12. Income Taxes

The consolidated income before income taxes, by domestic and foreign sources, is as follows:

(in thousands)	Years ended December 31,
	2017		2016
Domestic	$	1,580	$	2,873
Foreign		(1,176)		(1,101)
Total	$	404	$	1,772

The (benefit) provision for income taxes is as follows:

(in thousands)	Years ended December 31,
	2017		2016
Current:
Federal	$	459	$	-
State		47		6
Foreign		19		221
Subtotal		525		227

Deferred:
Federal		(4,694)		127
State		(942)		19
Foreign		131		(23)
Subtotal		(5,505)		123
Total	$	(4,980)	$	350

The effective income tax rate for the years ended December 31, 2017 and 2016 differed from the statutory federal income tax rate as presented below:

	Effective Tax Rate Percentage (%)
	Years ended December 31,
	2017	2016
Statutory federal income tax rate	34.0%	34.0%
State income taxes, net of federal tax benefit	(184.9)%	1.3%
Effect of foreign operations	55.6%	8.6%
Change in valuation allowance	(2,045.3)%	(46.9)%
Change in tax rate	619.1%	0.0%
Uncertain tax positions	338.6%	11.8%
Worthless stock deduction	(257.6%)	0.0%
Stock-based compensation	(51.7)%	0.2%
Transfer pricing adjustments	117.5%	(0.4)%
162(m) limit on compensation	52.3%	4.1%
Change in APB 23 liability	46.2%	0.0%
Meals and entertainment	37.8%	7.7%
Other permanent differences	5.7%	(0.6)%
Effective tax rate	(1,232.7)%	19.8%

The difference between the effective rate and statutory rate in 2017 primarily resulted from the release of valuation allowance and change in the statutory tax rate from 34% to 21%, effective for tax years beginning after December 31, 2017 due to the Tax Cuts and Jobs Act.

Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. A summary of the tax effect of the significant components of the deferred income tax assets and liabilities is as follows:

(in thousands)	As of December 31,
	2017		2016
Deferred tax assets:
Net operating loss carryforwards	$	5,009	$	7,868
Capital loss carryforwards		383		549
Accruals		487		183
Reserves		514		514
Alternative minimum tax credit carryforwards		299		203
Stock-based compensation expense		1,002		1,224
Intangibles		433		391
Undistributed earnings of foreign subsidiary		-		37
Other		135		71
Total deferred tax asset		8,262		11,040
Valuation allowance		(1,095)		(10,477)
Total deferred tax asset less valuation allowance		7,167		563

Deferred tax liabilities:
Undistributed earnings of foreign subsidiary		(149)		-
Software development costs		(188)		(382)
Fixed Assets		(91)		(161)
Indefinite-lived intangibles		(337)		(316)
Other		(45)		(27)
Total deferred tax liability		(810)		(886)

Net deferred tax asset	$	6,357	$	(323)

Deferred tax liabilities are included in "Other liabilities" on the consolidated balance sheet.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The Company's ability to realize its deferred tax assets depends primarily upon the preponderance of positive evidence that could be demonstrated by three year cumulative positive earnings, reversal of existing deferred temporary differences; and generation of sufficient future taxable income to allow for the utilization of deductible temporary differences.

As of each reporting date, the Company's management considers new evidence, both positive and negative, that could impact management's view with regard to future realization of deferral tax assets to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. This analysis is performed on a jurisdiction by jurisdiction basis. In the fourth quarter, the Company began providing forward forecasting beyond one year which was incorporated into the scheduling analysis to support realization of the deferred tax assets.

Based on the assessment the Company's management performed as of December 31, 2017, we conclude that critical pieces of positive evidence supporting the realization of deferred tax assets exist including the strength of three year cumulative positive earnings, reversal of existing deferred temporary differences and future taxable income for the U.S. entities. As a result, the Company has determined that a portion of the historic valuation allowance should be released as realization of the associated asset is more likely than not. Accordingly, we reversed $9.4 million of valuation allowance against the deferred tax assets related to the U.S. entities. Because a portion of the deferred tax assets are capital in nature, the Company must assess the realizability of these assets separately from the deferred tax assets that are ordinary in nature. The Company determined that it would not be able to generate sources of capital income and, therefore, would need to continue to assess a valuation allowance in the amount of $0.4 million.

The Company currently does not have sufficient object evidence to substantiate the recovery of the deferred tax assets for U.K. Swedish and Chinese deferred tax assets at December 31, 2017, accordingly, a full valuation allowance of $0.7 million has been established on these deferred tax assets, predominantly comprised of net operating losses.

