

Note 15.	Income Taxes

Components of income (loss) before income taxes (in thousands):



	Years ended December 31,
	2018			2017			2016
United States operations	$	(16,144	)	$	(15,731	)	$	(34,100	)
Foreign operations	(6,643		)	(4,461		)	(2,897		)
Income (loss) before income taxes	$	(22,787	)	$	(20,192	)	$	(36,997	)

Components of income tax expense (benefit) (in thousands):



	Years ended December 31,
	2018		2017			2016
Current:
United States federal	$	612	$	683		$	712
State and local	53		42			59
Foreign	367		368			(125		)
Total current	1,032		1,093			646
Deferred:
United States federal	338		(3,643		)	3
State and local	—		2			1
Foreign	832		(230		)	126



Total deferred	1,170		(3,871		)	130
Total income tax expense (benefit)	$	2,202	$	(2,778	)	$	776

Income tax expense differs from “expected” income tax expense (computed by applying the U.S. federal income tax rate of 21% in 2018 and 35% in 2017 and 2016) due to the following (in thousands):



	Years ended December 31,
	2018			2017			2016
United States federal tax expense (benefit) at statutory rate	$	(4,785	)	$	(7,067	)	$	(12,949	)
State taxes, net of United States federal tax expense (benefit)	(694		)	(273		)	(533		)
Change in valuation allowance	5,804			1,133			13,148
Non-deductible stock compensation	448			587			144
Impact of non-U.S. jurisdictional tax rate difference	(117		)	603			335
Research and development tax credit	(12		)	—			(338		)
Increase (reversal) of unrecognized tax benefits	—			—			135
Basis difference in investment	159			1,397			538
Non-U.S. withholding tax	470			435			452
Change in indefinite reinvestment assertion	998			—			—
Other	(69		)	407			(156		)
Total income tax expense (benefit)	$	2,202		$	(2,778	)	$	776

Net deferred tax assets, which are recorded at December 31, 2018 and December 31, 2017 using a 21% tax rate in the U.S. following the passage of the Tax Act, are comprised of the following (in thousands):



	December 31,
	2018			2017
Deferred tax assets:
United States federal net operating loss carryforwards	$	62,983		$	59,457
Deferred expenses	660			926
Research and development tax credit carryforwards	24,523			24,499
Net unrealized loss on investments	62			62
Accrued loss on excess office facilities	291			489
Stock-based compensation	2,603			2,738
State net operating loss carryforwards	11,971			13,746
Foreign net operating loss carryforwards	31,254			32,759
Deferred revenue	67			108
Equipment, software, and leasehold improvements	2,642			3,119
Intangibles	13			2
Net unrealized gains and basis differences on investments	1,193			1,188
Other	486			183
Gross deferred tax assets	138,748			139,276
Less valuation allowance	137,246			137,117
Gross deferred tax assets, net of valuation allowance	$	1,502		$	2,159
Deferred tax liabilities:
Other intangible assets	$	(155	)	$	(62	)
Undistributed foreign earnings	(1,001		)	—
Other	(479		)	(814		)
Prepaid expenses	(184		)	(254		)
Gross deferred tax liabilities	(1,819		)	(1,130		)
Net deferred tax assets (liabilities)	$	(317	)	$	1,029

In 2018, we continued to record a valuation allowance on the deferred tax assets that we believe are not more likely than not to be realized. The net change in valuation allowance was a $0.1 million increase and a $39.2 million decrease during the years ended December 31, 2018 and 2017, respectively.

We maintain a valuation allowance of $137.2 million for our deferred tax assets due to uncertainty regarding their realization as of December 31, 2018. The net increase in the valuation allowance since December 31, 2017 of $0.1 million was the result of an increase in current year deferred tax assets for which the Company maintains a valuation allowance.

RealNetworks' U.S. federal net operating loss carryforwards totaled $299.9 million and $283.1 million at December 31, 2018 and 2017, respectively. The increase is mainly due to the current year U.S. taxable loss. The remaining net operating loss carryforwards as of December 31, 2018 are from prior U.S. taxable losses and from acquired subsidiaries that are limited under Internal Revenue Code Section 382. These net operating loss carryforwards expire between 2024 and 2037.

In 2018, we finalized our evaluation of the current and future impacts of the Tax Act. There have been no changes to the estimates the Company provisionally recorded in 2017 in accordance with SAB 118. The primary impact of the Tax Act was the elimination of the corporate AMT for tax years beginning January 1, 2018, and provides that existing AMT credit carryovers are refundable beginning in 2018. The Company's $3.6 million of AMT credit carryovers are expected to be fully refunded by 2022. A $3.6 million benefit was recognized in 2017 as a result of this change.

Income tax receivables were $3.6 million at December 31, 2018 and 2017. $1.8 million of the $3.6 million is refundable in 2019 and has been recorded in our current tax receivable. The remaining $1.8 million remains in other long term assets.

We have concluded that we will not owe U.S. taxes on previously untaxed accumulated and current E&P of certain foreign subsidiaries. This conclusion is based on our history of negative E&P generated by our foreign subsidiaries. We have also concluded that we will not owe U.S. taxes on global intangible low-taxed income earned by controlled foreign corporations. In 2018, RealNetworks’ controlled foreign corporations had more tested loss than tested income; therefore, the Company did not have any deemed intangible income inclusion under the global intangible low-taxed income regime.

RealNetworks' U.S. federal research and development tax credit carryforward totaled $24.5 million at December 31, 2018 and 2017. The research and development credit carryforwards expire between 2020 and 2038.

Unrecognized tax benefits were $0.4 million as of December 31, 2018 and 2017. The unrecognized tax benefits are due to federal research and development tax credit carryforward risks. As of December 31, 2018, there are no unrecognized tax benefits remaining that would affect our effective tax rate if recognized, as the offset would increase the valuation allowance. We do not anticipate that the total amount of unrecognized tax benefits will significantly change within the next twelve months.

We recognize interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of December 31, 2018, and 2017 we have no accrued interest or penalties related to uncertain tax positions.

Prior to the Tax Act, the Company had not provided for U.S. income taxes on undistributed earnings and other outside basis differences of its foreign subsidiaries as it was the Company's intention for these tax basis differences to remain indefinitely reinvested. As a result of the Tax Act and other factors in the Company's strategic plan, the Company reevaluated its assertion and no longer intends to indefinitely reinvest substantially all of the Company's foreign earnings outside of the U.S. As a result of this change, we have recorded deferred taxes of $1.0 million as of December 31, 2018 to reflect local country foreign withholding taxes associated with a future repatriation of such foreign earnings.

Reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits (in thousands):



	Years ended December 31,
	2018		2017			2016
Balance, beginning of year	$	358	$	493		$	320
Increases related to prior year tax positions	8		—			38
Decreases related to prior year tax positions	—		(135		)	—
Increases related to current year tax positions	8		—			135
Balance, end of year	$	374	$	358		$	493