EZCORP INC

NOTE 10: INCOME TAXES

The following table presents the components of our income (loss) from continuing operations before income taxes, including inter-segment amounts:



	Fiscal Year Ended September 30,
	2017		2016			2015

	(in thousands)
Domestic	$	29,740	$	(17	)	$	(71,426	)
Foreign	13,499		380			5,219
	$	43,239	$	363		$	(66,207	)

The following table presents the significant components of the income tax provision from continuing operations:



	Fiscal Year Ended September 30,
	2017			2016			2015

	(in thousands)
Current:
Federal	$	1,092		$	11,120		$	(42,001	)
State and foreign	6,359			3,193			2,000
	7,451			14,313			(40,001		)
Deferred:
Federal	5,190			(3,766		)	16,580
State and foreign	(1,435		)	(1,186		)	9,396
	3,755			(4,952		)	25,976
Total income tax expense (benefit)	$	11,206		$	9,361		$	(14,025	)

The following table presents a reconciliation of income taxes calculated at the statutory rate and the provision for income taxes attributable to continuing operations:



	Fiscal Year Ended September 30,
	2017			2016			2015

	(in thousands)
Income tax expense (benefit) at the federal statutory rate	$	15,134		$	128		$	(23,172	)
State taxes, net of federal benefit	(714		)	2,476			(701		)
Mexico inflation adjustment	(1,286		)	(142		)	(302		)
Captive insurance company	—			—			(393		)
Non-deductible items	1,114			1,860			449
Foreign tax credit	(321		)	2,788			(2,413		)
Foreign rate differential	(172		)	277			880
Change in net operating loss carryforward	1,180			—			—
Change in valuation allowance	(3,211		)	1,511			4,846
Stock compensation	(386		)	—			—
Uncertain tax positions	472			—			1,781
Tax basis balance sheet adjustment	—			—			2,516
Other	(604		)	463			2,484
Total income tax expense (benefit)	$	11,206		$	9,361		$	(14,025	)
Effective tax rate	26		%	2,579		%	21		%

The amount of income tax expense (benefit) allocated to discontinued operations was $0.1 million, $(15.1) million, and $(16.4) million during fiscal 2017, 2016, and 2015, respectively.

The following table shows significant components of our deferred tax assets and liabilities:



	September 30,
	2017			2016

	(in thousands)
Deferred tax assets:
Cash Converters International	$	13,550		$	15,314
Tax over book inventory	10,094			8,763
Accrued liabilities	6,957			11,276
Pawn service charges receivable	8,687			7,871
Note receivable discount	—			2,427
Stock compensation	3,356			2,065
Foreign tax credit	3,132			2,706
Capital loss carryforward	5,010			8,017
State and foreign net operating loss carryforwards	13,671			12,891
Book over tax depreciation	2,678			—
Other	162			694
Total deferred tax assets before valuation allowance	67,297			72,024
Valuation allowance	(17,860		)	(21,078		)
Net deferred tax assets	49,437			50,946
Deferred tax liabilities:
Tax over book amortization	20,629			14,060
Tax over book depreciation	—			445
Note receivable discount	10,569			—
Prepaid expenses	1,383			1,138
Total deferred tax liabilities	32,581			15,643
Net deferred tax asset	$	16,856		$	35,303

As of September 30, 2017, we had gross state net operating loss carryforwards of approximately $174.0 million, which begin to expire in 2018 if not utilized. We also had foreign net operating loss carryforwards of $34.8 million, which will expire between 2030 and 2037 if not utilized. Additionally, we have a $3.1 million foreign tax credit that will expire during the years 2024 to 2027 that we expect is more likely than not to be fully utilized based on the weight of available evidence.

Deferred tax assets and liabilities are recorded for the estimated tax impact of temporary differences between the tax basis and book basis of assets and liabilities. A valuation allowance is established against a deferred tax asset when it is more likely than not that the deferred tax asset will not be realized. The valuation allowance decreased by $3.2 million in fiscal 2017, primarily due to $3.0 million realization of capital loss carryforwards offsetting capital gain realized on the restructuring of our Grupo Finmart notes. Management believes that our results from future operations will generate sufficient taxable income in the appropriate jurisdictions such that it is more likely than not that the remaining deferred tax assets will be realized.

Deferred taxes are not provided for undistributed earnings of foreign subsidiaries of approximately $20.6 million which are intended to be reinvested outside of the U.S. Accordingly, no provision for U.S. federal income and foreign withholding taxes associated with a distribution of those earnings has been made. We estimate that, upon distribution of our share of these earnings, we would be subject to U.S. income taxes of approximately $1.0 million as of September 30, 2017. We provided deferred income taxes on all undistributed earnings from Cash Converters International. Any taxes paid to foreign governments on these earnings may be used in whole or in part as credits against the U.S. tax on any dividends distributed from such earnings.

The following table presents a rollforward of unrecognized tax benefits:



	Fiscal Year Ended September 30,
	2017		2016		2015

	(in thousands)
Beginning balance	$	6,058	$	6,058	$	4,402
Tax positions taken during the current period	472		—		1,656
Ending balance	$	6,530	$	6,058	$	6,058

All of the above unrecognized tax benefits, if recognized, would impact our effective tax rate for the respective period of each ending balance. It is reasonably possible that unrecognized tax benefits will decrease by $4.9 million in the next 12 months due to the expiration of the statute of limitations.

We are subject to U.S., Mexico and Canada income taxes as well as income taxes levied by various state and local jurisdictions. With few exceptions, we are no longer subject to examinations by tax authorities for years before the tax year ended September 30, 2013. Management believes that adequate provisions have been made for any adjustments that may result from tax examinations.