13. Income Taxes

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

(in thousands)	Years ended December 31,
	2018			2017
Domestic	$	2,512		$	1,580
Foreign		(1,735	)		(1,176	)
Total	$	777		$	404

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

(in thousands)	Years ended December 31,
	2018			2017
Current:
Federal	$	(6	)	$	459
State		259			47
Foreign		234			19
Subtotal		487			525

Deferred:
Federal		600			(5,867	)
State		67			(942	)
Foreign		(23	)		131
Subtotal		644			(6,678	)
Total	$	1,131		$	(6,153	)

The effective income tax rate for the years ended December 31, 2018 and 2017 differed from the statutory federal income tax rate as presented below:

	Effective Tax Rate Percentage (%)
	Years ended December 31,
	2018	2017
Statutory federal income tax rate	21.0%	34.0%
State income taxes, net of federal tax benefit	30.1%	(184.7)%
Effect of foreign operations	(2.1)%	55.4%
Change in valuation allowance	(43.6)%	(2,332.0)%
Meals and Entertainment	10.0%	37.9%
Stock based compensation	(6.9)%	(81.7)%
162(m) Limit on compensation	0.0%	52.2%
Subpart F Income	0.0%	3.0%
Other permanent differences	0.4%	0.2%
Uncertain Tax Positions	46.3%	338.1%
Change in tax rate	(2.8)%	618.1%
Worthless stock deduction	0.0%	(257.0)%
Expired stock options	50.7%	30.2%
Change in APB 23	(4.4)%	46.0%
Prior year reconciling items	(2.4)%	117.3%
Expiration of capital Loss	49.3%	0.0%
Effective tax rate	145.6%	(1,523.0)%

The difference between the effective rate and statutory rate in 2018 primarily resulted from permanent differences, the write-off of the stock option deferred tax asset due to expirations, accruals related to uncertain tax positions for certain foreign tax contingencies and revenue recognition, expiration of capital loss, and return to provision true-ups. The Tax Cuts and Jobs Act (the Act) was enacted in the US on December 22, 2017. The Act reduced the US federal corporate income tax rate from 34% to 21%. In 2017, we recorded provisional amounts for certain enactment-date effects of the Act by applying the guidance in SAB 118 because we had not yet completed our enactment-date accounting for these effects. In 2018, the Company concluded its’ analysis under SAB 118 and determined that the changes to 2017 enactment-date provisional amounts increased the effective tax rate in 2018 by 1.77%.

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,
	2018			2017
Deferred tax assets:
Net operating loss carryforwards	$	4,074		$	5,009
Capital loss carryforwards		-			383
Accruals		760			487
Reserves		479			514
Alternative minimum tax credit carryforwards		213			299
Stock-based compensation expense		563			1,002
Intangibles		674			433
Undistributed earnings of foreign subsidiary		-			-
Other		324			135
Total deferred tax asset		7,087			8,262
Valuation allowance		(756	)		(1,095	)
Total deferred tax asset less valuation allowance		6,331			7,167

Deferred tax liabilities:
Undistributed earnings of foreign subsidiary		(103	)		(149	)
Software development costs		(163	)		(188	)
Fixed Assets		(44	)		(91	)
Indefinite-lived intangibles		(525	)		(337	)
Other		(138	)		(45	)
Total deferred tax liability		(973	)		(810	)

Net deferred tax asset	$	5,358		$	6,357

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 deferred 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. The Company provides forward forecasting which is 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, 2018, 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 valuation allowance in the U.S. is not appropriate at this time. A portion of the deferred tax assets is attributable to a capital loss that expired unutilized as of December 31, 2018 because the Company could not support the realization of this DTA, therefore, a valuation allowance has historically existed. The Company was not able to generate sources of capital income and, therefore the expiration and write-off of the capital loss deferred tax asset also generated the release of the valuation allowance existing at December 31, 2017 in the amount of $0.4 million.

The Company currently does not have sufficient positive objectively verifiable evidence to substantiate the recovery of the deferred tax assets for India, U.K, Swedish and Chinese deferred tax assets at December 31, 2018, accordingly, a full valuation allowance of $0.75 million has been established on these deferred tax assets, predominantly comprised of net operating losses.

At December 31, 2018, the Company's largest consolidated deferred tax asset was $5.1 million, excluding the impact of uncertain tax provisions. It primarily relates to a U.S. net operating loss carryforward of $4.4 million, which expires in various amounts between 2020 and 2037. 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 income tax effects of the Act. There were no material changes from what was reported as of December 31, 2017. The Company recognizes the tax on GILTI as a period cost in the period the tax is incurred. Under this policy, we have not provided deferred taxes related to temporary differences that upon their reversal will affect the amount of income subject to GILTI in the period. For the twelve months ended December 31, 2018, there is no GILTI inclusion.

As of December 31, 2018 and 2017, the Company's consolidated cash and cash equivalents totaled $12.1 million and $19.1 million, respectively, including cash and cash equivalents held at non-U.S. entities totaling $4.7 million and $5.4 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 $0.1 million 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, 2018, 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. Therefore, as of January 1, 2018, GSE UK is treated as a branch of the US for tax purposes. Accordingly, GSE UK’s 2018 activity has been included in the US Company’s income tax provision.

Uncertain Tax Positions

Foreign Uncertain Tax Positions

During 2018 and 2017, the Company recorded tax liabilities for certain foreign tax contingencies. 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 the liquidation of GSE UK. The uncertain tax position is recorded as a component of current and deferred liability.

During 2018, the Company recorded a tax liability for an uncertain tax position related to revenue recognition in the US. The uncertain tax position is recorded as a component of current and deferred liability.

We believe that is it reasonably possible that a decrease of up to $133,907 in unrecognized tax benefits related to federal and state tax exposures may be necessary within the next 12 months due to the intention of the Company to file an accounting method change related to revenue recognition for tax purposes.

The following table outlines the Company's 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		Interest and Penalties		Total

Balance, January 1, 2017	$	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
Increases		-		23		-		44		120		66		163		4		420
Decreases		12		-		18		-		-		-		-				30
Balance, December 31, 2018	$	204	$	285	$	82	$	72	$	461	$	111	$	996	$	4	$	2,215