10. Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Internal Revenue Service (the "IRS") has completed examinations of the Company's U.S. income tax returns or the statute of limitations has passed on returns for the years through 2010. The Company's 2011 through 2015 U.S. income tax returns are currently under examination by the IRS. The IRS has sought to disallow research credits in the total amount of $2.5 million on the Company's 2011, 2012 and 2013 U.S. income tax returns. The Company has exhausted all administrative appeals and formal mediation and has filed suit to resolve this dispute. The Company is awaiting a court date to be set by the U.S. Tax Court. The Company believes the research credits taken are appropriate and intends to vigorously defend its position. An amount of adjustment, if any, and the timing of such adjustment are not reasonably possible to estimate at this time. The total amount of research credits taken or expected to be taken in the Company's income tax returns for 2011 through December 31, 2017 is $8.9 million.

As of December 31, 2017, the Company had U.S. federal tax gross net operating loss carry forwards of approximately $1.9 million that will begin to expire in 2023 if not utilized. Utilization of net operating losses may be subject to an annual limitation due to the "change in ownership" provisions of the Code. The annual limitation may result in the expiration of net operating losses before utilization.

Significant components of the provision for income taxes are as follows (in thousands):

	Year Ended December 31,
	2017		2016		2015
Current:
Federal	$	9,095	$	3,733	$	6,394
State		1,262		720		772
Foreign		2,345		1,207		1,165
Total current		12,702		5,660		8,331

Deferred:
Federal		(3,726)		3,487		1,057
State		(684)		642		170
Foreign		270		261		270
Total deferred		(4,140)		4,390		1,497
Total provision for income taxes	$	8,562	$	10,050	$	9,828

The components of pretax income for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):

	Year Ended December 31,
	2017		2016		2015
Domestic	$	21,285	$	24,564	$	26,958
Foreign		5,858		5,945		5,877
Total	$	27,143	$	30,509	$	32,835

For the years ended December 31, 2017, 2016, and 2015 foreign operations included India, China, Canada and the United Kingdom.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred taxes as of December 31, 2017 and 2016 are as follows (in thousands):

	December 31,
	2017		2016
Deferred tax assets:
Accrued liabilities	$	2,027	$	1,710
Bad debt reserve		328		497
Net operating losses		483		893
Deferred compensation		2,579		3,851
Intangibles		4,097		3,624
Total deferred tax assets		9,514		10,575
Deferred tax liabilities:
Prepaid expenses		902		965
Accounting method change		1,366		3,096
Goodwill and intangibles		13,975		18,172
Fixed assets		631		1,195
Total deferred tax liabilities		16,874		23,428
Net deferred tax liability	$	7,360	$	12,853

Management regularly assesses the likelihood that deferred tax assets will be recovered from future taxable income. To the extent management believes that it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is established. Management believes it is more likely than not that the Company will generate sufficient taxable income in future years to realize the benefits of its deferred tax assets.

The federal corporate statutory tax rate is reconciled to the Company's effective income tax rate as follows:

	Year Ended December 31,
	2017		2016		2015
Federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	3.3		3.9		4.0
Effect of foreign operations	1.9		(2.1)		(2.6)
Foreign toll charge - U.S. tax reform	4.1		0.0		0.0
Stock compensation	1.9		2.4		3.4
Non-deductible acquisition costs	0.0		0.0		0.3
Research and development tax credit	(1.0)		(5.0)		(9.0)
U.S. domestic production deduction	(1.6)		(1.4)		(1.0)
Adjustment to deferred tax rate - U.S. tax reform	(12.3)		0.0		0.0
Other	0.2		0.1		(0.2)
Effective tax rate	31.5	%	32.9	%	29.9	%

The effective income tax rate decreased to 31.5% for the year ended December 31, 2017 from 32.9% for the year ended December 31, 2016. The effective rate for the year ended December 31, 2017 included the effects of certain foreign withholding taxes, a foreign toll charge on historic foreign earnings, and a revaluation of ending deferred income taxes caused by passage of the 2017 Tax Act.

