RELIV INTERNATIONAL INC

11.

Income Taxes

Compenents of loss before income taxes:	Year ended December 31
	2017			2016

United States	$	(30,606	)	$	(499,004	)
Foreign		(121,306	)		(117,051	)
	$	(151,912	)	$	(616,055	)

Compenents of provision (benefit) for income taxes:	Year ended December 31
	2017			2016
Current:
Federal	$	(2,000	)	$	(15,000	)
State		5,000			(10,000	)
Foreign		33,000			29,000
Total current		36,000			4,000

Deferred:
Federal		-			(27,000	)
State		-			(4,000	)
Foreign		509,000			36,000
Total deferred		509,000			5,000
	$	545,000		$	9,000

The provision (benefit) for income taxes is different from the amounts computed by applying the United States federal statutory income tax rate of

34%.

The reasons for these differences are as follows:

	Year ended December 31
	2017			2016

Income taxes at U.S. statutory rate	$	(52,000	)	$	(209,000	)
State income taxes, net of federal benefit		11,000			11,000
Higher/(lower) effective taxes on earnings/losses in foreign countries		(65,000	)		(104,000	)
Foreign corporate income taxes		33,000			44,000
Foreign tax credit carryover		(66,000	)		-
Effect of future tax rate changes to foreign deferred income taxes		-			21,000
Nondeductible meals and entertainment expense		13,000			15,000
Net operating loss carryback claims		-			(19,000	)
Valuation allowance, net		707,000			292,000
Other		(36,000	)		(42,000	)
	$	545,000		$	9,000

During

2016

and

2017,

the Company determined that it was more likely than

not

that U.S. federal and various state net operating losses primarily generated in

2016

and

2017

will

not

be realized based on projections of future U.S. taxable income, estimated reversals of existing taxable timing differences, and other considerations. Accordingly, the

2017

and

2016

income tax provisions include the impact of recording a full deferred tax asset valuation allowance of approximately

$198,000

and

$292,000,

respectively, against the annual losses generated from a U.S. tax perspective. The Company has domestic federal net operating loss carryforwards of approximately

$186,000

December 31, 2017

which will expire between

2036

and

2037.

The Company has a deferred tax asset of

$3,413,000

and

$3,237,000

December 31, 2017

and

2016,

respectively, relating to foreign net operating loss carryforwards (NOLs) in various jurisdictions which principally do

not

expire.

As of

December 31, 2017,

management

’s assessment of the realizability of its Europe’s subsidiary’s deferred tax assets concluded that it

longer meets the threshold of more likely than

not

based upon the subsidiary’s recent declining operating results. Accordingly, the Company has recorded a full valuation allowance against the Europe subsidiary’s deferred tax assets with a corresponding deferred income tax charge of

$509,000

December 31, 2017.

The Company has recorded a valuation allowance of

$2,904,000

against all other foreign net operating loss carryforward balances as it is more likely than

not

that this asset will

not

be realized.

The components of the deferred tax assets and liabilities, and the related tax effects of each temporary difference at

December 31, 2017

and

2016,

are as follows:

	2017			2016
Deferred tax assets:
Product refund reserve	$	7,000		$	10,000
Inventory obsolescence reserve		62,000			25,000
Vacation accrual		-			6,000
Stock-based compensation		-			9,000
Organization costs		127,000			189,000
Deferred compensation		94,000			108,000
Miscellaneous accrued expenses		13,000			10,000
Domestic net operating loss carryforwards		186,000			282,000
Foreign net operating loss carryforwards		3,413,000			3,237,000
Valuation allowance		(3,767,000	)		(3,042,000	)
		135,000			834,000
Deferred tax liabilities:
Depreciation and amortization		28,000			182,000
Foreign currency exchange		107,000			165,000
		135,000			347,000
Net deferred tax assets (liabilities)	$	-		$	487,000

Reported as:
Non-current deferred tax assets	$	-		$	487,000
Non-current deferred tax liabilities		-			-
Net deferred tax assets	$	-		$	487,000

The United States Tax Cuts and Jobs Act (TCJA) was enacted in

December 2017,

which significantly changes U.S. tax law, principally by permanently reducing the U.S. federal statutory rate to

21%

effective

January 1, 2018,

implementing a territorial tax system, and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. Under the TJCA

’s repatriation tax, the Company estimates its cumulative amount of unremitted foreign earnings and related tax is immaterial. The effect of the federal tax rate reduction to

21%

is reflected as a reduction in the U.S. deferred tax assets with a corresponding reduction in the valuation allowance.

Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”)

118

to provide guidance to companies on the reporting of the impacts of TCJA in their financial statements. Under SAB

118,

the Company is recording affected items as provisional to allow additional time for clarifying technical guidance from Treasury and analysis of the effect to the Company

’s current tax positions.

December 31, 2017

and

2016,

the Company had

$36,000

and

$43,000,

respectively, of cumulative unrecognized tax benefits, of which only the net amount of

$26,000

would impact the effective income tax rate if recognized.

The aggregate changes in the balance of gross unrecognized tax benefits were as follows:

	2017			2016

Beginning of year	$	32,000		$	46,000
Settlements and effective settlements with tax authorities		-			-
Lapse of statute of limitations		(6,000	)		(13,000	)
Decrease to tax positions taken during prior periods		(6,000	)		(7,000	)
Increase to tax positions taken during current period		6,000			6,000

End of year	$	26,000		$	32,000

The Company applied applicable accounting guidance relating to accounting for uncertainty in income taxes. Reserves for uncertainty in income taxes are adjusted quarterly in light of changing facts and circumstances, such as the progress of tax audits, case law, and emerging legislation. The primary difference between gross unrecognized tax benefits and net unrecognized tax benefits is the

U.S. federal tax benefit from state tax deductions. It is the Company’s practice to recognize interest and / or penalties related to income tax matters in income tax expense.

December 31, 2017

and

2016,

the Company had

$11,000

and

$13,000,

respectively, accrued for interest and penalties within the balance of unrecognized tax benefits. The Company

’s unrecognized tax benefits balance is included within other noncurrent liabilities on the consolidated balance sheets.

The Company, including its domestic and foreign subsidiaries, is subject to

U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. federal income tax matters for years through

2013

and concluded years through

2013

with its primary state jurisdiction.

One of the Company

’s foreign subsidiaries is presently under local country audit for alleged deficiencies (totaling approximately

$800,000

plus interest at

20%

per annum) in value-added tax (VAT) and withholding tax for the years

2004

through

2006.

The Company, in consultation with its legal counsel, believes that there are strong legal grounds that it should

not

be liable to pay the majority of the alleged tax deficiencies. As of

December 31, 2010,

management estimated and reserved approximately

$185,000

for resolution of this matter and recorded this amount within Selling, General, and Administrative expense in the

2010

Consolidated Statement of Income. In

2011,

the Company made good faith deposits to the local tax authority under the tax agency’s administrative judicial resolution process. As of

December 31, 2017,

management’s estimated reserve (net of deposits) for this matter is approximately

$181,000.