Unique Fabricating, Inc.

Income Taxes

Income before income taxes for U.S. and Non-U.S. operations are as follows:



	Fifty-Two Weeks Ended December 31, 2017		Fifty-Two Weeks Ended January 1, 2017		Fifty-Two Weeks Ended January 3, 2016
U.S. income	$	3,877,650	$	8,820,049	6,310,039
Non-U.S. income	3,741,921		1,121,690		1,033,223
Income before income taxes	$	7,619,571	$	9,941,739	$	7,343,262

The components of the income tax provision included in the consolidated statements of operations are all attributable to continuing operations and are detailed as follows:



	Fifty-Two Weeks Ended December 31, 2017			Fifty-Two Weeks Ended January 1, 2017			Fifty-Two Weeks Ended January 3, 2016
Current tax expense:
Federal	$	1,206,992		$	3,340,070		$	2,256,970
State	292,702			355,748			244,253
Foreign	1,185,688			727,450			309,528
Total	2,685,382			4,423,268			2,810,751
Deferred tax expense:
Federal	(1,165,546		)	(766,716		)	(468,169		)
State	(235,622		)	(68,069		)	(41,310		)
Foreign	(151,334		)	(330,864		)	13,052
Total	(1,552,502		)	(1,165,649		)	(496,427		)
Total income tax expense	$	1,132,880		$	3,257,619		$	2,314,324

Deferred income tax assets and liabilities at December 31, 2017 and January 1, 2017 reflect the effect of temporary differences between amounts of assets, liabilities and equity for financial reporting purposes and the bases of such assets, liabilities and equity as measured based on tax laws, as well as tax loss and tax credit carryforwards. The following table summarizes the components of temporary differences and carryforwards that give rise to deferred tax assets and liabilities:



	December 31, 2017			January 1, 2017
Deferred tax assets (liabilities):
Allowance for doubtful accounts	$	194,684		$	224,966
Inventories	118,813			198,130
Accrued payroll and benefits	491,214			776,309
Other	44,820			165,820
Deferred tax asset	849,531			1,365,225
Property, plant, and equipment	(2,534,440		)	(3,417,377		)
Goodwill and intangible assets	(405,293		)	(1,590,552		)
Deferred tax liability	(2,939,733		)	$	(5,007,929	)
Total deferred tax liability	$	(2,090,202	)	$	(3,642,704	)

Management evaluates all positive and negative evidence and uses judgment regarding past and future events, including operating results, to help determine when it is more likely than not that all or some portion of the deferred tax assets may not be realized. When appropriate, a valuation allowance is recorded against deferred tax assets to reserve for future tax benefits that may not be realized. On the basis of this evaluation, the Company believes that it is more likely than not that all deferred tax will be realized and this, no valuation allowance was recorded as of December 31, 2017 or January 1, 2017.

U.S. income taxes have not been recognized on basis differences in investments that are deemed to be indefinitely reinvested outside the U.S. At December 31, 2017, unremitted earnings have been included in the computation of the transition tax associated with the Tax Act eliminating the basis differences in foreign subsidiaries. The Company remains indefinitely reinvested with respect to its initial investment and any associated potential withholding tax on earnings of its subsidiaries subject to the transition tax, as well as with respect to future earnings that will primarily fund the operations of the subsidiary; however, the Company continues to evaluate its position under SAB 118. As of January 1, 2017 no taxes were provided on basis differences in investments in foreign subsidiaries of $2,183,895 due to the indefinite reinvestment assertion.

A reconciliation of taxes on income from continuing operations based on the statutory federal income tax rate to the provision for income taxes is as follows:



	Fifty-Two Weeks Ended December 31, 2017			Fifty-Two Weeks Ended January 1, 2017			Fifty-Two Weeks Ended January 3, 2016
Income tax expense, computed at 34% of pretax income	$	2,590,654		$	3,380,191		$	2,496,709
State income taxes, net of federal benefit	66,607			193,070			133,784
Foreign tax rate differential	(206,432		)	(51,388		)	(28,753		)
Impact of U.S. tax reform (1)	(559,286		)	—			—
Research and Development credits	(681,957		)	—			—
Other	(76,706		)	(264,254		)	(287,416		)
Total provision for income taxes	$	1,132,880		$	3,257,619		$	2,314,324

(1)

On December 22, 2017 the Tax Cuts and JOBS Act (the “Act”) was signed into law. The Act changed many aspects of U.S. corporate income taxation and included the reduction of the corporate income tax rate from 35% to 21%. The Act also included implementation of a territorial system and imposition of a one-time tax on deemed repatriated earnings of foreign subsidiaries. We recognized the impact of the Act for the fifty-two weeks ended December 31, 2017. The impact primarily consists of a $(1,357,472) benefit related to the impact on the U.S. deferred tax liability due to the lowering of the corporate tax rate described above and $798,186 of expense for the estimate for the impact of one-time transition tax on deemed repatriated earnings of foreign subsidiaries. We will continue to assess our provision for income taxes as future guidance becomes available, however we do not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118. The Act creates a new requirement that certain income such as Global Intangible Low-Taxed Income (“GILTI”) earned by a controlled foreign corporation (“CFC”) must be included in the gross income of the CFC U.S. shareholder. Because of the complexity of the new GILTI rules, we are continuing to evaluate these provisions of the Act and whether taxes due on future U.S. inclusions related to GILTI should be recorded as a current-period expense when incurred, or factored into a company’s measurement of its deferred taxes. As a result, we have not included an estimate of the tax expense or benefit related to this item for the period ended December 31, 2017.

The Company recognizes the benefit of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement with the relevant tax authority. The Company assesses all tax positions for which the statute of limitations remain open. The Company had no unrecognized tax benefits as of December 31, 2017 and January 1, 2017. The Company recognizes any penalties and interest when necessary as income tax expense. There were no penalties or interest recorded during the 52 weeks ended December 31, 2017, January 1, 2017, and January 3, 2016, respectively.

The Company files income tax returns in the United States, Mexico, and Canada as well as in various state and local jurisdictions. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years before 2015 in the United States and before 2012 in Mexico.