Techpoint, Inc.

10. Income Taxes

The components of income before income taxes are as follows (in thousands):

	Year Ended
	December 31,
	2017		2016		2015
Domestic	$	6,141	$	5,311	$	3,888
Foreign		131		52		1
Income before income taxes	$	6,272	$	5,363	$	3,889

The components of the provision for income taxes are as follows (in thousands):

	Year Ended
	December 31,
	2017		2016			2015
Current:
Federal	$	2,089	$	2,034		$	659
Foreign		55		40			1
State		1		1			1
Total Current		2,145		2,075			661
Deferred - net		370		(193	)		(829	)
Provision for income taxes	$	2,515	$	1,882		$	(168	)

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

	Year Ended
	December 31,
	2017			2016			2015
U.S. statutory federal taxes at statutory rate		34.00	%		34.00	%		34.00	%
State taxes - net of federal benefit		0.01			0.01			0.01
Research and development benefit		(1.72	)		(2.59	)		(4.08	)
Permanent items and other		0.94			2.55			0.55
Change in valuation allowance		1.78			1.12			(34.80	)
Tax rate change		5.06			—			—
Effective tax rate		40.07	%		35.09	%	(4.32)%

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

	Year Ended
	December 31,
	2017			2016			2015
Deferred tax assets:
Net operating loss carryforwards	$	85		$	71		$	71
Research and other credits		309			211			151
Accruals		243			464			192
Intangibles		323			574			623
Other		140			97			50
Total deferred tax assets		1,100			1,417			1,087
Deferred tax liabilities:
Property and equipment - net		(54	)		(113	)		(36	)
Total deferred tax liabilities		(54	)		(113	)		(36	)
Valuation allowance		(394	)		(282	)		(222	)
Deferred tax assets - net	$	652		$	1,022		$	829

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of its deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which temporary differences become deductible or includable in taxable income. Management considers projected future taxable income and tax planning strategies in making this assessment. Based on the level of current period taxable income and its expected recurring profitability, Management believes it is more likely than not the Company will realize benefits of deductible differences and thus has not recorded a full valuation allowance.

Tax reform H.R.1, originally known as the Tax Cuts and Jobs Act (“Act”), was enacted on December 22, 2017. The Act contains several key provisions that may have significant financial statement effects including the remeasurement of deferred taxes and the recognition of liabilities for taxes on mandatory repatriation and certain other foreign income. The Act reduces the corporate tax rate to 21%, effective January 1, 2018. ASC 740 requires companies to recognize the effect of tax law changes in the period of enactment, the effects must be recognized by companies’ December 2017 financial statements, even though the effective date for most provisions is January 1, 2018.

Subsequent to the enactment of the Act, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB 118"). SAB 118 addresses the application of ASC 740 in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act and permits the recording of provisional amounts relating to the impact of the Act during a measurement period which is not to extend beyond one year from the Act enactment date.

The Company has reflected the impact of the Act in its financial statements as the law was enacted before the end of the 2017 year. The Company estimated that the reduction in the Corporate tax rate to 21% reduced net deferred tax assets by $0.3 million from $1.0 million to $0.7 million. The Company has estimated the liabilities for taxes on mandatory repatriation and certain other foreign income. The liabilities for taxes on mandatory repatriation of foreign income and taxes on other foreign income from its foreign subsidiaries is approximately $35,000 of which $34,000 can be offset with a foreign tax credit.

As of December 31, 2017 and 2016, the Company had net operating loss carryforwards of $1.2 million and $1.2 million, respectively, for state income tax purposes. These net operating loss carryforwards will begin to expire in 2032 if unused. As of December 31, 2017 and 2016, the Company also had credit carryforwards of $0.5 million and $0.4 million, respectively, for state income tax purposes. These credits carryforwards have no expiration if unused. As of December 31, 2017 and 2016, the Company did not have net operating loss carryforwards or other credits for federal income tax purposes. Current tax laws impose substantial restrictions on the utilization of net operating losses and credit carryforwards in the event of an "ownership change", as defined by the Internal Revenue Code (IRC). If there should be an ownership change, the Company's ability to utilize its carryforwards could be limited.

As of December 31, 2017 and 2016, the Company had unrecognized tax benefits of $0.2 million and $0.2 million, respectively, due to research and development credits. The reversal of the uncertain tax benefits would impact the Company’s effective tax rate.