GEOSPACE TECHNOLOGIES CORP

14. Income Taxes:

Components of income (loss) before income taxes were as follows (in thousands):

	YEAR ENDED SEPTEMBER 30,
	2017			2016			2015
United States	$	(50,757	)	$	(45,506	)	$	(41,700	)
Foreign		(3,351	)		(9,827	)		(8,134	)
	$	(54,108	)	$	(55,333	)	$	(49,834	)

The provision (benefit) for income taxes consisted of the following (in thousands):

	YEAR ENDED SEPTEMBER 30,
	2017			2016			2015
Current
Federal	$	2,422		$	(13,726	)	$	(16,901	)
Foreign		286			148			647
State		-			6			4
		2,708			(13,572	)		(16,250	)
Deferred:
Federal		-			2,881			964
Foreign		(25	)		1,328			(1,907	)
		(25	)		4,209			(943	)
	$	2,683		$	(9,363	)	$	(17,193	)

Actual income tax expense (benefit) differs from income tax expense computed by applying the U.S. statutory federal tax rate of 35.0% for each of the fiscal years ended September 30, 2017, 2016 and 2015 as follows (in thousands):

	YEAR ENDED SEPTEMBER 30,
	2017			2016			2015
Benefit for U.S federal income tax at statutory rate	$	(18,940	)	$	(19,365	)	$	(17,442	)
Effect of foreign income taxes		124			630			249
Research and experimentation tax credit		(248	)		(686	)		(400	)
State income taxes, net of federal income tax benefit		—			4			2
Nondeductible expenses		164			149			488
Resolution of prior years’ tax matters		2			2,400			96
Contingency for uncertainty in income taxes		—			—			(121	)
Change in valuation allowance		20,087			7,715			—
Foreign income taxes - tax credits		506			—			—
Disallowance of stock compensation adjustments in excess of book		1,074			—			—
Other items		(86	)		(210	)		(65	)
	$	2,683		$	(9,363	)	$	(17,193	)
Effective tax rate		(5.0	)%		(16.9	)%		34.5	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred income tax asset were as follows (in thousands):

	AS OF SEPTEMBER 30, 2017									AS OF SEPTEMBER 30, 2016									AS OF SEPTEMBER 30, 2015
	U.S.			Non U.S.			Total			U.S.			Non U.S.			Total			U.S.			Non U.S.			Total
Deferred income tax assets:
Allowance for doubtful accounts	$	777		$	7		$	784		$	715		$	51		$	766		$	681		$	21		$	702
Inventories		11,215			50			11,265			5,089			21			5,110			4,350			(34	)		4,316
Net operating loss carry-forwards, tax credits and deferrals		11,803			4,490			16,293			3,000			3,823			6,823			-			2,270			2,270
Stock-based compensation		2,147			—			2,147			1,905			—			1,905			1,690			—			1,690
Accrued product warranty		174			2			176			130			4			134			803			6			809
Accrued compensated absences		419			—			419			467			—			467			520			—			520
Property and equipment		—			430			430			—			—			—			101			—			101
Insurance and other reserves		127			7			134			170			—			170			62			43			105
		26,662			4,986			31,648			11,476			3,899			15,375			8,207			2,306			10,513
Deferred income tax liabilities:
Allowance for doubtful accounts		—			(9	)		(9	)		—			—			—			31			—			31
Property, plant and equipment and other		(3,087	)		(71	)		(3,158	)		(7,470	)		(11	)		(7,481	)		(5,264	)		(770	)		(6,034	)
Subtotal deferred income tax assets		23,575			4,906			28,481			4,006			3,888			7,894			2,974			1,536			4,510
Valuation allowance		(23,575	)		(4,684	)		(28,259	)		(4,006	)		(3,709	)		(7,715	)		-			-			-
Net deferred income tax assets	$	—		$	222		$	222		$	—		$	179		$	179		$	2,974		$	1,536		$	4,510

Deferred income tax assets and liabilities are reported as follows in the accompanying consolidated balance sheets (in thousands):

	AS OF SEPTEMBER 30,
	2017			2016			2015
Deferred income tax assets, net	$	259		$	216		$	4,554
Deferred income tax liabilities, net		(37	)		(37	)		(44	)
	$	222		$	179		$	4,510

The financial reporting basis of investments in foreign subsidiaries exceed their tax basis. A deferred tax liability is not recorded for this temporary difference because the investment is deemed to be permanent. A reversal of the Company’s plans to permanently invest in these foreign operations would cause the excess to become taxable. At September 30, 2017, the Company had $7.6 million of cash and cash equivalents held by its foreign subsidiaries. At September 30, 2017, 2016 and 2015, the temporary difference related to undistributed earnings for which no deferred taxes have been provided was approximately $12.8 million, $13.0 million and $14.4 million, respectively.

Tax return filings which are subject to review by local tax authorities by major jurisdiction are as follows:

•

United States—fiscal years ended September 30, 2015 through 2017

•

State of Texas—fiscal years ended September 30, 2014 through 2017

•

State of New York—fiscal years ended September 30, 2015 through 2017

•

State of California – fiscal years ended September 30, 2014 through 2017

•

State of Pennsylvania – fiscal years ended September 30, 2015 through 2017

•

Russian Federation—calendar years 2015 through 2017

•

Canada—fiscal years ended September 30, 2014 through 2017

•

United Kingdom—fiscal years ended September 30, 2016 through 2017

•

Colombia—calendar years 2015 through 2017

The following table is a reconciliation of the total amounts of unrecognized tax liabilities (in thousands):

Balance at October 1, 2014	$	301
Change in prior year tax positions		(187	)
Current tax positions		17
Settlements with taxing authorities		—
Lapse of statute of limitations		(56	)
Balance at September 30, 2015		75
Change in prior year tax positions		(70	)
Current tax positions		—
Settlements with taxing authorities		—
Lapse of statute of limitations		(4	)
Balance at September 30, 2016		1
Change in prior year tax positions		(1	)
Current tax positions		—
Settlements with taxing authorities		—
Lapse of statute of limitations		—
Balance at September 30, 2017	$	—

As of September 30, 2017, the Company had net operating loss (“NOL”) carry-forwards of approximately $24.1 million in the United States, $18.6 million in Canada, $0.9 million in Russia and $0.1 million in the United Kingdom to offset future taxable income in those jurisdictions. The NOL carry-forwards for the United States, Canada and Russia begin to expire in 2037, 2033 and 2026, respectively. The NOL carry-forwards for the United Kingdom currently have no expiration.

During the year ended September 30, 2016, management concluded that it was more-likely-than-not that all of our U.S. and Canadian net deferred tax assets will not be realized in accordance with U.S. GAAP. At September 30, 2017 and September 30, 2016, we had a valuation allowance against our U.S. net deferred tax assets of $23.6 million and $4.0 million, respectively, and a valuation allowance against our Canadian net deferred tax assets of $4.7 million and $3.7 million, respectively.