Income Taxes

Information pertaining to the Company’s income (loss) before income taxes and the applicable provision for income taxes is as follows:



	December 31,
	2018			2017
Income (loss) before income taxes:
Domestic income (loss)	$	(1,105,447	)	$	590,660
Foreign income	432,021			469,347
Total income (loss) before income taxes:	(673,426		)	1,060,007
Provision (benefit) for income taxes:
Current:
Federal	$	(231,564	)	$	2,640
State and local	(47,304		)	(85,972		)
Foreign	244,396			238,729
	(34,472		)	155,397
Deferred:
Federal	$	208,709		$	(530,478	)
State and local	308			(8,215		)
Foreign	58,743			390,902
	267,760			(147,791		)
Total provision for income taxes:	$	233,288		$	7,606

During 2018 and 2017, the Company recorded a tax provision of $233,288 and $7,606, respectively, related to federal, state and local and foreign income taxes. The tax provisions include a tax benefit related to our Minimum Tax Credit carryforwards which are now realizable on a more-likely-than-not basis as such amounts will be refundable under the TCJA, partially offset with the accrual of foreign withholding taxes as the Company is no longer permanently reinvesting its foreign earnings.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:



	December 31,
	2018			2017
Deferred Tax Assets:
Allowance for receivables	$	35,218		$	76,266
Deferred revenue	852,015			1,970,216
Share-based compensation	21,940			517,841
Accrued expenses and other liabilities	341,553			404,316
Domestic net operating loss carryforwards	19,405,651			19,572,148
Foreign net operating loss carryforwards	198,017			17,997
Tax credit carryforwards	3,106,022			3,106,022
AMT tax credit carryforwards	233,007			464,571
Capital loss carryforwards	31,466			57,768
Fixed assets	178,502			218,412
Interest expense carryforwards	63,823			—
Intangibles	287,547			625,126
Sub-total	24,754,761			27,030,683
Valuation allowance	(22,424,261		)	(25,602,357		)
Total Deferred Tax Assets	2,330,500			1,428,326
Deferred Tax Liabilities:
Prepaid commissions and other	(100,569		)	—
Tax method changes	(1,227,047		)	—
Deferred state income tax	(279,540		)	(450,797		)
Foreign withholding taxes	(481,892		)	(472,112		)
Total Deferred Tax Liabilities	(2,089,048		)	(922,909		)
Net Deferred Tax Assets	$	241,452		$	505,417

As of each reporting date, the Company considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. In assessing the Company’s ability to recover its deferred tax assets, the Company evaluated whether it is more likely than not that some portion or the entire deferred tax asset will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating losses can be utilized. The Company considered all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, historical earnings, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Based on these factors the Company determined that its U.S. deferred tax assets with the exception of its Minimum Tax Credit are not realizable on a more-likely-than-not basis and has recorded a full valuation allowance against such net deferred tax assets. The Company’s valuation allowance decreased by $1.2 million due to operations and an additional $2.0 million primarily related to the adoption of ASC 606.

As of December 31, 2018, the Company had federal net operating loss carry forwards of approximately $86.1 million which are set to expire beginning in 2030, if not utilized. As of December 31, 2018, the Company had approximately $3.1 million of research and development tax credit carryforwards which expire at various dates beginning in 2023, if not utilized.

For U.S. purposes, the Company has not completed its evaluation of net operating losses and credit carryforwards utilization limitations under Internal Revenue Code, as amended (the “Code”), Section 382/383, change of ownership rules. If the Company has had a change in ownership, the net operating losses and credit carryforwards would be limited as to the amount that could be utilized each year and could be eliminated, based on the Code.

The effective tax rate before income taxes varies from the current statutory federal income tax rate as follows:



	December 31,
	2018			2017
Tax at Federal statutory rate	$	(141,419	)	$	371,003
Increase (reduction) in income taxes resulting from:
State and local taxes	543,278			355,888
Non-deductible expenses	200,464			(50,579		)
Stock compensation	509,951			1,273,956
Net effect of foreign operations	79,607			(14,022		)
Uncertain tax positions	(60,994		)	(41,482		)
Impact of U.S tax reform	—			14,295,386
Change in valuation allowance	(1,241,052		)	(15,072,298		)
Foreign withholding taxes	143,120			468,376
Decrease in unrecognized tax benefits	—			(1,427,906		)
Other	200,333			(150,716		)
	$	233,288		$	7,606

On December 22, 2017 the U.S. government enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). Under ASC 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. Among other things, the TCJA (1) reduces the US statutory corporate income tax rate from 35% to 21% effective January 1, 2018 (2) eliminates the corporate alternative minimum tax (3) requires companies to record/pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred (4) creates new taxes on certain foreign sourced earnings (5) changes rules related to uses and limitations of net operating loss carryforwards beginning after December 31, 2017.

While the TCJA provides for a modified territorial tax system, beginning in 2018, global intangible low-taxed income (“GILTI”) provisions will be applied providing an incremental tax on low taxed foreign income. The GILTI provisions require inclusions in U.S. taxable income related to foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income elated 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”). The Company has selected the “period cost method” as its accounting policy with respect to the new GILTI tax rules.

The TCJA reduces the corporate tax rate to 21% effective January 1, 2018. The Company remeasured its U.S. deferred tax assets and liabilities based on the lower federal rate and recorded a provisional income tax benefit of $13.5 million, offset by change in its valuation allowance of $13.6 million. The TCJA also enacted a one-time transition tax, which is based on the Company’s total post-1986 earnings and profits (“E&P”) that were previously deferred from U.S. income taxes. The Company recorded a provisional amount for the one-time transition tax liability for all of its foreign subsidiaries resulting in an income tax expense of $0.7 million, offset by valuation allowance. The Company has not yet completed its calculation of the total post-1986 E&P for these foreign subsidiaries as certain information is not readily available. As of December 31, 2018, the Company has completed its 2017 income tax returns and its accounting for the enactment-date income tax effects of the TCJA with no material adjustments to the provisional amounts recorded at December 31, 2017.

Due to the change in U.S. federal tax law, the Company does not intend to indefinitely reinvest any of its unremitted foreign earnings. As of December 31, 2018, the Company has provided for additional foreign withholding taxes totaling approximately $0.5 million on approximately $3.4 million of undistributed earnings of its subsidiaries operating outside of the United States for which withholding tax applies.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows:



	2018			2017
Balance at January 1,	$	180,202		$	217,461
Increases to tax positions taken in prior years	—			10,104
Expiration of statutes of limitation	(42,275		)	(53,169		)
Translation	(3,681		)	5,806
Balance at December 31,	$	134,246		$	180,202

At December 31, 2018, $192,106 including interest, if recognized, would reduce the Company’s annual effective tax rate. As of December 31, 2018, the Company had approximately $57,860 of accrued interest. The Company believes it is reasonably possible that $77,548 of its unrecognized tax benefits will reverse within the next 12 months due to expiring statute of limitations. The Company records any interest and penalties related to unrecognized tax benefits in income tax expense.

The Company files federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2015 through 2018 tax years generally remain subject to examination by federal and most state tax authorities. In addition to the U.S., the Company’s major taxing jurisdictions include China, Taiwan, Japan, France and Germany.