7. INCOME TAXES
New Tax Legislation
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (The Act). This legislation makes significant changes in U.S. tax law including a reduction in the corporate tax rate to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. The legislation reduced the U.S. corporate tax rate from the current rate of 35% to 21% for tax years beginning after December 31, 2017. As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities existing as of December 22, 2017 from the 35% federal rate in effect through the end of 2017, to the new 21% rate. As a result of the change in law, the Company recorded a current period tax benefit of $118,000 in continuing operations and a corresponding reduction in the deferred tax liability. Because of the complexities involved in determining the previously unremitted earnings and profits of our foreign subsidiaries, the Company is still in the process of obtaining, preparing, and analyzing the required information. The Company has recorded an initial estimate of the tax on unremitted earnings. The amount, net of related foreign tax credits, is a tax of approximately $827,000. The rate of tax paid, after foreign tax credits, is 7% of the foreign earnings. This amount will be paid over 8 years. As of December 31, 2017, the Company is indefinitely invested in amounts in the foreign subsidiary in excess of the amounts that have been previously taxed.
Income tax expense consisted of the following:
| December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (in thousands) | ||||||||||||
| Federal Income Tax: | ||||||||||||
| Current | $ | 6,848 | $ | 5,788 | $ | 6,155 | ||||||
| Deferred | 48 | (311 | ) | 31 | ||||||||
| State Income Tax: | ||||||||||||
| Current | 667 | 652 | 601 | |||||||||
| Deferred | 16 | (23 | ) | 2 | ||||||||
| Foreign Income Tax: | ||||||||||||
| Current | 863 | 791 | 797 | |||||||||
| Deferred | 8 | 78 | 17 | |||||||||
| Income Tax Expense | $ | 8,450 | $ | 6,975 | $ | 7,603 | ||||||
Pre-tax income included foreign income of $4,528,000, $3,944,000 and $4,117,000 in 2017, 2016 and 2015, respectively. During 2017, the Company was deemed to have paid a dividend out of its U.K. subsidiary of all of its unremitted earnings, resulting in incremental U.S. taxes of $827,000.
Total income tax expense differed from statutory income tax expense, computed by applying the U.S. federal income tax rate of 35% to earnings before income tax, as follows:
| December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (in thousands) | ||||||||||||
| Computed Statutory Income Tax Expense | $ | 8,440 | $ | 7,475 | $ | 8,193 | ||||||
| State Income Tax, Net of Federal Tax Benefit | 447 | 386 | 360 | |||||||||
| Foreign Tax Rate Differential | (713 | ) | (592 | ) | (607 | ) | ||||||
| Impact of Deemed Repatriation due to Tax Reform | 827 | — | — | |||||||||
| Manufacturing Deduction | (401 | ) | (385 | ) | (423 | ) | ||||||
| Impact of Federal Tax Rate Reduction on Deferred Taxes | (118 | ) | — | — | ||||||||
| Increase/(Reduction) in Tax Uncertainties | — | (70 | ) | 3 | ||||||||
| Valuation Allowance for Foreign Loss Carryover | — | 70 | — | |||||||||
| Other - Net | (32 | ) | 91 | 77 | ||||||||
| Income Tax Expense | $ | 8,450 | $ | 6,975 | $ | 7,603 | ||||||
A deferred income tax (expense) benefit results from temporary timing differences in the recognition of income and expense for income tax and financial reporting purposes. The components of and changes in the net deferred tax assets (liabilities) which give rise to this deferred income tax (expense) benefit for the years ended December 31, 2017 and 2016 are as follows:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| (in thousands) | ||||||||
| Deferred Tax Assets: | ||||||||
| Compensation Assets | $ | 98 | $ | 151 | ||||
| Inventory Valuation | 195 | 482 | ||||||
| Accounts Receivable Valuation | 215 | 344 | ||||||
| Deferred Litigation Costs | 24 | 37 | ||||||
| Foreign Net Operating Losses | 70 | 70 | ||||||
| Valuation Allowance for Loss Carryover | (70 | ) | (70 | ) | ||||
| Other | 78 | 265 | ||||||
| Compensation Liabilities | 648 | 796 | ||||||
| Total Deferred Assets | $ | 1,258 | $ | 2,075 | ||||
| Deferred Tax Liabilities: | ||||||||
| Prepaid Expenses | (417 | ) | (655 | ) | ||||
| Depreciation and Amortization | (1,038 | ) | (1,546 | ) | ||||
| Total Deferred Liabilities | $ | (1,455 | ) | $ | (2,201 | ) | ||
| Total Deferred Tax Liability | $ | (197 | ) | $ | (126 | ) | ||
Management believes it is more likely than not that the Company will have sufficient taxable income when these timing differences reverse and that the deferred tax assets will be realized with the exception of a carryover of foreign operating losses. Due to the uncertainty of future income in the foreign subsidiary, the Company has recognized a valuation allowance related to the foreign operating losses carrying forward.
The Company is currently subject to audit by the Internal Revenue Service for the calendar years ended 2014 through 2016. The Company and its Subsidiaries’ state income tax returns are subject to audit for the calendar years ended 2013 through 2016.
As of December 31, 2017, the Company had no liability for unrecognized tax benefits related to various federal and state income tax matters.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the current and previous year:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Beginning Unrecognized Tax Benefits – | $ | — | $ | 110 | ||||
| Current Year – Increases | — | — | ||||||
| Current Year – Decreases | — | — | ||||||
| Current Year – Interest/Penalties | — | 4 | ||||||
| Expired Statutes | — | (114 | ) | |||||
| Ending Unrecognized Tax Benefits – | $ | — | $ | — | ||||