11. Income taxes

The components of the income tax provision are as follows:

	Year Ended December 31,
(In thousands)	2018			2017			2016
Current:
Federal	$	1,049		$	2,379		$	1,776
State		85			114			70
Foreign		13			(49	)		2
		1,147			2,444			1,848
Deferred:
Federal		(117	)		1,097			(257	)
State		10			20			(38	)
Foreign		–			–			–
		(107	)		1,117			(295	)
Income tax provision	$	1,040		$	3,561		$	1,553

On December 22, 2017, the United States enacted significant changes to U.S. tax law following the passage and signing of the Tax Reform Act. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a one-time repatriation tax on undistributed foreign earnings. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. Income tax effects resulting from changes in tax laws are accounted for by the Company in accordance with authoritative guidance, which requires that these tax effects be recognized in the period in which the law is enacted.

On December 22, 2017, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. SAB 118 provides a measurement period, not to exceed one year from the enactment of the Tax Reform Act. In accordance with SAB 118, the Company has recognized provisional tax impacts related to the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017, and no changes were made to these provisional amounts during the year ended December 31, 2018. As of December 22, 2018 our accounting for the impact of the Tax Reform Act was complete.

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction of TransAct's U.S. corporate income tax rate from 34% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax assets at December 31, 2017 and recognized a provisional $1.3 million charge to income tax expense in the Company's consolidated statement of income for the year ended December 31, 2017.

The Tax Reform Act also provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits ("E&P") through the year ended December 31, 2017. The Company had no undistributed foreign E&P subject to the one-time mandatory repatriation and, therefore, did not recognize any income tax expense related to undistributed foreign subsidiary E&P for the year ended December 31, 2017.

While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income ("GILTI") provisions and the base-erosion and anti-abuse tax ("BEAT") provisions. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. The BEAT provisions in the Tax Reform Act eliminate the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. The Company is not currently subject to these taxes and therefore has not included any tax impacts of GILTI or BEAT in its consolidated financial statements for the year ended December 31, 2018 or 2017.

Our effective tax rates were 16.1%, 52.6%, and 30.0% for 2018, 2017, and 2016, respectively. The effective tax rate in 2018 was significantly lower due to the impact of the Tax Reform Act. In addition to the lowering of the corporate from 34% to 21%, the Tax Reform Act also provided the Company with a new deduction, the foreign-derived intangible income deduction. The effective tax rate in 2017 was unusually high due to the initial impact of the Tax Reform Act as we recognized a provisional $1.3 million charge to income tax expense for the year ended December 31, 2017 as a result of revaluing our net deferred tax assets using the new U.S. corporate tax rate of 21%.

At December 31, 2018, we have no federal or state net operating loss carryforwards, no R&D credit carryforwards, and no state tax credit carryforwards. Foreign loss before taxes was $286 thousand, $563 thousand, and $235 thousand in 2018, 2017, and 2016, respectively.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the Consolidated Financial Statements. Our deferred tax assets and liabilities were comprised of the following:

	December 31,
(In thousands)	2018			2017
Deferred tax assets:
Foreign net operating losses	$	390		$	328
Depreciation		71			107
Inventory reserves		879			845
Deferred revenue		16			16
Warranty reserve		60			59
Stock compensation expense		682			694
Other accrued compensation		233			363
Other liabilities and reserves		278			246
Gross deferred tax assets		2,609			2,658
Valuation allowance		(390	)		(328	)
Net deferred tax assets		2,219			2,330

Deferred tax liabilities:
Other		21			22
Net deferred tax liabilities		21			22
Total net deferred tax assets	$	2,198		$	2,308

As of December 31, 2018 a valuation allowance of $390 thousand has been established for foreign net operating loss carryforwards that are not expected to be used. The following table summarizes the activity recorded in the valuation allowance on the deferred tax assets:

	Year Ended December 31,
(In thousands)	2018		2017			2016
Balance, beginning of period	$	328	$	423		$	340
Additions charged to income tax provision		62		67			83
Reductions credited to income tax provision		–		(162	)		–
Balance, end of period	$	390	$	328		$	423

Differences between the U.S. statutory federal income tax rate and our effective income tax rate are analyzed below:

	Year Ended December 31,
	2018		2017		2016

Federal statutory tax rate		21.0%		34.0%	34.0%
State income taxes, net of federal income taxes		1.2		1.3	0.4
Valuation allowance and tax accruals		1.0		1.6	1.6
Miscellaneous permanent items		0.7		(0.5)	(1.2)
U.S. corporate tax rate change		0.0		19.4	0.0
Stock option cancellations		0.0		1.7	0.0
Uncertain tax positions		0.0		(0.1)	(0.1)
Stock award excess tax benefit		(1.5)		(1.4)	0.0
Foreign-derived intangible income deduction		(1.5)		0.0	0.0
R&D credit		(4.9)		(3.3)	(4.6)
Other		0.1		(0.1)	(0.1)
Effective tax rate		16.1%		52.6%	30.0%

At both December 31, 2018 and 2017, we had $104 thousand of total gross unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. We are not aware of any events that could occur within the next twelve months that could cause a significant change in the total amount of unrecognized tax benefits. A tabular reconciliation of the gross amounts of unrecognized tax benefits at the beginning and end of the year is as follows:

	December 31,
(In thousands)	2018			2017
Unrecognized tax benefits as of January 1	$	104		$	111
Tax positions taken during the current period		28			24
Lapse of statute of limitations		(28	)		(31	)
Unrecognized tax benefits as of December 31	$	104		$	104

We expect $25 thousand of the $104 thousand of unrecognized tax benefits will reverse in 2019 upon the expiration of the statute of limitations.

We recognize interest and penalties related to uncertain tax positions in the income tax provision. We have accrued interest and penalties related to uncertain tax positions of $17 thousand as of December 31, 2018 and 2017.

We are subject to U.S. federal income tax as well as income tax of certain state and foreign jurisdictions. We have substantially concluded all U.S. federal income tax, state and local, and foreign tax matters through 2014. However, our federal tax returns for the years 2015 through 2017 remain open to examination. Various state and foreign tax jurisdiction tax years remain open to examination as well, though we believe that any additional assessment would be immaterial to the Consolidated Financial Statements.