Consolidated Water Co. Ltd.

12. Income taxes

The components of income (loss) before income taxes for the years ended December 31 are as follows:

	Year Ended December 31,
	2017		2016		2015
Foreign (not subject to income taxes)	$	10,041,971	$	8,851,332	$	10,502,379
Mexico		(3,188,134)		(3,339,932)		(2,576,885)
United States		(2,010,241)		(3,270,144)		-
	$	4,843,596	$	2,241,256	$	7,925,494

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act made significant changes to U.S. corporate income tax by, among other things, reducing the corporate federal income tax rate from 35% to 21%, eliminating or reducing certain deductions, and providing for immediate expensing of certain qualified property. U.S. GAAP requires the effects of changes in tax rates and laws upon deferred tax balances to be recognized in the period in which the legislation is enacted. Accordingly, the Company re-measured its deferred tax assets and liabilities based upon the newly enacted U.S. statutory federal income tax rate of 21%, which is the tax rate at which these assets and liabilities are expected to reverse in the future. The re-measurement resulted in a $545,000 income tax benefit for the year ended December 31, 2017 related to items included in continuing operations.

The Company's provision for income taxes for the years ended December 31, 2017 and 2016 consisted of a deferred tax benefit relating to U.S. operations made up of the following:

	Year Ended December 31,
	2017		2016
Current tax expense	$	1,371	$	-
Deferred tax benefit		(890,348)		(536,057)
	$	(888,977)	$	(536,057)

A reconciliation of the U.S. statutory federal tax rate to the effective benefit rate for the U.S. loss before income taxes for the years ended December 31, 2017 and 2016 is as follows:

	Year Ended December 31,
	2017			2016
U.S. statutory federal rate		34.00	%		34.00	%
State taxes, net of federal effect		2.00			(2.00)
Foreign tax rate differential		(82.91)			(128.30)
R&D tax credit		(2.49)			0.00
Permanent items		13.39			20.90
Tax Act adjustment		(11.25)			0.00
Valuation allowance for deferred tax assets		28.90			51.40
		(18.36)	%		(24.00)	%

The tax effects of significant items comprising the Company's net long-term deferred tax liability at December 31, 2017 and 2016 were as follows:

	December 31,
	2017		2016
Deferred tax assets:
Operating loss carryforwards - Mexico	$	4,923,026	$	4,462,746
Land basis difference		702,547		414,101
Start-up costs		747,215		668,161
Operating loss carryforwards - United States		-		150,758
Valuation allowances		(6,372,788)		(5,695,766)
		-		-
Deferred tax liabilities:
Property and equipment		205,827		129,041
Intangible assets		819,066		1,786,200
		1,024,893		1,915,241

Net deferred tax liability	$	1,024,893	$	1,915,241

During the year ended December 31, 2017, the Company increased its total valuation allowance from $5.7 million to $6.4 million. As of December 31, 2017, the Company had a net loss carryforward valued at $16.4 million that will begin to expire in 2020 if unused.