9. Income Taxes

 

Income tax (benefit) expense from continuing operations and effective income tax rates consist of the following:

 

 

The effective income tax rate differs from the U.S. federal statutory income tax rate as follows:

 

 

The components of the deferred tax assets and liabilities are as follows:

 

 

The net deferred tax liabilities are reflected in the consolidated balance sheets as follows:

 

 

The net change in the valuation allowance during the year ended December 31, 2017 was a decrease of $242 and related to foreign currency exchange rate fluctuations, changes in net operating losses of foreign locations and state research and development credits carried forward. 

 

The Company has potential tax benefits associated with $8,089 of gross foreign operating loss carryforwards, which expire at various dates from 2024 through 2032.  Due to the uncertainty of being able to recognize these loss carryforwards, the Company has provided a valuation allowance of 100% of the tax benefit.

 

The Company has potential tax benefits associated with state research and development tax credit carryforwards as of December 31, 2017 of $584, which will expire at various dates between 2029 and 2032. Due to the uncertainty of being able to recognize these credit carryforwards, the Company has provided a valuation allowance of 100% of the tax benefit.

 

At December 31, 2017, no provision has been made for U.S. federal and state taxes on cumulative foreign earnings from CPI Card Group-Europe Limited operations of approximately $4,800, which are expected to be indefinitely reinvested outside of the U.S.  The U.S. deferred tax liability associated with indefinitely reinvested earnings and profits is not material.

 

2017 Tax Reform

 

On December 22, 2017, the U.S. government enacted comprehensive tax reform legislation that includes significant changes to taxation of business entities. These changes include, among others, (i) a permanent reduction to the corporate income tax rate, (ii) a partial limitation on the deductibility of business interest expense, (iii) elimination of deduction for income attributable to domestic production activities and (iv) a partial shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system (along with a transitional rule that taxes certain historic foreign accumulated earnings and certain rules that aim to prevent erosion of U.S. income tax base). In conjunction with the Tax Act’s reduction of the U.S. federal tax rate from 35.0% to 21.0%, the Company accrued a $7,057 tax benefit during the year ended December 31, 2017 related to the net change in deferred tax liabilities.

 

Due to the complexities involved in accounting for the recently enacted Tax Act, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 118, requires that the Company include in its financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined. Accordingly, the Company is currently estimating a zero tax liability on foreign unremitted earnings due to a net earnings and profits (“E&P”) deficit on accumulated post-1986 deferred foreign income. Therefore, the Company has not accrued any amount of tax expense for the Tax Act’s one-time transition tax on the foreign subsidiaries’ accumulated, unremitted earnings going back to 1986 for the year ended December 31, 2017. The Company will continue to analyze historical E&P on accumulated post-1986 deferred foreign income and will record any resulting tax adjustment during 2018. All other accounting as required by the Tax Act as of December 31, 2017 is complete.

 

Unrecognized Tax Benefits

 

Unrecognized tax benefits represent the aggregate tax effect of differences between the tax return positions and the amounts otherwise recognized in the Company’s consolidated financial statements, and are reflected in “Income taxes receivable” and “Deferred income taxes” in the Company’s consolidated balance sheets.  The Company accounts for uncertain tax positions by recognizing the financial statement effects of a tax provision only when based upon the technical merits, it is “more-likely-than-not” that the tax position will be sustained upon examination.

 

 

As of December 31, 2017, the total amount of tax contingency reserves was $1,212, that if recognized, would impact the Company’s effective tax rate, prior to the impact of any related valuation allowance.  The Company recognizes interest and penalties with respect to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest and penalties related to unrecognized tax benefits as of and for the year ended December 31, 2017 was not material. The Company had no uncertain tax positions as of December 31, 2016 and 2015.  Amounts recorded for unrecognized tax benefits represent management estimates, and actual results could differ which would impact the Company’s effective tax rate.

 

It is reasonably possible that $723 of the Company’s unrecognized tax benefits and associated interest and penalties, related to state income tax matters, will be paid or favorably settled in the next twelve months.

 

The Company is generally subject to potential federal and state examinations for the tax years after December 31, 2013 for federal purposes and December 31, 2012 for state purposes. The Company’s locations in the United Kingdom and Canada are subject to examinations for tax years after December 31, 2014 and December 31, 2012, respectively.