At December 31, 2017, the Company's largest deferred tax asset of $5.8 million primarily relates to a U.S. net operating loss carryforward of $5.0 million which expires in various amounts between 2020 and 2035, and and excludes the impact of uncertain tax positions. The amount of U.S. loss carryforward which can be used by the Company each year is limited due to changes in the Company's ownership which occurred in 2003. However, the Company does not anticipate that any of the loss carryforward will expire unutilized.

On December 22, 2017, the United States enacted tax reform legislation known as the H.R.1, commonly referred to as the "Tax Cuts and Jobs Act" (the Act), resulting in significant modifications to existing law.

The Company follows the guidance in SEC Staff Accounting Bulletin 118 (SAB 118), which provides additional clarification regarding the application of ASC 740 in situations where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act for the reporting period in which the Act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the Act's enactment date and ending when the Company has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstances should the measurement period extend beyond one year from the enactment date.

The Company has completed the accounting for the effects of the Act. Our financial statements for the year ended December 31, 2017, reflect certain effects of the Act predominantly related to the reduction in the corporate tax rate from 34% to 21%. As a result of the changes to the tax laws and tax rates under the Act, the Company incurred incremental income tax expense of $2.5 million during the year ended December 31, 2017 which consisted of the remeasurement of its net deferred tax asset from 34% to 21%. The Company has not recorded a charge related to the one-time deemed repatriation transition tax on unrepatriated foreign earnings given an estimated net negative earnings and profits position. The Company is evaluating available accounting policy alternatives to either record the U.S. income tax effect of future global intangible low-tax income (GILTI) inclusions in the period in which they arise or establish deferred taxes with respect to the expected future tax liabilities associated with future GILTI inclusions, but has not yet made a policy election.

As of December 31, 2017 and 2016, the Company's consolidated cash and cash equivalents totaled $19.1 million and $21.7 million, respectively, including cash and cash equivalents held at non-U.S. entities totaling $5.4 million and $4.2 million, respectively. The non-U.S. entities include operating subsidiaries located in China, United Kingdom, Sweden and India. Of these, the Company does not assert permanent reinvestment in the UK, Sweden or India. Accordingly, the Company analyzed the cumulative earnings and profits and determined no US deferred liability exists given aggregated accumulated deficits. A deferred tax liability in the amount of $149,000 has been recorded for India with respect to the undistributed earnings related to India's application of a Dividend Distributions Tax. Undistributed earnings in China are considered indefinitely reinvested as of December 31, 2017, to fund the Company's ongoing international operations. If China were to repatriate the funds it would not incur any tax due to an accumulated earnings and profits deficit.

The Company has made an entity classification (CTB) election to treat GSE UK as a disregarded entity effective January 1, 2018. GSE UK is deemed to distribute all its assets and liabilities to GSE in liquidation. The liquidation will be deemed to occur immediately before the close of December 31, 2017, the day before the election is effective. The provision includes a $3.0 million worthless stock deduction representing the Company's tax basis at the time of liquidation. See discussion regarding treatment of this item as an uncertain tax position.

Uncertain Tax Positions

Foreign Uncertain Tax Positions

During 2017 and 2016, the Company recorded tax liabilities for certain foreign tax contingencies. During 2016, the Company also determined that South Korea should be included in this inventory. The Company recorded these uncertain tax positions in other current liabilities on the consolidated balance sheets.

During 2017, the Company recorded a tax liability for an uncertain tax position related to the worthless stock deduction on liquidation of GSE UK. The uncertain tax position is recorded as a component of current and deferred liability.

The following table outlines the Company's foreign uncertain tax liabilities, including accrued interest and penalties for each jurisdiction:

	China				Ukraine				South Korea					U.S.
(in thousands)	Tax		Interest and Penalties		Tax		Interest and Penalties		Tax		Interest and Penalties			Tax	Total

Balance, January 1, 2016	$	225	$	152	$	21	$	15	$	-	$	-	$	-	$	413
Increases		-		57		68		13		129		8		-		275
Decreases		23		-		-		-		-		-		-		23
Balance, December 31, 2016	$	202	$	209	$	89	$	28	$	129	$	8	$	-	$	665
Increases		14		53		11		-		212		37		833		1,160
Decreases		-		-		-		-		-		-		-		-
Balance, December 31, 2017	$	216	$	262	$	100	$	28	$	341	$	45	$	833	$	1,825