NOTE 10: INCOME TAXES

The following table presents the components of our income from continuing operations before income taxes, including inter-segment amounts:



	Fiscal Year Ended September 30,
	2018		2017		2016

	(in thousands)
Domestic*	$	29,001	$	29,740	$	(17	)
Foreign	28,075		13,499		380
	$	57,076	$	43,239	$	363


*	Includes the majority of our corporate administrative costs. See Note 15 for information pertaining to segment contribution.

The following table presents the significant components of the income tax provision from continuing operations:



	Fiscal Year Ended September 30,
	2018			2017			2016

	(in thousands)
Current:
Federal	$	(26	)	$	1,092		$	11,120
State and foreign	9,470			6,359			3,193
	9,444			7,451			14,313
Deferred:
Federal*	9,076			5,190			(3,766		)
State and foreign	(371		)	(1,435		)	(1,186		)
	8,705			3,755			(4,952		)
Total income tax expense	$	18,149		$	11,206		$	9,361

The year ended September 30, 2018 includes a $2.1 million charge resulting from the remeasurement of our domestic net deferred tax assets based on the new corporate income tax rate as a result of the Act, as well as $2.6 million charge resulting from recording a valuation allowance against foreign tax credit carryforwards that do not meet the “more likely than not” threshold to be utilized as a result of tax law changes included in the Act.

The following table presents a reconciliation of income taxes calculated at the statutory rate and the provision for income taxes attributable to continuing operations:



	Fiscal Year Ended September 30,
	2018			2017			2016

	(in thousands)
Income tax expense at the federal statutory rate	$	14,000		$	15,134		$	128
State taxes, net of federal benefit	1,265			(714		)	2,476
Mexico inflation adjustment	(936		)	(1,286		)	(142		)
Non-deductible items	2,214			1,114			1,860
Tax credits	(615		)	(321		)	2,788
Foreign rate differential	1,405			(172		)	277
Change in net operating loss carryforward	—			1,180			—
Change in valuation allowance	3,986			(3,211		)	1,511
Stock compensation	—			(386		)	—
Uncertain tax positions	(4,808		)	674			—
Change in tax rate resulting from enactment of the Act	2,060			—			—
Other	(422		)	(806		)	463
Total income tax expense	$	18,149		$	11,206		$	9,361
Effective tax rate	32		%	26		%	2,579		%

The amount of income tax expense (benefit) allocated to discontinued operations was $0.2 million, $0.1 million, and $(15.1) million during fiscal 2018, 2017, and 2016, respectively.

The following table shows significant components of our deferred tax assets and liabilities:



	September 30,
	2018			2017

	(in thousands)
Deferred tax assets:
Cash Converters International	$	9,782		$	13,550
Tax over book inventory	8,803			10,094
Accrued liabilities	4,667			6,957
Pawn service charges receivable	4,512			8,687
Stock compensation	3,328			3,356
Foreign tax credit	2,638			3,132
Capital loss carryforward	3,006			5,010
State and foreign net operating loss carryforwards	15,215			13,671
Book over tax depreciation	972			2,678
Other	137			162
Total deferred tax assets before valuation allowance	53,060			67,297
Valuation allowance	(20,254		)	(17,860		)
Net deferred tax assets	32,806			49,437
Deferred tax liabilities:
Tax over book amortization	15,700			20,629
Note receivable discount	17,396			10,569
Prepaid expenses	1,362			1,383
Total deferred tax liabilities	34,458			32,581
Net deferred tax (liability) asset	$	(1,652	)	$	16,856

As of September 30, 2018, we had gross state net operating loss carryforwards of approximately $121.0 million, which begin to expire in 2019 if not utilized. We also had foreign net operating loss carryforwards of $40.3 million, which will expire between 2030 and 2038 if not utilized. Additionally, we have a $2.6 million foreign tax credit that will expire during the years 2024 to 2027 if not utilized.

Deferred tax assets and liabilities are recorded for the estimated tax impact of temporary differences between the tax basis and book basis of assets and liabilities. A valuation allowance is established against a deferred tax asset when it is more likely than not that the deferred tax asset will not be realized. Our valuation allowance has been established to offset certain state and foreign net operating loss carryforwards, capital loss carryforwards, and foreign tax credit carryforwards that are not more likely than not to be utilized prior to expiration. The valuation allowance increased by $2.4 million in fiscal 2018, primarily due to the recording of a valuation allowance against the foreign tax credit carryforwards which we believe are not more likely than not to be utilized subsequent to tax law changes enacted as part of tax reform. In addition, a valuation allowance was recorded to offset net operating losses generated in the current year in foreign jurisdictions which we believe are not more likely than not to be utilized. These increases were partially offset by a decrease in the valuation allowance as a result of the reduction of the US statutory rate to 21% enacted as part of the Act. We believe our results from future operations will generate sufficient taxable income in the appropriate jurisdictions such that it is more likely than not that the remaining deferred tax assets will be realized.

Deferred taxes are not provided for undistributed earnings of foreign subsidiaries of approximately $50.0 million which are intended to be reinvested outside of the U.S. Accordingly, no provision for foreign withholding taxes associated with a distribution of those earnings has been made. We estimate that, upon distribution of our share of these earnings, we would be subject to withholding taxes of approximately $2.5 million as of September 30, 2018. We provided deferred income taxes on all undistributed earnings from Cash Converters International.

The following table presents a rollforward of unrecognized tax benefits:



	Fiscal Year Ended September 30,
	2018			2017		2016

	(in thousands)
Beginning balance	$	6,530		$	6,058	$	6,058
Increase for tax positions taken during a prior period	963			—		—
Increase for tax positions taken during the current period	—			472		—
Decrease for tax positions as a result of the lapse of the statute of limitations	(4,402		)	—		—
Ending balance	$	3,091		$	6,530	$	6,058

All of the above unrecognized tax benefits, if recognized, would impact our effective tax rate for the respective period of each ending balance. It is possible that unrecognized tax benefits will decrease by $1.8 million in the next 12 months due to the expiration of the statute of limitations for positions related to certain transaction between the US and foreign subsidiaries.

We are subject to U.S., Mexico, Canada, Guatemala, Honduras, El Salvador, and Peru income taxes as well as income taxes levied by various state and local jurisdictions. With few exceptions, we are no longer subject to examinations by tax authorities for years before the tax year ended September 30, 2013. We believe that adequate provisions have been made for any adjustments that may result from tax examinations.