Income Taxes

12 Months Ended

Dec. 31, 2019


Note 15.			Income Taxes

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


	Years ended December 31,
	2019		2018
United States operations	$	(12,567)	$	(16,144)
Foreign operations	(7,623)		(6,643)
Income (loss) before income taxes	$	(20,190)	$	(22,787)

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


	Years ended December 31,
	2019		2018
Current:
United States federal	$	454	$	612
State and local	98		53
Foreign	546		367
Total current	1,098		1,032
Deferred:
United States federal	(54)		338
State and local	—		—
Foreign	24		832
Total deferred	(30)		1,170
Total income tax expense (benefit)	$	1,068	$	2,202

Income tax expense differs from “expected” income tax expense (computed by applying the U.S. federal income tax rate of 21% in 2019 and 2018) due to the following (in thousands):


	Years ended December 31,
	2019		2018
United States federal tax expense (benefit) at statutory rate	$	(4,240)	$	(4,785)
State taxes, net of United States federal tax expense (benefit)	607		(694)
Change in valuation allowance	4,389		5,804
Non-deductible stock compensation	253		448
Impact of non-U.S. jurisdictional tax rate difference	(311)		(117)


Research and development tax credit	(125)		(12)

Increase (reversal) of unrecognized tax benefits	96		—
Basis difference in investment	—		159
Non-U.S. withholding tax	283		470
Change in indefinite reinvestment assertion	(72)		998
Other	188		(69)
Total income tax expense (benefit)	$	1,068	$	2,202

Net deferred tax assets, which are recorded at December 31, 2019 and December 31, 2018 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,
	2019		2018
Deferred tax assets:
United States federal net operating loss carryforwards	$	85,270	$	62,983
Deferred expenses	3,226		660
Research and development tax credit carryforwards	19,694		24,523
Right of use tax asset	2,696		—



Stock-based compensation	2,697		2,603
State net operating loss carryforwards	13,880		11,971
Foreign net operating loss carryforwards	34,079		31,254
Deferred revenue	900		67
Equipment, software, and leasehold improvements	2,922		2,642
Intangibles	6,216		13
Net unrealized gains and basis differences on investments	—		1,193
Other	455		839
Gross deferred tax assets	172,035		138,748
Less valuation allowance	160,783		137,246
Gross deferred tax assets, net of valuation allowance	$	11,252	$	1,502
Deferred tax liabilities:
Other intangible assets	$	(4,667)	$	(155)
Right of use tax liability	(2,333)		—
Undistributed foreign earnings	(909)		(1,001)
Other	(838)		(663)
Net unrealized gains and basis differences on investments	(2,916)		—
Gross deferred tax liabilities	(11,663)		(1,819)
Net deferred tax assets (liabilities)	$	(411)	$	(317)

As of December 31, 2019, we maintained a valuation allowance of $160.8 million for our deferred tax assets that we believe are not more likely than not to be realized. The net change in valuation allowance was a $23.5 million increase and a $0.1 million increase during the years ended December 31, 2019 and 2018, respectively. The net increase in the valuation

allowance since December 31, 2018 of $23.5 million was the result of the acquisition of Napster and 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 $406.0 million and $299.9 million at December 31, 2019 and 2018, respectively. The increase is mainly due to net operating loss carryforwards from the acquisition of Napster, in addition to the current year U.S. taxable loss. The remaining net operating loss carryforwards as of December 31, 2019 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.

Income tax receivables were $1.8 million and $3.6 million at December 31, 2019 and 2018. $0.9 million of the $1.8 million is refundable in 2020 and has been recorded in our current tax receivable. The remaining $0.9 million remains in other long term assets.

RealNetworks' U.S. federal research and development tax credit carryforward totaled $19.7 million and $24.5 million at December 31, 2019 and 2018. The research and development credit carryforwards expire between 2020 and 2039.

As of December 31, 2018, the Company no longer intends to indefinitely reinvest substantially all of the Company's foreign earnings outside of the U.S. We have recorded deferred taxes of $0.9 million and $1.0 million as of December 31, 2019 and 2018, respectively, for local country and foreign withholding taxes associated with the repatriation of such foreign earnings.

As of December 31, 2019 and 2018, RealNetworks had $5.0 million and $0.4 million in uncertain tax positions, respectively. The increase in uncertain tax positions was primarily the result of the acquisition of Napster, for which unrecognized tax positions were recorded relating to federal research and development tax credit carryforward risks, as well as transfer pricing risks in certain foreign jurisdictions. Notwithstanding current year accruals for existing positions, 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, 2019, we have approximately $0.6 million of accrued interest or penalties related to uncertain tax positions. There was no accrued interest or penalties related to uncertain tax positions as of December 31, 2018.

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


	Years ended December 31,
	2019		2018
Balance, beginning of year	$	374	$	358
Increases related to prior year tax positions	4,125		8
Decreases related to prior year tax positions	(85)		—

Increases related to current year tax positions	606		8

Balance, end of year	$	5,020	$	374