Income taxes (Tables)

12 Months Ended

Dec. 31, 2019

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

Deferred tax assets and liabilities

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

Valuation allowance on deferred tax assets

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

Statutory to effective tax rate reconciliation

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.

Unrecognized tax benefits

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