Entity information:
Income Taxes 

The Company accounts for income taxes in accordance with ASC 740, Income Taxes ("ASC 740"), under which deferred tax assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and their respective tax bases.
 
The provision for income taxes consisted of the following components for the years ended December 31, 2017, 2016 and 2015 (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
Current income tax expense:
 

 
 

 
 

Federal
$
4,680

 
$
282

 
$
—

State
236

 
159

 
324

Foreign
4,471

 
6,430

 
5,021

Total current income tax expense
9,387

 
6,871

 
5,345

Deferred income tax expense (benefit):


 
 

 
 

Federal
1,586

 
4,021

 
3,491

State
1,545

 
418

 
465

Foreign
613

 
(355
)
 
2,991

Total deferred income tax expense (benefit)
3,744

 
4,084

 
6,947

Income tax expense
$
13,131

 
$
10,955

 
$
12,292



The provision for income taxes for the years ended December 31, 2017, 2016 and 2015 differs from the amount computed by applying the U.S. federal income tax rate of 35% to pretax income (loss) because of the effect of the following items (in thousands):  
 
Year Ended December 31,
 
2017
 
2016
 
2015
Tax expense (benefit) at U.S. federal income tax rate
$
11,243

 
$
5,364

 
$
(7,270
)
State income taxes, net of federal income tax effect
1,028

 
449

 
500

Federal and state deferred tax rate change
(5,375
)
 
—

 
—

Transition tax
5,323

 
—

 
—

Effect of non-US operations
(2,143
)
 
(501
)
 
(254
)
Nontaxable contingent liability fair value changes and goodwill impairment
237

 
3,578

 
13,083

Research and development credit
(38
)
 
(297
)
 
(422
)
Change in valuation allowances
2,103

 
2,206

 
5,173

Prior year provision to return adjustment
(424
)
 
(137
)
 
372

Write-off of deferred taxes and tax receivables
263

 
—

 
858

Nondeductible expense and other
914

 
293

 
252

Income tax expense (benefit)
$
13,131

 
$
10,955

 
$
12,292



Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the Company's tax assets and liabilities for financial reporting purposes and the amounts used for income tax return reporting purposes. At December 31, 2017 and 2016, the Company’s deferred tax assets and liabilities consisted of the following (in thousands):
 
December 31,
 
2017
 
2016
Deferred tax assets:
 
 
 

Inventory reserve
$
700

 
$
902

Other reserves and allowances
52

 
4,233

Income tax basis in excess of financial statement basis in intangible assets
1,669

 
3,394

Deductible stock-based compensation
3,760

 
4,693

Net operating loss carryforward
13,530

 
9,496

Tax credit carryforwards
428

 
2,758

 
20,139

 
25,476

Valuation allowance
(10,711
)
 
(8,292
)
Total deferred tax assets
9,428

 
17,184

 
 
 
 
Deferred tax liabilities:
 
 
 

Prepaid & other expenses
(265
)
 
(139
)
Fixed assets
(4,946
)
 
(5,913
)
Intangible assets
(15,953
)
 
(21,392
)
Total deferred tax liabilities
(21,164
)
 
(27,444
)
 
 
 
 
Net deferred tax liability
$
(11,736
)
 
$
(10,260
)
 
 
 
 


The realizability of deferred income tax assets is based on a more likely than not threshold. If it is determined that it is more likely than not that deferred income tax assets will not be realized, a valuation allowance must be established against the deferred income tax assets. Realization of deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance the Company considers historical taxable income along with other positive and negative evidence in assessing the realizability of its deferred tax assets.
 
For the years ended December 31, 2017 and 2016, the Company recorded additional valuation allowances of $2.4 million and $2.2 million, respectively, related to operating losses for certain foreign locations.
 
As of December 31, 2017, the Company has gross federal and state net operating loss (“NOLs”) carryforwards of $0.6 million and $0.3 million, respectively. The federal carryovers begin to expire in 2023 and the state carryovers begin to expire in 2022. The Internal Revenue Code imposes an annual limitation on the utilization of net operating loss carryforwards related to acquired corporations based on a statutory rate of return (usually the “applicable federal funds rate” as defined in the Internal Revenue Code) and the value of the corporation at the time of a “change in ownership” as defined by Section 382. The Company’s total federal NOL as of December 31, 2017 includes $0.6 million of NOLs from acquired corporations. These acquired NOLs have an annual limitation under Section 382 of the Internal Revenue Code of $0.2 million.
 
As of December 31, 2017, the Company had NOLs in France, Italy, Chile, Germany, South Africa, Japan, and Switzerland of $8.9 million, $0.4 million, $1.3 million, $0.8 million, $0.2 million $0.3 million, and $0.3 million, respectively, which have an indefinite carryover period.

A reserve for an uncertain tax position was recorded during 2016 as a result of a sale of intellectual property during 2016 between the Company's subsidiaries for the following amount (in thousands):
 
Uncertain tax positions
Balance at December 31, 2016
$
280

Additions based on tax positions related to the current year
—

Subtractions based on tax positions related to the current year
(35
)
Interest and penalties
8

Balance at December 31, 2017
$
253



As of December 31, 2017, the Company had gross state research and development credit carryforwards of approximately $0.3 million. The carryovers began to expire in 2016.
   
The Company's intention is to indefinitely reinvest all undistributed earnings of its foreign subsidiaries in accordance with ASC 740. Deferred income taxes were not calculated on undistributed earnings (deficit) of foreign subsidiaries, which were $59.0 million and $34.5 million at December 31, 2017 and 2016, respectively. Determination of the amount of unrecognized deferred tax liability on the undistributed earnings considered indefinitely reinvested is not practicable.
 
The Company's income (loss) before taxes for its foreign operations was $14.9 million, $13.6 million and $(29.6) million for the years ended December 31, 2017, 2016 and 2015, respectively. 

On December 22, 2017, the U.S. government enacted comprehensive Federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Act”). The Act makes changes to the corporate tax rate, business-related deductions and taxation of foreign earnings, among others, that will generally be effective for taxable years beginning after December 31, 2017. As of the date of enactment, we have adjusted our deferred tax assets and liabilities for our new statutory rate which resulted in a $5.4 million credit to our income tax provision for the year ended December 31, 2017. In addition, we have estimated and recorded a provisional expense of $5.3 million for transition tax related to our foreign operations.

We continue to evaluate the impacts of the Act and will consider additional guidance from the U.S. Treasury Department, IRS or other standard-setting bodies. Further adjustments, if any, will be recorded by us during the measurement period in 2018 as permitted by SEC Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act. 
  
We operate under a grant of income tax exemption in Puerto Rico, that became effective for certain operations occurring during the period ending December 31, 2017 and should remain in effect for 20 years as long as specific requirements are satisfied. The impact of this income tax exemption grant decreased foreign taxes by $0.4 million for 2017. The benefit of the tax exemption on diluted earnings per share was less than $0.01.