HARTE HANKS INC

Income Taxes

The components of income tax expense (benefit) are as follows:



	Year Ended December 31,
In thousands	2017			2016			2015
Current
Federal	$	348		$	(6,360	)	$	2,920
State and local	245			(107		)	744
Foreign	472			807			545
Total current	$	1,065		$	(5,660	)	$	4,209

Deferred
Federal	$	(9,886	)	$	18,619		$	(38,048	)
State and local	(747		)	7,655			(3,523		)
Foreign	(326		)	16			2
Total deferred	$	(10,959	)	$	26,290		$	(41,569	)

Total income tax expense (benefit)	$	(9,894	)	$	20,630		$	(37,360	)

The U.S. and foreign components of income (loss) from continuing operations before income taxes were as follows:



	Year Ended December 31,
In thousands	2017			2016			2015
United States	$	(49,731	)	$	(66,828	)	$	(217,920	)
Foreign	(2,023		)	(2,320		)	(506		)
Total income (loss) from continuing operations before income taxes	$	(51,754	)	$	(69,148	)	$	(218,426	)

The differences between total income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate to income (loss) before income taxes were as follows:



	Year Ended December 31,
In thousands	2017			Rate		2016			Rate		2015			Rate
Computed expected income tax expense (benefit)	$	(18,114	)	35.0	%	$	(24,202	)	35.0	%	$	(76,449	)	35.0	%
Goodwill impairment basis difference	6,000			-11.6	%	6,275			-9.1	%	36,664			-16.8	%
Sold operations basis difference	—			—	%	—			—	%	686			-0.3	%
Net effect of state income taxes	(559		)	1.1	%	(954		)	1.4	%	178			-0.1	%
Foreign subsidiary dividend inclusions	440			-0.8	%	843			-1.2	%	557			-0.3	%
Foreign tax rate differential	187			-0.4	%	722			-1.0	%	291			-0.1	%
Change in valuation allowance	2,265			-4.4	%	34,478			-49.9	%	(153		)	0.1	%
Non-deductible interest	1,280			-2.5	%	3,219			-4.7	%	715			-0.3	%
Stock-based compensation shortfalls	1,373			-2.7	%	—			—	%	—			—	%
Change in valuation allowance due to tax reform	(13,821		)	26.7	%	—			—	%	—			—	%
Change in U.S. tax rate due to tax reform	10,391			-20.1	%	—			—	%	—			—	%
Other, net	664			-1.2	%	249			-0.4	%	151			-0.1	%
Income tax expense (benefit) for the period	$	(9,894	)	19.1	%	$	20,630		-29.9	%	$	(37,360	)	17.1	%

Total income tax expense (benefit) was allocated as follows:



	Year Ended December 31,
In thousands	2017			2016			2015
Continuing operations	$	(9,894	)	$	20,630		$	(37,360	)
Discontinued operations	—			8,994			5,446
Loss on sale of discontinued operations	—			(4,600		)	—
Stockholders’ equity	755			(782		)	2,021
Total	$	(9,139	)	$	24,242		$	(29,893	)

The U.S. Tax Cuts and Jobs Act (the "Tax Reform Act”) was enacted on December 22, 2017. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries (the “transition tax”). The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The main impact of the Tax Reform Act on our 2017 financial statement is the re-measurement of deferred tax balances to the new corporate tax rate, in which we recorded a deferred tax benefit of $3.4 million.

Due to the complexities involved in accounting for the recently enacted Tax Reform Act, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 118 requires that the company include in its financial statements the reasonable estimate of the impact of the Tax Reform Act on earnings to the extent such reasonable estimate has been determined. Accordingly, our U.S. provision for income tax for 2017 is based on the reasonable estimate guidance provided by SAB 118.

Additionally, we have made a provisional estimate for the transition tax. Due to net deficits in our total accumulated post-1986 foreign earnings and profits that were previously deferred from U.S. income tax, we believe that the company will not be subject to the transition tax, and therefore we have not recorded an income tax effect for the transition tax in the current period. We will update this estimate, if necessary, as the accounting for this is complete.

