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,
	2019			2018
Income (loss) before income taxes:
Domestic loss	$	(1,847,586	)	$	(1,105,447	)
Foreign income	587,957			432,021
Total loss before income taxes:	(1,259,629		)	(673,426		)
Provision (benefit) for income taxes:
Current:
Federal	$	(116,504	)	$	(231,564	)
State and local	(40,860		)	(47,304		)
Foreign	237,244			244,396
	79,880			(34,472		)
Deferred:
Federal	$	121,898		$	208,709
State and local	12,700			308
Foreign	277,847			58,743
	412,445			267,760
Total provision for income taxes:	$	492,325		$	233,288

During 2019 and 2018, the Company recorded a tax provision of $492,325 and $233,288, 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.

The TCJA provides for a modified territorial tax system whereby, beginning in the Company's 2018 tax year, global intangible low-taxed income (“GILTI”) provisions will be applied providing an incremental tax on low taxed foreign income. The GILTI provisions require us to include in our U.S. income tax return 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 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”). The Company elected the "period cost method" as its accounting policy with respect to the new GILTI tax rules.

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,
	2019			2018
Deferred Tax Assets:
Allowance for receivables	$	52,439		$	35,218
Deferred revenue	383,920			852,015
Share-based compensation	25,127			21,940
Accrued expenses and other liabilities	232,777			341,553
Domestic net operating loss carryforwards	20,761,781			19,405,651
Foreign net operating loss carryforwards	187,328			198,017
Tax credit carryforwards	3,106,022			3,106,022
AMT tax credit carryforwards	116,504			233,007
Capital loss carryforwards	32,109			31,466
Fixed assets	179,534			178,502
Interest expense carryforwards	94,674			63,823
Lease liability	494,030			—
Intangibles	176,210			287,547
Sub-total	25,842,455			24,754,761
Valuation allowance	(23,613,642		)	(22,424,261		)
Total Deferred Tax Assets	2,228,813			2,330,500
Deferred Tax Liabilities:
Prepaid commissions and other	(134,618		)	(100,569		)
Tax method changes	(913,496		)	(1,227,047		)
Right of use asset	(387,740		)	—
Deferred state income tax	(470,545		)	(279,540		)
Foreign withholding taxes	(496,093		)	(481,892		)
Total Deferred Tax Liabilities	(2,402,492		)	(2,089,048		)
Net Deferred Tax Assets	$	(173,679	)	$	241,452

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 increased by $1.2 million due to operations.

As of December 31, 2019, the Company had federal net operating loss carry forwards of approximately $88.1 million, of which $83.4 million are set to expire beginning in 2030, if not utilized, and the remaining $4.7 million of which can be carryforward indefinitely. As of December 31, 2019, 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. Utilization of the net operating losses and credit carryforwards may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credit carryforwards before utilization.

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



	December 31,
	2019			2018
Tax at Federal statutory rate	$	(264,522	)	$	(141,419	)
Increase (reduction) in income taxes resulting from:
State and local taxes	(675,527		)	543,278
Non-deductible expenses	9,100			5,788
GILTI	208,632			194,676
Stock compensation	6,236			509,951
Net effect of foreign operations	(10,012		)	79,607
Uncertain tax positions	(71,119		)	(60,994		)
Change in valuation allowance	1,188,639			(1,241,052		)
Foreign withholding taxes	165,099			143,120
Other	(64,201		)	200,333
	$	492,325		$	233,288

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, 2019, the Company has provided for additional foreign withholding taxes totaling approximately $0.5 million on approximately $4.6 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:



	2019			2018
Balance at January 1,	$	134,246		$	180,202
Increases to tax positions taken in prior years	—			—
Expiration of statutes of limitation	(42,207		)	(42,275		)
Translation	(10,639		)	(3,681		)
Balance at December 31,	$	81,400		$	134,246

At December 31, 2019, $113,619 including interest, if recognized, would reduce the Company’s annual effective tax rate. As of December 31, 2019, the Company had approximately $32,219 of accrued interest. The Company believes it is reasonably possible that $7,981 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 2016 through 2019 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.