Synacor, Inc.

6. INCOME TAXES

Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income rate from 35% to 21% under the Tax Act, the Company revalued its deferred income tax assets and liabilities at December 31, 2017, recording a net reduction of both the Company’s deferred income tax liability at December 31, 2017 and income tax provision for the year ended December 31, 2017 in the amount of $0.2 million. The one-time transition tax liability of foreign subsidiaries, calculated based on earning and profits (“E&P”) that were previously deferred from U. S. income taxes, was $0. The Company has not fully completed the calculation of the E&P and expects it may refine its calculations as additional analysis is completed.

Loss from continuing operations before income taxes included loss from domestic operations of $(9.6) million, $(10.2) million and $(2.9) million for the years ended December 31, 2017, 2016 and 2015, and income (loss) from foreign operations of $0.9 million, $0.7 million $(0.3) million for the same years.

The provision for income taxes for the years ended December 31, 2017, 2016 and 2015, was comprised of the following (in thousands):

	2017		2016		2015
Current:
United States Federal	$	—	$	—	$	(1	)
State		30		40		45
Foreign		933		1,036		195
Total current provision for income taxes		963		1,076		239
Deferred:
United States Federal		74		95		—
State		63		48		—
Net deferred provision for income taxes		137		143		—
Total provision for income taxes	$	1,100	$	1,219	$	239

The income tax effects of significant temporary differences and carryforwards that give rise to deferred income tax assets and liabilities as of December 31, 2017 and 2016 are as follows (in thousands):

	2017			2016
Deferred income tax assets:
Stock and other compensation expense	$	3,345		$	4,576
Net operating losses		7,059			5,907
Research and development credits		1,676			1,676
Other federal, state and foreign carryforwards		1,151			1,151
Fixed assets		—			246
Intangible assets		570			557
Other		408			838
Gross deferred tax assets		14,209			14,951
Valuation allowances		(13,301	)		(14,030	)
		908			921
Deferred income tax liabilities:
Fixed assets		(16	)		(29	)
Intangible assets and other		(529	)		(392	)
Gross deferred tax liabilities		(545	)		(421	)
Subtotal		363			500
Less unrecognized tax benefit liability related to deferred items		(627	)		(627	)
Net deferred tax liabilities	$	(264	)	$	(127	)

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

	2017		2016		2015
Balance—beginning of year	$	627	$	627	$	627
Additions for tax positions of prior years		—		—		—
Reductions for tax positions of prior years		—		—		—
Balance—end of year	$	627	$	627	$	627

The unrecognized tax benefits at the end of 2017, 2016 and 2015 were primarily related to research and development carryforwards.

If the $0.6 million of unrecognized tax benefits as of December 31, 2017 were recognized, approximately $0.6 million would decrease the effective tax rate in the period in which each of the benefits is recognized. The remaining amount would be offset by the reversal of related deferred income tax assets on which an unrecognized tax benefit liability is placed. The Company does not expect any material changes to its unrecognized tax benefits within the next twelve months.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2017 and 2016, penalties and interest were insignificant.

The Company files income tax returns in the U.S. federal jurisdiction as well as many U.S. states and foreign jurisdictions. The tax years 2004 to 2017 remain open to examination by the major jurisdictions in which the Company is subject to tax. Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years which have been carried forward and may be audited in subsequent years when utilized. The Company’s 2016 U.S. Federal income tax return is currently under examination; the Company is not currently under examination in any other major taxing jurisdictions.

Income tax expense for the years ended December 31, 2017, 2016 and 2015 differs from the expected income tax benefit calculated using the statutory U.S. Federal income tax rate as follows (dollars in thousands):

	2017					2016					2015
Federal income tax (benefit) expense at statutory rate	$	(2,950	)	34	%	$	(3,237	)	34	%	$	(1,075	)	34	%
State and local taxes—net of federal benefit		64		(1	)		75		(1	)		30		(1	)
Foreign taxes		466		(6	)		1,036		(11	)		195		(6	)
Impact of United States federal tax rate change		4,965		(57	)		—		—			—		—
Impact of United States federal tax rate change - valuation allowance		(5,205	)	60			—		—			—		—
Valuation allowance		3,596		(41	)		3,299		(34	)		928		(29	)
Permanent differences		(103	)	1			3		—			144		(5	)
Other		267		(3	)		43		(1	)		17		(1	)
Total	$	1,100		(13	)%	$	1,219		(13	)%	$	239		(8	)%

At December 31, 2017, the Company has federal and state NOL carryforwards of approximately $26.8 million and $25.1 million, respectively, including approximately $2.2 million of NOL carryforwards created by windfall tax benefits relating to stock compensation expense. The NOLs will begin to expire in 2027. The Company has weighed the positive and negative evidence, including cumulative pre-tax losses, and determined that it is more likely than not that the deferred income tax assets, primarily related to the NOLs, will not be realized and, therefore, a full valuation allowance has been recorded against the net deferred income tax assets as of December 31, 2017 and 2016.