On June 1, 2017, SDOI consummated the Contribution and Exchange to acquire a 52.1% controlling interest in Turning Point (see Note 3 above). This acquisition was a reverse acquisition, with Turning Point as the accounting acquirer. Accordingly, the historical financial statements of Turning Point through May 31, 2017 became the Company’s historical financial statements, including the comparative prior periods. These consolidated financial statements include the results of SDOI from June 1, 2017, the date the reverse acquisition was consummated. However, SDOI’s controlling interest does not meet the ownership threshold to file a consolidated federal tax return with Turning Point. Therefore, the parent company will continue to file a separate federal tax return apart from Turning Point.

The components of income from continuing operations before tax expense for the years ending December 31, 2017, 2016 and 2015 was $24.4 million, $14.9 million and $10.2 million. Income tax expense (benefit) for the years ended December 31 consist of the following components (in thousands):

 

A reconciliation showing the differences between our effective tax rate and the U.S. Federal statutory tax rate is as follows:

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. On December 22, 2017, H.R. 1, commonly known as the Tax Cuts and Jobs Act (“TCJA”) was signed into law. As a result, the federal corporate income tax rate was reduced from 35% to 21%, effective January 1, 2018. The Company's 2017 financial results included an SDOI-related charge of $3.2 million to income tax expense, offset by a reduction in the valuation allowance of $3.2 million, primarily resulting from re-measuring SDOI’s net deferred tax assets to reflect the recently enacted lower tax rate effective January 1, 2018. The rate change also resulted in a re-measurement of the full valuation allowance already established against the deferred tax asset. Turning Point was also required to re-measure its deferred tax assets and liabilities at the newly enacted rate, resulting in $0.2 million of income tax expense for the year ended December 31, 2017. The permanent differences for the year ended December 31, 2017 are primarily related to income tax benefits of $4.2 million as a result of Turning Point stock option exercises.

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities as of December 31 (in thousands):

 

SDOI has recorded a full valuation allowance, as of December 31, 2017, offsetting its U.S. federal and state net deferred tax assets which primarily represent net operating loss carry forwards (“NOLs”). At December 31, 2017, SDOI’s management concluded, based upon the evaluation of all available evidence, that it is more likely than not that the U.S. federal and state net deferred tax assets will not be realized.  Due to the reverse acquisition transaction with Turning Point, the Company determined that SDOI has experienced a “change in control” as defined in Internal Revenue Code Section 382, which will result in an annual limitation on SDOI’s utilization of NOLs in future periods.  SDOI is currently evaluating the effects of Section 382 on future utilization of NOLs.  Overall, the valuation allowance for deferred tax assets increased during 2017 by $8.6 million.

At December 31, 2017, Turning Point had federal net operating loss (“NOL”) carryforwards for income tax purposes of approximately $17.8 million, which expire in 2034. At December 31, 2017, Turning Point had state NOL carryforwards for income tax purposes of approximately $63.1 million, which expire between 2018 and 2036.  Turning Point has determined that, at December 31, 2017 and 2016, its ability to realize future benefits of its state NOL carryforwards does not meet the “more likely than not” criteria in ASC 740, Income Taxes. Therefore, a valuation allowance of $3.1 million has been recorded in each year, respectively.

Under ASC 740, Income Taxes, the effect of income tax law changes on deferred taxes should be recognized as a component of income tax expense related to continuing operations in the period in which the law is enacted. This requirement applies not only to items initially recognized in continuing operations, but also to items initially recognized in other comprehensive income. As a result of the reduction in the U.S. federal statutory income tax rate, Turning Point recognized $0.2 million of income tax expense.

At December 31, 2017, SDOI had U.S. federal net operating loss carryforwards of approximately $25 million including those of acquired companies, which will expire as follows (in thousands):

 

The above includes net operating losses of $0.5 million which, if realized, would be accounted for as additional paid in capital and excludes $1.3 million related to unrecognized tax benefits.

The Company has federal research and experimentation credit carryforwards of $1.1 million, net of $0.1 million related to unrecognized tax benefits, as of December 31, 2017, which are set to expire in years 2020 through 2032. The Company also has federal alternative minimum tax credit carryforwards of less than $0.1 million which have indefinite lives.

The following table is a reconciliation of the gross unrecognized tax benefits during the years ended December 31 ((in thousands):

The unrecognized tax benefits was re-measured at December 31, 2017 to $0.5 million, due to the federal statutory enacted rate change.  If recognized in a period where there was not a full valuation allowance, this would affect the effective tax rate.

 

SDOI is subject to U.S. federal income tax, as well as income taxes of multiple state jurisdictions.

SDOI recognizes accrued interest expense and penalties related to uncertain tax benefits that have resulted in a refund or reduction of income taxes paid. Unrecognized tax benefits aggregating $0.5 million would reduce already existing net operating loss and tax credit carryforwards and therefore require no accrual for interest or penalty in any of the years 2017, 2016 or 2015. The remaining unrecognized tax benefit of $6 thousand include de minimis interest and penalty where required.

For federal purposes, SDOI post-1997 tax years remain open to examination as a result of net operating loss carryforwards. For state purposes, the statute of limitations remains open in a similar manner for states that have generated net operating losses. SDOI does not expect that the total amount of unrecognized tax benefits related to positions taken in prior periods will change significantly during the next twelve months.

Turning Point has determined that they did not have any uncertain tax positions requiring recognition as a result of the provisions of ASC 740-10-25. Turning Point’s policy is to recognize interest and penalties accrued on uncertain tax positions as part of interest expense. For the years ended December 31, 2017, 2016, and 2015, no estimated interest or penalties were recognized for the uncertainty of tax positions taken. Turning Point files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. In general, Turning Point is no longer subject to U.S. federal and state tax examinations for years prior to 2014.