Effective in 2018, the Tax Reform Act also includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries and a base erosion anti-abuse tax (“BEAT”) measure that taxes certain payments between a U.S. corporation and its foreign subsidiaries. We do not expect that the company will be subject to these taxes and therefore we have not included any tax impacts of GILTI and BEAT in our 2017 financial statements.

We do not have all of the necessary information available to determine a reasonable estimate of the tax liability, if any, under the Tax Reform Act for our remaining outside basis difference in our foreign subsidiaries or to evaluate how the Tax Reform Act will affect our existing accounting position to indefinitely reinvest unremitted foreign earnings. We will continue to apply our existing accounting for this matter under ASC 740, Income Taxes, based on the tax law in effect prior to the enactment of the Tax Reform Act.

We re-measured the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse. However, we are still analyzing certain aspects of the Tax Reform Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.

We will continue to assess the impact from the Tax Reform Act throughout the one-year measurement period as provided by SAB 118 and will record adjustments, if necessary, in 2018.

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:



	Year Ended December 31,
In thousands	2017			2016
Deferred tax assets
Deferred compensation and retirement plan	$	15,017		$	24,715
Accrued expenses not deductible until paid	1,619			3,508
Employee stock-based compensation	1,757			3,321
Accrued payroll not deductible until paid	1,111			1,400
Accounts receivable, net	179			406
Goodwill	700			—
Other, net	290			393
Foreign net operating loss carryforwards	2,887			2,271
State net operating loss carryforwards	3,978			3,349
Foreign tax credit carryforwards	3,653			785
Total gross deferred tax assets	31,191			40,148
Less valuation allowances	(28,350		)	(40,148		)
Net deferred tax assets	$	2,841		$	—

Deferred tax liabilities
Property, plant and equipment	$	(1,941	)	$	(3,060	)
Goodwill and other intangibles	(701		)	(6,800		)
Other, net	(972		)	(1,184		)
Total gross deferred tax liabilities	(3,614		)	(11,044		)
Net deferred tax liabilities	$	(773	)	$	(11,044	)

A reconciliation of the beginning and ending balance of deferred tax valuation allowance is as follows:



In thousands
Balance at December 31, 2015	$	9,958
Additions:
Charged to cost and expenses	37,798
Deductions	(7,608		)
Balance at December 31, 2016	$	40,148
Additions:
Charged to cost and expenses	4,111
Deductions	(15,909		)
Balance at December 31, 2017	$	28,350

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The valuation allowance for deferred tax assets was $28.4 million and $40.1 million at December 31, 2017 and 2016, respectively. We recorded a $13.8 million deferred income tax benefit related to implementation of the applicable provisions of the Tax Reform Act. The amount of the deferred tax asset considered realizable could be adjusted if estimates of future taxable income during the carryforward period are increased, or if objective negative evidence in the form of cumulative losses is no longer present, and additional weight may be given to subjective evidence such as changes in our growth projections.

We or one of our subsidiaries file income tax returns in the U.S. federal, U.S. state, and foreign jurisdictions. For U.S. federal, U.S. state, and foreign returns, we are no longer subject to tax examinations for years prior to 2013.

A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:



In thousands
Balance at December 31, 2014	$	—
Additions for prior year tax positions	761
Balance at December 31, 2015	$	761
Additions for prior year tax positions	206
Balance at December 31, 2016	$	967
Settlements	(761		)
Balance at December 31, 2017	$	206

Included in the balance as of December 31, 2017 are $0.2 million of unrecognized tax benefits that, if recognized, would impact our effective tax rate. Any adjustments to this liability as a result of the finalization of audits or potential settlements would not be material.

We have elected to classify any interest and penalties related to income taxes within income tax expense in our Consolidated Statements of Comprehensive Income (Loss). We did not recognize any tax benefits for the reduction of accrued interest and penalties associated with the reduction of the liability for unrecognized tax benefits during the years ended December 31, 2017 and 2016. We did not have any interest and penalties accrued at December 31, 2017 or 2016.

As of December 31, 2017, we had net operating loss carryforwards that are available to reduce future taxable income and that will begin to expire in 2030.