11. Income taxes

The components of the income tax provision are as follows:

	Year Ended December 31,
(In thousands)	2019			2018			2017
Current:
Federal	$	58		$	1,049		$	2,379
State		51			85			114
Foreign		(58)			13			(49	)
		51			1,147			2,444
Deferred:
Federal		(205	)		(117)			1,097
State		5			10			20
		(200	)		(107	)		1,117
Income tax provision (benefit)	$	(149	)	$	1,040		$	3,561

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.

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, 2019 or 2018.

At December 31, 2019, we have no federal or state net operating loss carryforwards, $111 thousand in R&D credit carryforwards, and no state tax credit carryforwards. Foreign loss before taxes was $515 thousand, $286 thousand, and $563 thousand in 2019, 2018, and 2017, 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)	2019			2018
Deferred tax assets:
Foreign net operating losses	$	538		$	390
Depreciation		165			71
Inventory reserves		916			879
Deferred revenue		58			16
Warranty reserve		47			60
Stock compensation expense		701			682
Other accrued compensation		226			233
R&D credit carryforward		111			–
Other liabilities and reserves		276			278
Gross deferred tax assets		3,038			2,609
Valuation allowance		(444	)		(390	)
Net deferred tax assets		2,594			2,219

Deferred tax liabilities:
Other		29			21
Net deferred tax liabilities		29			21
Total net deferred tax assets	$	2,565		$	2,198

As of December 31, 2019 a valuation allowance of $444 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)	2019		2018		2017
Balance, beginning of period	$	390	$	328	$	423
Additions charged to income tax provision		54		62		67
Reductions credited to income tax provision		–		–		(162	)
Balance, end of period	$	444	$	390	$	328

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

	Year Ended December 31,
	2019			2018			2017

Federal statutory tax rate		21.0	%		21.0	%		34.0	%
Valuation allowance and tax accruals		14.8			1.0			1.6
State income taxes, net of federal income taxes		12.0			1.2			1.3
Business meals and entertainment		5.4			0.4			0.4
Miscellaneous permanent items		1.4			0.3			(0.9	)
Uncertain tax positions		1.0			–			(0.1	)
Stock option cancellations		0.8			–			1.7
U.S. corporate tax rate change		–			–			19.4
Foreign-derived intangible income deduction		(5.4	)		(1.5	)		–
Stock award excess tax benefit		(8.4	)		(1.5	)		(1.4	)
R&D credit		(83.2	)		(4.9	)		(3.3	)
Other		–			0.1			(0.1	)
Effective tax rate		(40.6	%)		16.1	%		52.6	%

Our effective tax rates were -40.6%, 16.1%, and 52.6% for 2019, 2018, and 2017, respectively. We recorded a tax benefit in 2019 due to the impact of R&D credits on a near break-even level of income before income tax.

We had $107 thousand and $104 thousand of total gross unrecognized tax benefits at December 31, 2019 and 2018, respectively 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)	2019			2018
Unrecognized tax benefits as of January 1	$	104		$	104
Tax positions taken during the current period		28			28
Lapse of statute of limitations		(25	)		(28	)
Unrecognized tax benefits as of December 31	$	107		$	104

We expect $27 thousand of the $107 thousand of unrecognized tax benefits will reverse in 2020 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 $18 thousand and $17 thousand as of December 31, 2019 and 2018, respectively.

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 2015. However, our federal tax returns for the years 2016 through 2018 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.