(9)          Income Taxes

Income tax expense (benefit) consisted of the following components (dollars in thousands):

 

Income (loss) before income taxes consisted of the following (dollars in thousands):

 

The components of the Company’s net deferred tax asset are as follows (dollars in thousands):

 

Under ASC 740, Income Taxes, the Company regularly assesses the need for a valuation allowance against its deferred taxes. In making that assessment, both positive and negative evidence is considered related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely than not that some or all of its deferred tax assets will not be realized. In evaluating the need for a valuation allowance, the Company considered its cumulative pre-tax loss in the U.S. jurisdiction over the previous three years as a significant piece of negative evidence. Prevailing accounting guidance limits the ability to consider other subjective evidence to support deferred tax assets, such as projections of future profits, when objective verifiable evidence such as a cumulative loss exists. As a result, the Company recorded a full valuation allowance against its U.S. deferred tax assets in the third quarter 2017, resulting in a non-cash charge of $48.1 million, which included $42.3 million related to deferred tax assets that existed at June 30, 2017.

The Tax Cuts and Jobs Act of 2017 (the “Tax Cuts and Jobs Act”) was enacted on December 22, 2017, and introduced significant changes to U.S, income tax law. Effective in 2018, the Tax Cuts and Jobs Act reduces the U.S. statutory corporate tax rate from 35% to 21% and creates new taxes on certain foreign-sourced earnings and certain related party payments, which are referred to as the global intangible low-taxed income tax (“GILTI”) and the base erosion tax, respectively. In addition, under the Tax Cuts and Jobs Act, in 2017 the Company was subject to the mandatory inclusion in U.S. taxable income of all accumulated foreign subsidiary earnings not previously subject to U.S. tax. The mandatory inclusion did not result in any incremental U.S. tax expense in 2017 due to the impact of a U.S. tax loss in the current year and the utilization of foreign tax credits. 

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Cuts and Jobs Act, the Company has made reasonable estimates of the effects and recorded provisional amounts in the 2017 consolidated financial statements. As the Company collects and prepares necessary data and interprets the Tax Cuts and Jobs Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, additional adjustments to the provisional amounts may be made. Information needed to adjust provisional amounts include the completion of all international 2017 tax returns. These additional adjustments may materially impact the provision for income taxes and effective tax rate in the period in which the adjustments are made. We expect the final accounting for the tax effects of the Tax Cuts and Jobs Act to be completed in 2018.

At December 31, 2017, the valuation allowance on U.S. deferred taxes was reduced to $37.7 million primarily from the realization of deferred tax assets following a tax method change and the reduction to gross deferred tax assets to incorporate the impact of the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act. The remaining valuation allowance at December 31, 2017 relates to certain U.S. state credits and losses and a full valuation allowance on deferred tax assets held in the Asia Pacific entities, including loss carryforwards. The $4.9 million balance for deferred tax assets, net of the valuation allowance, at December 31, 2017 relates to temporary differences between financial statement carrying amounts and their respective tax bases in Europe and Canada. The Company has foreign tax credit carryforwards of $11.1 million that begin to expire in 2024 and research and development tax credits of $7.4 million that begin to expire in 2032.

Net operating loss carryforwards expire as follows (dollars in thousands):

 

The effective tax rate varied from the U.S. federal statutory income tax rate due to the following:

 

Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on its ongoing evaluation of its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be.  

 

Tax Uncertainties

Under ASC 740, Income Taxes, a tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (dollars in thousands):

 

The unrecognized tax benefits were $7.7 million and $7.4 million, respectively, at December 31, 2017 and 2016. At December 31, 2017, $4.5 million of the unrecognized tax benefits was netted against fully reserved U.S. deferred tax assets.

With limited exception, the Company is no longer subject to U.S. federal, state, local or foreign income tax audits by taxing authorities for years preceding 2011. The Internal Revenue Service is currently examining the Company’s U.S. federal income tax returns for 2011 through 2012. Certain foreign state and local returns are also currently under various stages of audit for the tax years 2013 through 2014. The Company does not anticipate a significant change to the total of unrecognized tax benefits within the next twelve months.

At December 31, 2017, interest expense of $2.1 million was accrued related to unrecognized tax benefits. As a continuing policy, interest accrued related to unrecognized tax benefits is recorded as income tax expense. During 2017, the Company recognized net reductions of $0.1 million of tax-related interest expense.  During 2016 and 2015, the Company recognized a net reduction of $2.5 million and a net addition of $0.1 million, respectively, of tax-related interest expense. Tax penalties of $0.1 million were recorded during 2017. No penalties were recorded in 2016 or 2015.