Income Taxes

12 Months Ended

Sep. 30, 2019

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,
	2019			2018		2017

	(in thousands)
Domestic*	$	(9,609	)	$	28,645	$	29,598
Foreign	13,783			26,894		13,080
	$	4,174		$	55,539	$	42,678


*	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,
	2019			2018			2017

	(in thousands)
Current:
Federal	$	431		$	(26	)	$	1,043
State and foreign	704			9,288			6,233
	1,135			9,262			7,276
Deferred:
Federal*	(4,264		)	9,498			4,082
State and foreign	5,535			(371		)	(265		)
	1,271			9,127			3,817
Total income tax expense	$	2,406		$	18,389		$	11,093

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,
	2019			2018			2017

	(in thousands)
Income tax expense at the federal statutory rate	$	878		$	13,623		$	14,937
State taxes, net of federal benefit	184			1,265			(242		)
Mexico inflation adjustment	(801		)	(936		)	(1,286		)
Non-deductible items	2,088			2,214			1,114
Tax credits	(551		)	(615		)	(536		)
Foreign rate differential	1,080			1,405			(151		)
Change in valuation allowance	1,601			3,986			(2,030		)
Stock compensation	(711		)	—			(386		)
Uncertain tax positions	(1,596		)	(4,808		)	202
Change in tax rate resulting from enactment of the Act	—			2,558			—
Other	234			(303		)	(529		)
Total income tax expense	$	2,406		$	18,389		$	11,093
Effective tax rate	58		%	33		%	26		%

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



	September 30,
	2019			2018

	(in thousands)
Deferred tax assets:
Cash Converters International	$	14,616		$	9,782
Tax over book inventory	6,858			11,963
Accrued liabilities	4,518			4,664
Pawn service charges receivable	1,699			2,171
Stock compensation	2,758			3,328
Foreign tax credit	2,638			2,638
Capital loss carryforward	—			3,006
State and foreign net operating loss carryforwards	15,806			15,223
Book over tax depreciation	2,659			972
Other	2,159			134
Total deferred tax assets before valuation allowance	53,711			53,881
Valuation allowance	(18,094		)	(20,254		)
Net deferred tax assets	35,617			33,627
Deferred tax liabilities:
Tax over book amortization	19,042			15,700
Note receivable discount	15,416			17,396
Prepaid expenses	1,146			1,362
Total deferred tax liabilities	35,604			34,458
Net deferred tax asset (liability)	$	13		$	(831	)

As of September 30, 2019, we had state net operating loss carryforwards of approximately $120.0 million, which begin to expire in 2020 if not utilized. We also had foreign net operating loss carryforwards of $50.2 million, which will expire between 2030 and 2038 if not utilized. Additionally, we have a $2.6 million foreign tax credit that will expire between 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 $3.3 million in fiscal 2019, primarily due to the recording of a valuation allowance against the foreign tax credit carryforwards generated during the year which we believe are not more likely than not to be utilized, offset by a decrease of $3.0 million due to the expiration of a capital loss carryforward that expired unused for which a valuation allowance had been recorded. 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 $61.0 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 $3.4 million as of September 30, 2019. 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,
	2019			2018			2017

	(in thousands)
Beginning balance	$	3,091		$	6,530		$	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	(1,656		)	(4,402		)	—
Ending balance	$	1,435		$	3,091		$	6,530

All of the above unrecognized tax benefits, if recognized, would impact our effective tax rate for the respective period of each ending balance.

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, 2014. We believe that adequate provisions have been made for any adjustments that may result from tax examinations.