In general, it is the Company's practice and intention to reinvest the earnings of the Company's foreign subsidiaries in those operations. However, during the second quarter of 2017, the Company determined that as a result of changes in the business and macroeconomic environment, the foreign earnings of the Company's Chinese subsidiary were no longer permanently reinvested, and the Company repatriated $4.8 million of cash in June 2017 and an additional $4.8 million of cash in July 2017. A provision for the expected current and deferred taxes on repatriation of these earnings was recorded as a discrete item in the amount of $2.5 million during the second quarter of 2017. Approximately $1.6 million of this provision was reversed during the fourth quarter of 2017 due to the adoption of the 2017 Tax Act. Management intends to continue to permanently reinvest all other remaining current and prior earnings in its other foreign subsidiaries.

Excluding China, foreign unremitted earnings of entities not included in the United States tax return have been included in the consolidated financial statements without giving effect to the United States taxes that may be payable on distribution to the United States because it is not anticipated such earnings will be remitted to the United States. Under current applicable tax laws, if the Company elects to remit some or all of the funds it has designated as indefinitely reinvested outside the United States, the amount remitted would be subject to applicable non-U.S. withholding taxes. As of December 31, 2017, the aggregate unremitted earnings of the Company's foreign subsidiaries for which a deferred income tax liability has not been recorded was approximately $4.9 million, and the unrecognized deferred tax liability on unremitted earnings was approximately $0.2 million.

Under the provisions of the ASC Section 740-10-25, Income Taxes - Recognition, the Company had an unrecognized tax benefit of $2.7 and $1.2 million as of December 31, 2017 and 2016, respectively. If the Company's assessment of unrecognized tax benefits is not representative of actual outcomes, the Company's consolidated financial statements could be significantly impacted in the period of settlement or when the statute of limitations expires.

The following table is a reconciliation of beginning and ending balances of total amounts of gross unrecognized tax benefits (in thousands):

	December 31,
	2017		2016
Balance at beginning of year	$	1,164	$	957
Additions based on tax positions related to current year		464		-
Additions based on tax positions related to prior years		1,151		207
Reductions for tax positions of prior years		(99)		-
Balance at end of year	$	2,680	$	1,164

U.S. Tax Reform

On December 22, 2017, the U.S. government enacted the 2017 Tax Act. The 2017 Tax Act significantly revised the future ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system.

There are certain transitional impacts of the 2017 Tax Act which affected the Company's tax provision during the fourth quarter of 2017. As part of the transition to the new territorial tax system, the 2017 Tax Act imposed a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries, which produced a $1.1 million tax expense payable over eight years. As a result, a $0.1 million current liability and a $1.0 million non-current liability were recorded in the Company's consolidated financial statements during the fourth quarter of 2017. The reduction of the U.S. corporate tax rate caused the Company to adjust its U.S. deferred tax assets and liabilities to the lower federal base rate of 21%. The reduction in the corporate tax rate resulted in a provisional net tax credit of $3.3 million for the fourth quarter of 2017. In addition, as a result of the 2017 Tax Act, changes to the net tax cost of certain China dividends repatriated during 2017 created a $1.6 million tax credit during the fourth quarter of 2017.

The changes included in the 2017 Tax Act are broad and complex. The final transition impacts of the 2017 Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the 2017 Tax Act, any legislative action to address questions that arise because of the 2017 Tax Act, any changes in the accounting standards for income taxes or related interpretations in response to the 2017 Tax Act, or any updates or changes to estimates the Company has utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries. There were no specific impacts of the 2017 Tax Act that could not be reasonably estimated which the Company accounted for under prior tax law. However, the SEC has issued rules that would allow for a measurement period of up to one year after the enactment date of the 2017 Tax Act to finalize the recording of the related tax impacts. Based on a continued analysis of the estimates and further guidance on the application of the law, it is anticipated that additional revisions may occur throughout the allowable measurement period. We currently anticipate finalizing and recording any resulting adjustments within a year of the enactment date.