NOTE 10 – INCOME TAXES

Income (loss) before income taxes consists of the following:

The provision (benefit) for income taxes consists of the following:

A reconciliation of the statutory rate to the effective income tax rate is as follows:

Our effective tax rate for 2017 was favorably impacted by 93.8% due to a significant change in income tax law contained in the Tax Cuts and Jobs Act (the Tax Reform Act) passed by the U.S. Congress in December 2017. Under the new tax law, the prior system of taxing U.S. corporations on the foreign earnings of their non-U.S. affiliates when such earnings were repatriated was replaced with a partial territorial system that provides a 100% dividends-received-deduction for foreign-source dividends received from 10%-or-more owned foreign corporations. The benefit from eliminating the previously recorded $2.7 million deferred tax liability for the undistributed earnings of our Singapore subsidiary was offset in part by the write-down of our deferred tax assets to reflect the 21% corporate income tax rate in the new tax law. 

Our effective tax rate for 2016 was favorably impacted by 141.9% due to a substantial reduction in the valuation allowances for our deferred tax assets. Recognition of the deferred tax liability for the undistributed earnings of our subsidiary in Singapore impacted our effective tax rate by a negative 32.2% in 2016. Receipt of a dividend from our subsidiary in Singapore impacted our income tax rate by a negative 28.9% in 2015. 

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (“UTB”) is as follows:

The ending net UTB results from adjusting the gross balance for items such as federal, state, and non-U.S. deferred items, interest and penalties, and deductible taxes. The net UTB is a long-term income tax reserve within our consolidated balance sheets. We recognize interest and penalties related to unrecognized tax benefits in tax expense. Accrued interest and penalties on a gross basis are inconsequential. We recorded additional income tax expense for the increase in our liability for uncertain tax positions of $28,000 in 2017 and $5,000 in 2016. We recorded an income tax benefit for the decrease in our liability for uncertain tax positions of $14,000 in 2015. Estimated gross interest and penalties included in the above amounts for all years were inconsequential.

We file income tax returns in the United States and various state and foreign jurisdictions. Our federal income tax returns for years after 2013 are still subject to examination by the Internal Revenue Service. We are no longer subject to state and local income tax examinations for years prior to 2013. The Inland Revenue Authority of Singapore recently initiated a review of our 2016 and 2015 income tax returns, causing us to increase our gross and net UTB. The increase in the UTB did not have a significant impact on our overall effective income tax rate in 2017. We do not presently anticipate that the outcome of these audits will have a significant impact on our financial position or results of operations.

Deferred tax assets and liabilities consist of the following:

We have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and U.S. GAAP income, research and development tax credit carry forwards and federal, state and foreign net operating loss carry forwards. A deferred tax asset generally represents future tax benefits to be received when temporary differences previously reported in our consolidated financial statements become deductible for income tax purposes, when net operating loss carry forwards are applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on the guidance provided in current financial accounting standards.

Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods, our experience with loss carry forwards not expiring unused and tax planning alternatives. In analyzing the need for valuation allowances, we first considered our history of cumulative operating results for income tax purposes over the past three years in each of the tax jurisdictions in which we operate, our financial performance in recent quarters, statutory carry forward periods and tax planning alternatives. Finally, we considered both our near and long-term financial outlook. After considering all available evidence both positive and negative, we concluded that recognition of valuation allowances for substantially all of our U.S. and Singapore deferred tax assets was not required. Our conclusions regarding the realizability of our deferred tax assets caused us to substantially reduce the valuation allowances recorded against our U.S. and Singapore based deferred tax assets in the fourth quarter of 2016, resulting in recognition of a significant non-cash income tax benefit. 

The remaining valuation allowances recorded against our deferred tax assets increased by $520,000 in 2017 for federal and state R&D tax credit carry forwards and state net operating loss carry forwards that we do expect to use. Valuation allowances recorded against our deferred tax assets decreased by $9.6 million in 2016 from utilization of available net operating loss carry forwards and our determination that significant valuation allowances were no longer needed for substantially all of our U.S. and Singapore based deferred tax assets, due to the improvement in our operating results and financial outlook. At December 31, 2017, we have federal R&D tax credit carry forwards of $3.9 million that will begin to expire in 2019 and a federal net operating loss carry forward of $8.9 million that will begin to expire in 2022, if unused. 

During 2016, we concluded that it was no longer our intent to permanently reinvest the undistributed earnings of our Singapore subsidiary, and we recognized the corresponding U.S. deferred tax liability for the related outside basis difference. Under the Tax Reform Act passed by the U.S. Congress in December 2017, the prior system of taxing U.S. corporations on the foreign earnings of their non-U.S. affiliates when such earnings were repatriated was replaced with a partial territorial system that provides a 100% dividends-received-deduction for foreign-source dividends received from 10%-or-more owned foreign corporations. Accordingly, the previously recorded deferred tax liability for the outside basis difference related to our Singapore subsidiary was reversed. 

Cash payments for income taxes, net of refunds received, were $40,000 in 2017, $144,000 in 2016 and $16,000 in 2015.