Income Taxes

The provision for income taxes consists of the following (in thousands):



	Years Ended September 30,
	2017			2016
Current tax expense (benefit) U.S.	$	(96	)	$	136
Current tax expense (benefit) foreign	17			133
Deferred income tax expense	—			—
Provision for income taxes	$	(79	)	$	269

U.S. and foreign components of income (loss) before income taxes were as follows (in thousands):



	Years Ended September 30,
	2017			2016
U.S.	$	(5,225	)	$	(3,504	)
Foreign	107			456
Income (loss) before income taxes	$	(5,118	)	$	(3,048	)

The reconciliation of income tax expense (benefit) computed at the appropriate country specific rate to income tax expense (benefit) is as follows (in thousands):



	Years Ended September 30,
	2017			2016
Income tax expense (benefit) at statutory rate	$	(1,800	)	$	(1,036	)
State income tax expense (benefit)	(192		)	(130		)
Foreign tax activity	41			9
R&D tax credit expiration	—			—
Permanent differences, net	469			274
Adjustment of temporary differences to income tax returns	—			—
Change in valuation allowance	1,403			1,152
Income tax expense (benefit)	$	(79	)	$	269

The significant components of the deferred tax accounts recognized for financial reporting purposes are as follows (in thousands):



	September 30,
	2017			2016
Deferred tax assets:
Net operating loss and other carryforwards	$	35,529		$	34,563
Common stock options	1,246			1,134
Unearned revenue	520			389
Other	650			423
Total deferred tax assets	37,945			36,509
Deferred tax liabilities:
Other	(146		)	(144		)
Total deferred tax liabilities	(146		)	(144		)

Net deferred tax asset	37,799			36,365
Valuation allowance	(37,702		)	(36,299		)
Equity gains on investment in Mediasite KK	(916		)	(916		)
Customer relationships	(570		)	(718		)
Goodwill amortization	(2,940		)	(2,930		)
Net deferred tax liability for goodwill and intangible assets amortization	$	(4,329	)	$	(4,498	)

The Company has a $97 thousand and $66 thousand deferred tax asset at September 30, 2017 and 2016, respectively, recorded within the prepaid expenses and other current assets and other long-term assets lines on the consolidated balance sheet and is primarily related to net operating losses of MSKK.

At September 30, 2017, the Company had net operating loss carryforwards of approximately $97 million for U.S. Federal and $44 million for state tax purposes. For Federal tax purposes, the carryforwards expire in varying amounts between 2019 and 2037. For state tax purposes, the carryforwards expire in varying amounts between 2017 and 2036. Utilization of the Company’s net operating loss may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss carryforwards before utilization. In addition, the Company has research and development tax credit carryforwards of approximately $418 thousand, which expire in varying amounts between 2019 and 2020.

The Company maintains an additional paid-in-capital (APIC) pool which represents the excess tax benefits related to share-based compensation that are available to absorb future tax deficiencies. If the amount of future tax deficiencies is greater than the available APIC pool, the Company records the excess as income tax expense in its consolidated statements of income. For fiscal 2017 and fiscal 2016, the Company had a sufficient APIC pool to cover any tax deficiencies recorded and as a result, these deficiencies did not affect its results of operations. At September 30, 2017, the Company has $1.1 million of net operating loss carry forwards for which a benefit would be recorded in APIC when realized.

Earnings of the Company’s foreign subsidiaries are generally subject to U.S. taxation upon repatriation to the U.S. and the Company’s tax provision reflects the related incremental U.S. tax except for certain foreign subsidiaries whose unremitted earnings are considered to be indefinitely reinvested. No deferred tax liability has been recognized with regard to the remittance of such earnings after MSKK and Sonic Foundry International BV acquisitions were completed. At September 30, 2017, unremitted earnings of $925 thousand for foreign subsidiaries were deemed to be indefinitely reinvested.

Beginning with an acquisition in fiscal year 2002, the Company has amortized Goodwill for tax purposes over a 15 year life. Tax amortization is not applicable to the goodwill from the foreign acquisitions that took place during fiscal 2014 since the foreign goodwill is non-deductible for US federal tax purposes.

The difference between the book and tax balance of certain of the company’s goodwill creates a deferred tax liability and an annual tax expense. Because of the long term nature of the goodwill timing difference, tax planning strategies cannot be utilized with respect to the deferred tax liability. The Company’s tax rate differs from the expected tax rate each reporting period as a result of the aforementioned items. The balance of the Deferred Tax Liability was $4.4 million at September 30, 2017 and $4.6 million at September 30, 2016, respectively. The Company recorded a deferred tax liability related to the Customer Relationship intangibles value acquired as part of the purchase of Sonic Foundry International BV and Mediasite KK. The Company also recorded tax expense related to the “step-up” gain on its original equity investment in Mediasite KK. The Company has some other temporary differences related to its Mediasite KK subsidiary.

In accordance with accounting guidance for uncertainty in income taxes, the Company has concluded that a reserve for income tax contingencies is not necessary. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accruals for interest and penalties on the Company’s Condensed Consolidated Balance Sheets at September 30, 2017 or September 30, 2016 and has not recognized any interest or penalties in the Condensed Consolidated Statements of Operations for either of the years ended September 30, 2017 or 2016.

The Company is subject to taxation in the U.S., Netherlands, Japan and various state jurisdictions. All of the Company’s tax years are subject to examination by the U.S., Dutch, Japanese and state tax authorities due to the carryforward of unutilized net operating losses.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into United States tax law and included numerous provisions that will affect businesses. Given this date of enactment, our financial statements for the year ended September 30, 2017 do not reflect the impact of this legislation. We are currently undergoing an analysis of the tax reform law and its impact to the financial statements and tax footnote disclosures. We are also evaluating any impact the tax reform law will have on the realizability of deferred tax assets and carryforwards. A more detailed analysis will be completed in our quarterly report for the period in which the law was enacted.