January 1		Charged to costs and expenses		(Deductions)/Other	Balance at December 31
2017	$	13,179	(945	)	—	$	12,234
2018	$	12,234	810		—	$	13,044
2019	$	13,044	2,350		—	$	15,394

For the years ended December 31, 2019, 2018 and 2017, there were no exercises of stock options.

As required by ASC 740, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense for all periods presented. There were no interest and penalties recognized in income tax expense during the years ended December 31, 2019, 2018 and 2017. There were no unrecognized tax benefits as of December 31, 2019, 2018 and 2017.

We are subject to taxation in the U.S., various states, and in non-U.S. jurisdictions. Our U.S. income tax returns are primarily subject to examination from 2016 through 2018; however, U.S. tax authorities also have the ability to review prior tax years to the extent loss carryforwards and tax credit carryforwards are utilized. The open years for the non-U.S. tax returns range from 2011 through 2018 based on local statutes.

On April 3, 2019, the Company received notice from the Internal Revenue Service that our U.S. income tax return for the year ended December 31, 2016 is currently under audit.

Management periodically estimates our probable tax obligations using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which we transact business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period. Tax accruals for tax liabilities related to potential changes in judgments and estimates for both federal and state tax issues are included in current liabilities on the consolidated balance sheet.

The investment in foreign subsidiaries other than Fuel Tech S.p.A (Chile) and Beijing Fuel Tech is considered to be indefinite in duration and therefore we have not provided a provision for deferred U.S. income taxes on the unremitted earnings from those subsidiaries. A provision has not been established because it is not practicable to determine the amount of unrecognized deferred tax liability for such unremitted foreign earnings and because it is our present intention to reinvest the undistributed earnings indefinitely.

As of December 31, 2019, the investment in Fuel Tech S.p.A (Chile) was no longer considered to be indefinite and a provision for deferred U.S income taxes was recorded. The deferred income taxes associated with this investment are offset by a valuation allowance.

As required by ASC 740, a valuation allowance must be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. We have approximately $17,469 of US net operating loss carryforwards available to offset future US taxable income as of December 31, 2019. The net operating loss carry-forwards related to tax losses generated in prior years in the US begin to expire in 2034. Further, we have tax loss carry-forwards of approximately $5,681 available to offset future foreign income in Italy as of December 31, 2019. We have recorded a full valuation allowance against the resulting $1,363 deferred tax asset because we cannot anticipate when or if this entity will have taxable income sufficient to utilize the net operating losses in the future. There is no expiration of the net operating loss carry-forwards related to tax losses generated in prior years in Italy. Finally, we have tax loss carry-forwards of approximately $12,689 available to offset future foreign income in China as of December 31, 2019. The net operating loss carry-forwards related to tax losses generated in prior years in China expire in 2022.