The Company is subject to income tax in the United States and Mexico. Income from continuing operations before taxes subject to United States and foreign income taxes for each of the three years ended December 31, were as follows:

 

		Year ended December 31,
		2017			2016			2015
		(in thousands)
United States		$	(10,401)		$	18,280		$	17,902
Foreign			1,574			(1,058)			1,710
Total (loss) income before income taxes		$	(8,827)		$	17,222		$	19,612

 

The components of the provision for income taxes for each of the three years ended December 31, were as follows:

 

		Year ended December 31,
		2017			2016			2015
		(in thousands)
Current:
U.S. Federal		$	(31,060)		$	(2,934)		$	1,945
U.S. State			(2,048)			(352)			(224)
Foreign			240			127			99
			(32,868)			(3,159)			1,820
Deferred:
U.S. Federal			16,667			7,906			3,930
U.S. State			429			(568)			-
Foreign			271			232			305
			17,367			7,570			4,235
Total provision for (benefit from) income taxes		$	(15,501)		$	4,411		$	6,055

 

Significant components of the Company's deferred income tax assets and (liabilities) at December 31 were:

 

		2017			2016
		(in thousands)
Deferred income taxes
Inventories		$	1,477		$	1,576
Prepaid expenses			(134)			(209)
Accrued vacation			14			70
Plant and equipment			(31,185)			(34,114)
Federal net operating loss carryforward			12,010			-
State investment tax credit carryforward			9,036			7,721
State net operating loss carryforward			2,407			352
Stock-based compensation			862			1,375
State income taxes - temporary differences			(6,483)			(4,738)
R&D and other federal credits			677			766
Intangible assets			(326)			(273)
Other			50			140
Deferred income tax liabilities, net		$	(11,595)		$	(27,334)

 

The following table summarizes the differences between the U.S. federal statutory rate and the Company's effective tax rate for financial statement purposes:

 

		Year ended December 31,
		2017			2016			2015
Statutory tax rate			35.0	%		35.0	%		35.0	%
Change in future years' tax rate			125.0	%		-			-
State income taxes, net of U.S. federal tax benefit			3.5	%		4.6	%		3.3	%
R&D and other federal credits			0.9	%		(2.1)	%		(1.2)	%
Employee and board stock compensation			(0.5)	%		-			0.1	%
State investment tax credits			14.9	%		(10.0)	%		(5.5)	%
Section 199 manufacturing deduction			-			-			(1.5)	%
Change in estimates			-			(1.8)	%		-
Foreign income taxes, net of U.S. federal tax credits			2.7	%		(1.1)	%		0.6	%
Other			(5.9)	%		1.0	%		0.1	%
			175.6	%		25.6	%		30.9	%

 

For the year ended December 31, 2017, the effective tax rate was impacted by the Tax Cuts and Job Act for future tax years as enacted in December 2017. Deferred tax assets and liabilities are measured based on applicable enacted tax rates and provisions of enacted tax laws.  Accordingly, all deferred tax assets and liabilities as of December 31, 2017, were restated at a 21% tax rate.  Since the Company has a net deferred tax liability, this resulted in a net tax benefit of approximately $11 million. The effect on the effective tax rate was 125% as shown in the rate reconciliation table above. Exclusive of the $11 million benefit from the change in the tax laws, the Company’s effective tax rate would have been approximately 51%. Oklahoma Investment Tax Credits (“OITC”) associated with investments in our manufacturing operations in Pryor, Oklahoma; federal credits, foreign tax credits and research and development credits; and the Company’s pre-tax net losses contributed to the difference between the U.S. federal statutory rate and the Company’s effective tax rate for 2017.

 

 

For the year ended December 31, 2015, the effective tax rate was lower than the statutory rate primarily due to OITC associated with investments in the Company’s manufacturing operations in Pryor, Oklahoma, manufacturing tax deductions and IEC.

 

The Company has significant carryforwards for the State of Oklahoma and South Carolina totaling $9.0 million.  For Oklahoma the OITC is $8.6 million, which is primarily associated with significant equipment acquisitions in the current and prior years.  The Company believes that its future state taxable income will be sufficient to allow realization before the OITC expires in varying amounts from 2021 through 2032. Accordingly, deferred tax assets have been recognized for this credit.

 

The U.S. tax code requires that certain types of income produced by non-U.S. subsidiaries be currently taxed without regard to actual distribution (Subpart F income). Income earned by Orchids Mexico meets the definition of Subpart F income. As a result, U.S. current and deferred federal income tax has been recorded on these earnings. Upon remittance of these earnings, no significant incremental U.S. tax is expected.

 

Based upon a review of its income tax filing positions, the Company believes that its positions would be sustained upon an audit and does not anticipate any adjustments that would result in a material change to its financial position. However, the 2014 tax return has been selected for audit by the Internal Revenue Service. The Company recognizes interest related to income taxes as interest expense and penalties as selling, general and administrative expenses. The tax years 2014 through 2017 remain open to examination by major taxing jurisdictions in which the Company files income tax returns.