Entity information:
INCOME TAXES

The Company is subject to income taxes in the U.S., Switzerland and France. Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are calculated based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using the enacted income tax rates expected to be in effect during the years in which the temporary differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Significant judgment is required in determining whether a valuation allowance should be recorded against deferred tax assets. In assessing the need for a valuation allowance, management considers all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. In the event that the Company changes its determination as to the amount of deferred tax assets that can be realized, the Company will adjust its valuation allowance with a corresponding impact to income tax expense in the period in which such determination is made.

Prior to the Spin-off

Prior to the spin-off, the income tax provision in the consolidated statements of operations has been calculated using the separate return method, as if the Company filed a separate tax return and operated as a stand-alone business. Therefore, cash tax payments and items of current and deferred taxes may not be reflective of actual tax balances included in Integra’s historical consolidated income tax return.

After the Spin-off

Subsequent to the spin-off on July 1, 2015, the deferred tax balances were adjusted to reflect only those tax attributes that carryforward with the Company. The adjustment to deferred taxes was recorded through stockholders' equity. The Company also made an election to change the tax classification for its foreign entity. This election resulted in both the foreign entity and its U.S. subsidiary to be included in the consolidated federal tax group on September 1, 2015.

Income Tax Provision (Benefit)

Income (loss) before income taxes consisted of the following:
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
United States operations
$
(34,886
)
 
$
(44,072
)
 
$
(51,305
)
Foreign operations
2,653

 
308

 
(1,748
)
 
$
(32,233
)
 
$
(43,764
)
 
$
(53,053
)


A reconciliation of the U.S. federal statutory rate to the Company’s effective tax rate is as follows:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Federal statutory rate
35.0%
 
35.0%
 
35.0%
Increase (decrease) in income taxes resulting from:
 
 
 
 
 
State income taxes, net of federal tax benefit
4.1%
 
2.1%
 
0.1%
Foreign operations
(0.2)%
 
(3.2)%
 
(0.7)%
Changes in valuation allowances
43.2%
 
(33.1)%
 
(16.7)%
Pre-Spin losses with no tax benefit
—%
 
—%
 
(22.7)%
Uncertain tax positions
0.3%
 
0.2%
 
—%
Research and development credit
0.2%
 
0.2%
 
—%
Return to provision
—%
 
0.9%
 
—%
Domestic manufacturing deduction
—%
 
—%
 
0.5%
Other
0.8%
 
(0.8)%
 
(0.2)%
Change in rate resulting from the 2017 Tax Act
(83.0)%
 
—%
 
—%
Effective tax rate
0.4%
 
1.3%
 
(4.7)%

The provision/(benefit) for income taxes consisted of the following:
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Current:

 

 

Federal
$
(102
)
 
$
(532
)
  
$
2,655

State
20

 
(51
)
 
106

Foreign
42

 
41

 
—

Total current
$
(40
)
 
$
(542
)
 
$
2,761

Deferred:


 


 


Federal
—

 
—

 
—

State
—

 
—

 
—

Foreign
(78
)
 
(10
)
 
(282
)
Total deferred
$
(78
)
 
$
(10
)
 
$
(282
)
Provision (benefit) for income taxes
$
(118
)
 
$
(552
)
 
$
2,479


The income tax effects of significant temporary differences that give rise to deferred tax assets and liabilities, shown before jurisdictional netting, are presented below:
 
Year Ended December 31,
 
2017
 
2016
 
(In thousands)
Deferred tax assets:


 


Doubtful accounts
$
116

 
$
184

Inventory related items
8,976

 
13,163

Tax credits
158

 
83

Accrued vacation
348

 
498

Accrued bonus
815

 
812

Stock compensation
3,129

 
3,329

Net operating loss carryforwards
22,175

 
19,955

Intangible and fixed assets
12,054

 
22,910

Other
686

 
923

Total deferred tax assets
48,457

 
61,857

Less valuation allowance
(47,433
)
 
