NOTE 12 - INCOME TAXES
On December 22, 2017, the United States enacted TCJA which instituted fundamental changes to the taxation of multinational corporations, including a reduction the U.S. corporate income tax rate to 21% beginning in 2018. The Company has recognized $1,247 net tax expense for the year ended 2017 which includes $2,481 deferred tax expense from revaluing the Company’s deferred tax assets to reflect the new U.S. corporate tax rate. The TCJA also requires a one-time transition tax on the mandatory deemed repatriation of the cumulative earnings of the Company’s foreign subsidiary as of December 31, 2017. To determine the amount of this transition tax, the Company must determine the amount of earnings generated since inception by the relevant foreign subsidiary, as well as the amount of non-U.S. income taxes paid on such earnings, in addition to potentially other factors. The Company’s earnings and profits from its foreign subsidiary under the transition tax calculation is offset by net operating losses thus no transition tax is payable.
The components of income tax expense (benefit) related to income (loss) from operations are as follows:
| Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Current: | ||||||||
| Federal | $ | (4) | $ | - | ||||
| State | 22 | 37 | ||||||
| Foreign | (166) | - | ||||||
| Deferred: | ||||||||
| Federal | 1,672 | (340 | ) | |||||
| State | (275) | (49) | ||||||
| Foreign | (2) | - | ||||||
| Total | $ | 1,247 | $ | (352) | ||||
The following is a reconciliation of the maximum statutory federal tax rate to the Company’s effective tax relative to operations:
| Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| % of Pre Tax Earnings | % of Pre Tax Earnings | |||||||
| Statutory federal income tax rate | (34.0) | % | (34.0) | % | ||||
| Changes in tax rates | 67.4 | - | ||||||
| Permanent differences | 7.9 | 6.9 | ||||||
| Repatriation tax - new law | 4.8 | - | ||||||
| Change in valuation allowance | 4.4 | 11.9 | ||||||
| Research and development incentive | (6.7) | - | ||||||
| State income tax net of federal tax benefit | (3.5) | 1.7 | ||||||
| Foreign rate difference | (1.5) | - | ||||||
| Other | (0.4) | (2.6) | ||||||
| Total | 38.4 | % | (16.1) | % | ||||
In 2017 the difference between the statutory and effective tax rate is primarily due to the change in tax rates under TCJA. In 2016 the difference between the statutory and the effective tax rate is primarily due to a change in valuation allowance and a current provision for state income taxes, respectively.
The components of deferred income taxes are as follows:
| Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 11,979 | $ | 12,559 | ||||
| Inventory | 909 | 786 | ||||||
| Research and development credit | 648 | - | ||||||
| Stock compensation | 165 | - | ||||||
| Other | 108 | 184 | ||||||
| Goodwill and intangible assets | (1,147) | (541) | ||||||
| Fixed assets | (439) | (122) | ||||||
| Gross deferred tax asset | 12,223 | 12,866 | ||||||
| Less valuation allowance | (7,051) | (5,462) | ||||||
| Net deferred tax asset | $ | 5,172 | $ | 7,404 | ||||
The Company has a domestic federal and state net operating loss carryforward at December 31, 2017 of approximately $19,537 and $44,998, respectively, which expires in 2029. The Company also has a foreign net operating loss carryforward at December 31, 2017 of approximately Euro 12,845 for German corporate tax and German trade tax purposes.
Realization of the Company’s deferred tax assets is dependent upon the Company generating sufficient taxable income in the appropriate tax jurisdictions in future years to obtain benefit from the reversal of net deductible temporary differences and from utilization of net operating losses. The Company’s valuation allowances of $7,051 and $5,462 at December 31, 2017 and 2016, respectively, are primarily associated with the Company’s foreign net operating loss carryforward from an inactive foreign entity, state net operating loss carryforward and a state research and development credit. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed. As of December 31, 2017, management believes that is more likely than not that the Company will fully realize the benefits of its deferred tax assets associated with its domestic federal net operating loss carryforward.
The Company does not have any significant unrecognized tax positions and does not anticipate significant increase or decrease in unrecognized tax positions within the next twelve months.