LGL GROUP INC

F. Income Taxes

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “2017 Act”). The 2017 Act significantly changes U.S. corporate income tax law. Among other changes effective in 2017, the 2017 Act requires companies to pay a one-time tax on certain unrepatriated earnings of foreign subsidiaries. The Company calculated the impact of the 2017 Act in its income tax provision for the year ended December 31, 2017 in accordance with its understanding of the 2017 Act and guidance available as of the date of this filing.

The Company recognized tax expense of $1,662,000 related to the remeasurement of certain deferred tax assets and liabilities from 34% to 21%. The most material deferred taxes to be remeasured related to inventory reserves, and net operating losses (after reduction for the one-time transition tax) and property, plant and equipment. This tax expense from remeasurement of deferred tax assets had no impact on our effective tax rate as it was completely offset by the Company’s valuation allowance.

The Company also recognized provisional tax expense of $565,000 related to the one-time transition tax on the deemed repatriation of foreign earnings. The calculation of the one-time tax is quite complex, requiring determinations of liquid asset balances over three years, determination of foreign earnings and profits (“E&P," a U.S. tax measure) at multiple dates, and multiple other computations. Our provisional calculated tax expense was impacted by cash and other liquid assets taxable at a 15.5% rate and the balance of non-cash E&P taxable at 8%. The one-time transition tax had no impact on our 2017 effective tax rate as it was completely offset by the Company’s valuation allowance. Additional work is necessary to perform a more detailed analysis of historical foreign earnings. Upon gathering all necessary data, interpreting any additional guidance from tax authorities, and completing the analysis, our provisional amount will be adjusted in the measurement period allowable, but in no circumstances will the measurement period extend beyond one year from the enactment date.

Income tax provision (benefit) for the years ended December 31, 2017 and 2016 is as follows:

	2017			2016
	(in thousands)
Current:
Federal	$	—		$	—
State and local		18			8
Foreign		43			41
Total Current		61			49
Deferred:
Federal		1,637			(211	)
State and local		42			267
Foreign		41			55
Total before change in valuation allowance		1,720			111
Change in Valuation Allowance		(1,679	)		(325	)
Net Deferred		41			(214	)
Income tax provision (benefit)	$	102		$	(165	)

A reconciliation of the provision (benefit) for income taxes and the amount computed by applying the statutory federal income tax rate to income before income taxes is detailed below:

	2017			2016
	(in thousands)
Tax provision (benefit) at expected statutory rate	$	75		$	(8	)
State taxes, net of federal benefit		81			(25	)
Permanent differences		450			6
Credits		(106	)		(123	)
Foreign tax expense, and other		(381	)		11
True-up to State NOL		—			299
Change in rate		1,662			—
Change in valuation allowance		(1,679	)		(325	)
Provision (benefit) for income taxes	$	102		$	(165	)

Loss before income taxes from domestic operations was ($65,000) and ($434,000) in 2017 and 2016, respectively. Income before income taxes from foreign operations was $284,000 and $417,000 in 2017 and 2016, respectively.

The Company has a total federal NOL carry-forward of $11,333,000 as of December 31, 2017. This federal NOL carry-forward expires through 2037 if not utilized prior to that date. The Company has total state NOL carry-forwards of $16,985,000 as of December 31, 2017. These state NOL carry-forwards expire through 2037 if not utilized prior to that date. The Company has research and development tax credit carry-forwards of approximately $1,515,000 at December 31, 2017 that can be used to reduce future income tax liabilities and expire principally between 2020 and 2038. The Company has foreign tax credit carry-forwards of approximately $727,000 at December 31, 2017 that are available to reduce future U.S. income tax liabilities subject to certain limitations. These foreign tax credit carry-forwards expire at various times between 2018 and 2020.

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will or will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become realizable. Based upon the weighting of positive and negative evidence, the Company has determined the results of future operations of one of its foreign subsidiaries will generate enough taxable income that it is more likely than not that deferred tax assets of $173,000 at December 31, 2017, generated from foreign NOL’s, can be utilized in the foreseeable future. The Company has also determined that a full valuation against the remaining net deferred tax assets is required and has recorded a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. Should a change in circumstances lead to a change in judgment about the ability to realize deferred tax assets in future years, the Company will adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income. The Company recognizes interest and/or penalties, if any, related to income tax matters in income tax expense.

Deferred income taxes for 2017 and 2016 were provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. Tax effects of temporary differences and carry-forwards at December 31, 2017 and 2016 were as follows:

	December 31, 2017					December 31, 2016
	Deferred Tax					Deferred Tax
	Asset			Liability		Asset			Liability
	(in thousands)
Inventory reserve	$	325		$	—	$	1,083		$	—
Fixed assets		—			141		—			151
Other reserves and accruals		133			—		213			—
Stock-based compensation		18			—		384			—
Undistributed foreign earnings		—			—		—			144
Other		—			29		—			56
Tax credit carry-forwards		2,284			—		1,921			—
Federal tax loss carry-forwards		2,380			—		3,428			—
State tax loss carry-forwards		657			—		627			—
Foreign tax loss carry-forwards		173			—		214			—
Total deferred income taxes		5,970		$	170		7,870		$	351
Valuation allowance		(5,627	)				(7,305	)
Net deferred tax assets	$	173				$	214

The Company will recognize any interest and penalties related to unrecognized tax positions in income tax expense. At the date of adoption of ASC 740, the Company did not have a liability for unrecognized tax positions. In addition, the Company did not record any increases or decreases to its liability for unrecognized tax positions during the years ended December 31, 2017 or 2016. Accordingly, the Company has not accrued for any interest and penalties as of December 31, 2017 or 2016. The Company does not anticipate any change in its liability for unrecognized tax positions over the next fiscal year.

The Company files income tax returns in the U.S. federal, various state, Hong Kong and India jurisdictions. The statute of limitations for assessment by the Internal Revenue Service ("IRS") and state tax authorities is open for tax years ended December 31, 2014, 2015 and 2016, although carry-forward attributes that were generated prior to tax year 2014, including NOL carry-forwards and tax credits, may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be used in a future period. The Company is generally subject to examinations by foreign tax authorities from 2012 to the present.