(61,118
)
Deferred tax assets after valuation allowance
$
1,024

 
$
739

Deferred tax liabilities:


 


Other
469

 
246

Total deferred tax liabilities
$
469

 
$
246

Net deferred tax assets
$
555

 
$
493



The Tax Cuts and Jobs Act (the 2017 Tax Act) was enacted on December 22, 2017. The 2017 Tax Act reduces the U.S federal corporate tax rate from 35% to 21%. Accordingly, the Company has modified the value of the deferred tax assets and liabilities including the net operating loss carryover at December 31, 2017. Prior to enactment of the new tax reform, the Company had total net deferred tax assets of $74.1 million before valuation allowance at December 31, 2017. Taking the new tax reform into consideration, the Company's total net deferred tax assets were $48.0 million before valuation allowance at December 31, 2017.

The Company is not subject to the new transition tax on accumulated foreign earnings enacted by the 2017 Tax Act since the foreign operations have been included in US tax filings pursuant to an election to disregard these entities for federal income tax purposes.
 
At December 31, 2017, the Company had net operating loss carryforwards of $88.3 million for federal and state income tax purposes. The Company also had foreign net operating loss carryforwards of $2.7 million. These tax loss carryforwards begin to expire in 2018 and 2027 for foreign and federal and state income tax, respectively, and will expire through 2037. The tax benefit recorded for net operating losses, net of valuation allowance, was less than $0.1 million which relates only to foreign net operating losses.

At December 31, 2016, the Company had net operating loss carryforwards of $51.4 million for federal and state income tax purposes. The Company also had foreign net operating loss carryforwards of $3.0 million. These tax loss carryforwards began to expire in 2016 and 2027 for foreign and federal and state income tax, respectively, and will expire through 2035. The tax benefit recorded for net operating losses, net of valuation allowance, was less than $0.1 million which relates only to foreign net operating losses.

The valuation allowance relates to deferred tax assets for certain items that will be deductible for income tax purposes under very limited circumstances and for which the Company believes it is not more likely than not that it will realize the associated tax benefit. However, in the event that the Company determines that it would be able to realize more or less than the recorded amount of net deferred tax assets, an adjustment to the deferred tax asset valuation allowance would be recorded in the period such a determination is made. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some portion of all of the deferred tax assets 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 deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax planning strategies in making this assessment. Based upon the levels of historical taxable income, projections of future taxable income and the reversal of deferred tax liabilities over the periods in which the deferred tax assets are deductible, management believes it is more-likely-than-not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowance. The amount of deferred tax asset considered realizable, however, could change in the near term if estimates which require significant judgment of future taxable income during the carryforward period are increased or decreased.

A reconciliation of the Company’s uncertain tax benefits is as follows:
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Balance, beginning of year
$
305

 
$
298

  
$
113

Gross increases:

 

  

Prior years’ tax positions
5

 
7

  
90

Additions to tax positions in prior years due to spin-off
—

 
—

 
185

Current year tax positions
74

 
107

 
—

Gross decreases:

 

  

Settlements
—

 
—

  
—

Statute of limitations lapses
(107
)
 
(107
)
  
(90
)
Balance, end of year
$
277

 
$
305

 
$
298



Approximately $0.3 million of the balance at December 31, 2017 relates to uncertain tax positions that, if recognized, would affect the annual effective tax rate. There is $0.1 million related to tax positions for which it is reasonably possible that the total amounts could be reduced during the twelve months following December 31, 2017, as a result of expiring statutes of limitations.

The Company recognizes interest and penalties relating to uncertain tax positions in income tax expense. The amounts recorded in 2017, 2016 and 2015 were not significant.

The Company files income tax returns as prescribed by tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state, local and foreign jurisdictions where applicable based on the statute of limitations that apply in each jurisdiction. The Company has no open tax audits with any taxing authority as of December 31, 2017.