NOTE 16. INCOME TAXES

The components of the income tax expense consisted of the following:

 

On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company has calculated a provisional amount of the impact of the Tax Act in its year end income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date of this filing and as a result has recorded $23.8 million as a net income tax benefit in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional benefit amount related to the re-measurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was $25.2 million. The provisional expense amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $1.4 million based on cumulative foreign earnings of $26.7 million.

In connection with the Tax Act being signed into law on December 22, 2017, the SEC staff issued SAB 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, we have determined that the $25.2 million of the deferred tax benefit recorded in connection with the re-measurement of certain deferred tax assets and liabilities and the $1.4 million of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings are provisional amounts estimated based on information available as of December 31, 2017. These amounts are subject to change as we obtain information necessary to complete the calculations.  Any subsequent adjustment to these provisional amounts will be recorded to current tax expense in 2018 when the analysis is complete. We expect to complete our analysis of the provisional items during the second half of 2018. The effects of other provisions of the Tax Act are being analyzed and are subject to change as additional information, guidance, and regulation become available.

We have historically considered the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested. Accordingly, prior to the enactment of the Tax Act, no U.S. income and foreign withholding taxes had been provided on such earnings. As a result of the Tax Act being signed into law on December 22, 2017 we recorded a provisional expense related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings of $1.4 million based on cumulative foreign earnings of $26.7 million.  Any actual repatriation from our non-U.S. subsidiaries could still be subject to additional foreign withholding taxes and U.S. state taxes.

We are currently analyzing our global working capital and cash requirements and the potential tax liabilities attributable to a repatriation, including calculating any excess of the amount for financial reporting over the tax basis in our foreign subsidiaries, but we have yet to determine whether we plan to change our prior assertion and repatriate earnings. Accordingly, we have not recorded any deferred taxes attributable to our investments in our foreign subsidiaries. We will record the tax effects of any change in our prior assertion in the period that we complete our analysis and are able to make a reasonable estimate, and disclose any unrecognized deferred tax liability for temporary differences related to our foreign investments, if practicable.

Due to the adoption of ASU 2016-09 in 2017, all excess tax benefits and deficiencies are recognized as income tax expense in the Company’s consolidated statement of operations. This will result in increased volatility in the Company’s effective tax rate.

A reconciliation between the effective income tax rate and the applicable statutory federal and state income tax rate is as follows:

 

The components of the total net deferred tax assets and liabilities as of December 31, 2017 and 2016 consisted of the following:

 

All deferred tax assets and liabilities are recorded in Deferred income taxes, net on the consolidated balance sheets as of December 31, 2017 and 2016. In evaluating its ability to realize the deferred tax assets, the Company considered all available positive and negative evidence, including its past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies.  The Company re-measured these non-current assets and liabilities at the applicable tax rate of 21% in accordance with the Tax Act. The re-measurement resulted in a total decrease in these net liabilities of $25.2 million.

As of December 31, 2017, we have no federal NOLs available to offset future income, and have approximately $8.9 million in state and local NOLs for which we maintain a substantial valuation allowance. We have historically recorded a valuation allowance for certain deferred tax assets due to uncertainties regarding future operating results and limitations on utilization of state and local NOLs for tax purposes. State and local NOLs expire between 2019 and 2036. At December 31, 2017 and 2016, we maintained a valuation allowance of approximately $182,000 and $278,000, respectively, for state NOLs that are not expected to be utilizable prior to expiration.

As of December 31, 2017, we have foreign tax credit carry forwards of approximately $1.4 million that expire starting in 2024. As of December 31, 2017, we have capital loss carry forwards of approximately $2.7 million that expire in 2020. We believe it is more likely than not the foreign tax credit and capital loss carry forwards will not be utilized and therefore maintain a valuation allowance on the entire balance.

The domestic and foreign components of Income (loss) before income taxes consisted of the following:

 

We apply the provisions of ASC 740 related to income tax uncertainties which clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is require to meet before being recognized in the consolidated financial statements. As of December 31, 2017, we have no material unrecognized tax benefits.

We file a consolidated U.S. federal income tax return with the IRS as well as tax returns in various states, Canada, and Mexico.  The Company is subject to examination by the IRS for tax years 2014 through 2017.  EQ is subject to examination by the IRS for pre-acquisition tax year 2014.  We may be subject to examinations by various state and local taxing jurisdictions for tax years 2013 through 2017. The Company has no significant foreign jurisdiction audits underway. The tax years 2013 through 2017 remain subject to examination by foreign jurisdictions.