15. Income Taxes

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

(in thousands)	Years ended December 31,
	2019			2018
Domestic	$	(6,671	)	$	2,512
Foreign		319			(1,735	)
Total	$	(6,352	)	$	777

The provision for income taxes is as follows:

(in thousands)	Years ended December 31,
	2019			2018
Current:
Federal	$	(30	)	$	(6	)
State		60			259
Foreign		354			234
Subtotal		384			487

Deferred:
Federal		4,686			600
State		663			67
Foreign		-			(23	)
Subtotal		5,349			644
Total	$	5,733		$	1,131

The effective income tax rate for the years ended December 31, 2019 and 2018 differed from the statutory federal income tax rate as presented below:

	Effective Tax Rate percentage (%)
	Years ended December 31,
	2019			2018
Statutory federal income tax rate		21.0	%		21.0	%
State income taxes, net of federal tax benefit		(12.1	)%		30.1	%
Effect of foreign operations		(0.3	)%		(2.1	)%
Change in valuation allowance		(93.1	)%		(43.6	)%
Meals and Entertainment		(1.4	)%		10.0	%
Stock based compensation		(1.4	)%		(6.9	)%
Other permanent differences		(0.6	)%		0.4	%
Uncertain Tax Positions		0.9	%		46.3	%
Change in tax rate		0.0	%		(2.8	)%
Expired stock options		0.0	%		50.7	%
Change in APB 23		0.0	%		(4.4	)%
Prior year reconciling items		(3.3	)%		(2.4	)%
Expiration of capital Loss		0.0	%		49.3	%
Effective tax rate		(90.3	)%		145.6	%

The difference between the effective rate and statutory rate in 2019 primarily resulted from the recognition of a valuation allowance, permanent differences, accruals related to uncertain tax positions for certain foreign tax contingencies and revenue recognition, and return to provision true-ups. The difference between the effective tax 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.

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,
	2019			2018
Deferred tax assets:
Net operating loss carryforwards	$	4,396		$	4,074
Accruals		247			760
Reserves		408			479
Alternative minimum tax credit carryforwards		126			213
Stock-based compensation expense		539			563
Intangible assets		1,021			674
Goodwill		1,037			-
Operating lease liabilities		998			-
Other		464			324
Total deferred tax assets		9,236			7,087
Valuation allowance		(7,576	)		(756	)
Total deferred tax assets less valuation allowance		1,660			6,331

Deferred tax liabilities:
Undistributed earnings of foreign subsidiary		-			(103	)
Software development costs		(161	)		(163	)
Fixed assets		(7	)		(44	)
Intangible assets		(22	)		-
Indefinite-lived intangibles		(728	)		(525	)
Operating lease - right of use assets		(510	)		-
Other		(175	)		(138	)
Total deferred tax liabilities		(1,603	)		(973	)

Net deferred tax assets	$	57		$	5,358

Deferred tax liabilities are included in “Other Liabilities” on the consolidated balance sheets. As of December 31, 2018, there was a deferred tax liability related to the operations in India. As a result of the sale of the India subsidiary during 2019, there is no longer a deferred tax liability as of December 31, 2019.

The Company files tax returns in the United States federal jurisdiction and in several state and foreign jurisdictions. Because of the net operating loss carryforwards, the Company is subject to U.S. federal and state income tax examinations for tax years 2000, and forward, and is subject to foreign tax examinations by tax authorities for the years 2014 and forward. Open tax years related to state and foreign jurisdictions remain subject to examination but are not considered material to our financial position, results of operations or cash flows.

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 the future realization of deferred tax assets to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. The 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.

The Company performed a detailed analysis of the valuation allowance position for it’s worldwide deferred tax assets. Both objectively verifiable positive and negative evidence are considered in the analysis. When analyzing the need for a valuation allowance, the Company first looks to the history of cumulative income or losses and three years is generally considered a reliable measure of historical earnings.

At September 30, 2019, the Company relied upon the strength of its three year cumulative positive core earnings and the projection of future taxable income in the U.S., both of which supported the realization of all of the U.S. deferred tax assets. At this time, the Company determined that a valuation allowance in the U.S. was not appropriate.

Since the third quarter analysis, the U.S. three year cumulative positive core earnings has decreased substantially. Furthermore, due to substantial doubt about the entity’s ability to continue as a going concern, the Company no longer feels that it can rely upon forecasted future earnings and its impact on future taxable income in the valuation allowance analysis. Accordingly, the Company has determined that it does not have sufficient positive, objectively verifiable evidence to substantiate the realizability of the U.S. deferred tax assets at December 31, 2019 and therefore a valuation allowance is appropriate at this time on its U.S. deferred tax assets in the amount of $6.9 million, with the exception of its alternative minimum tax credit that will be refunded at the filing of its 2019 U.S. income tax return.

Due to a history of losses in the U.K. and Sweden and the inability to rely upon forecasted future earnings in China and Slovakia due to the going concern opinion, the Company does not have sufficient positive, objectively verifiable evidence to substantiate the recovery of the deferred tax assets for its U.K., Swedish, and Chinese deferred tax assets at December 31, 2019. 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, 2019, the Company’s largest consolidated deferred tax asset was $5.3 million of net operating losses, excluding the impact of uncertain tax provisions. It primarily relates to a U.S. Federal net operating loss carryforward of $4.0 million net ($19.2 million gross). $3.9 million net ($18.5 million gross) of the net operating loss carryforward expires in various amounts between 2023 and 2037; $0.1 million net ($0.7 million gross) of the net operating loss carryforward is an indefinite lived deferred tax asset. The net operating loss deferred tax asset also includes $0.7 million net of state net operating losses. $0.5 million net of the state net operating loss carryforwards expire in various amounts through 2039; $0.2 million of the state net operating loss is an indefinite lived deferred tax asset.

The net operating loss deferred tax asset also includes $0.6 million net ($2.8 million gross) of net operating losses from international operations which is an indefinite lived deferred tax asset.

As of December 31, 2019 and 2018, the Company’s consolidated cash and cash equivalents totaled $11.7 million and $12.1 million, respectively, including cash and cash equivalents held at non-U.S. entities totaling $4.4 million and $4.7 million, respectively. The non-U.S. entities include operating subsidiaries located in China, United Kingdom, Sweden and Slovakia. Of these, the Company does not assert permanent reinvestment in the UK, Sweden or Slovakia. Accordingly, the Company analyzed the cumulative earnings and profits and determined no US deferred liability exists given aggregated accumulated deficits. Undistributed earnings in China are considered indefinitely reinvested as of December 31, 2019, to fund the Company’s ongoing international operations. If the Company were to repatriate funds from China, the Company 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 2019 activity has been included in the US Company’s income tax provision.

Uncertain Tax Positions

During 2019 and 2018, 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 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. An accounting method change was filed with the 2018 tax return, accordingly, the uncertain tax position related to revenue recognition has been reversed in 2019.

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, 2018	$	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
Increases		-		33		-		-		93		67		-		2		195
Decreases		3		-		4		12		-		-		203		-		222
Balance, December 31, 2019	$	201	$	318	$	78	$	60	$	554	$	178	$	793	$	6	$	2,188