| 6. | Income Taxes |
On December 22, 2017 the Tax Cuts and Jobs Act (“the Act”) was signed into law, making significant changes to the U.S. Internal Revenue Code. The major provisions include a corporate tax rate decrease from 35% to 21%, effective for years beginning after December 31, 2017, and changes in business-related exclusions and deductions.
As a result of the reduction in the U.S. corporate tax rate, the Company re-measured its deferred income tax balances at December 31, 2017. The Company has recorded a best estimate of the impact of the Act in the year-end income tax provision and as a result has recorded provisional income tax expense of $0.3 million in the fourth quarter of 2017, the period in which the legislation was enacted. At December 31, 2017, the Company has not completed its accounting for the tax effects of the Act; however, for certain items, the Company has made a reasonable estimate of the effects on its existing deferred tax balances. The Company is still analyzing the Act and refining its calculations, which could potentially impact the measurement of the tax balances. The Company is also assessing the impact of the provisions of the Act which do not apply until 2018. Any subsequent adjustment to these estimates will be included in the current tax expense of future periods.
The provision (benefit) for income taxes consists of:
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (In thousands) | ||||||||||||
| Current: | ||||||||||||
| Federal | $ | 1,280 | $ | (1,285 | ) | $ | 3,166 | |||||
| State | 159 | (95 | ) | 392 | ||||||||
| Total current | 1,439 | (1,380 | ) | 3,558 | ||||||||
| Deferred: | ||||||||||||
| Federal | 1,259 | 13 | (436 | ) | ||||||||
| State | 55 | (7 | ) | (49 | ) | |||||||
| Total deferred | 1,314 | 6 | (485 | ) | ||||||||
| Total | $ | 2,753 | $ | (1,374 | ) | $ | 3,073 | |||||
A reconciliation of the U.S. Federal statutory tax rate to the effective tax rate on income (loss) before taxes is as follows:
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| State taxes, net of federal benefit | 4.2 | 1.7 | 4.1 | |||||||||
| Impairment, non-deductible portion | — | (6.6 | ) | 20.0 | ||||||||
| Share-based compensation | 15.2 | (9.0 | ) | 3.7 | ||||||||
| Non-deductible items | 4.6 | (3.9 | ) | 3.0 | ||||||||
| Valuation allowance | 41.0 | — | — | |||||||||
| Tax reform rate change | 12.9 | — | — | |||||||||
| Other | (4.1 | ) | 1.4 | (5.7 | ) | |||||||
| Total effective tax rate | 108.8 | % | 18.6 | % | 60.1 | % | ||||||
The share-based compensation resulted in incremental income tax expense, because the grant date fair value of share-based payments exceeded the actual tax deductions realized, either upon exercise or vesting or due to forfeitures. Any future net deficits arising from stock-based compensation transactions will result in incremental income tax expense, and will likely negatively impact the effective tax rate. In 2015, the other credit includes the impact of over accruals of both federal and state taxes in earlier years. The current year tax charge included $1.0 million for the impact of the valuation allowance.
Significant components of the Company’s deferred taxes were as follows:
| Year Ended December 31, |
||||||||
| 2017 | 2016 | |||||||
| (In thousands) | ||||||||
| Deferred tax assets: | ||||||||
| Uniform capitalization adjustment | $ | 1,272 | $ | 1,420 | ||||
| Inventory valuation | 1,334 | 2,496 | ||||||
| Accounts receivable valuation | 51 | 159 | ||||||
| Stock compensation expense | 725 | 1,368 | ||||||
| Property and equipment | 62 | 145 | ||||||
| Other | 134 | 96 | ||||||
| Total deferred tax assets | 3,578 | 5,684 | ||||||
| Deferred tax liabilities | ||||||||
| Goodwill | 460 | 393 | ||||||
| Intangibles | 2,385 | 4,211 | ||||||
| Other | 109 | 188 | ||||||
| Total deferred tax liabilities | 2,954 | 4,792 | ||||||
| Less: Valuation allowance | 1,038 | — | ||||||
| Net deferred tax (liabilities)/assets | $ | (414 | ) | $ | 892 | |||
The Company establishes a valuation allowance to reduce the deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the ability to realize deferred tax assets, the Company considers all available positive and negative evidence, in determining whether, based on the weight of that evidence, a valuation allowance is needed for some or all of their deferred tax assets. In determining the need for a valuation allowance on the Company’s deferred tax assets the Company places greater weight on recent and objectively verifiable current information, as compared to more forward-looking information that is used in valuing other assets on the balance sheet. The Company has considered taxable income in prior carryback years, future reversals of existing taxable temporary differences, future taxable income, and tax planning strategies in assessing the need for the valuation allowance. If the Company was to determine that it would be able to realize the deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the valuation allowance, which would reduce the provision for income taxes. Due to the level of losses incurred in 2016, management believes that it is more-likely-than-not that the Company would not be able to realize all of the benefits of its deferred tax assets and accordingly recognized a valuation allowance of $1.0 million for the year ended December 31, 2017.
The Company does not have any unrecognized tax benefits recorded at December 2017, 2016 and 2015. The Company recognizes interest on any tax issue as a component of interest expense and any related penalties in other operating expenses. As of December 31, 2017, 2016 and 2015, the Company recorded no provision for interest or penalties related to uncertain tax positions. The tax years 2013 through 2017 remain open to examination by the major taxing jurisdictions to which the Company is subject.