Income Taxes

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act. The legislation significantly changes U.S. tax law by, among other things, reducing the US federal corporate tax rate from 35% to 21%, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allowed the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As a result, The Company previously recorded a provisional estimate of the effect of the Tax Act in its financial statements. In the fourth quarter of 2018, the Company completed its analysis to determine the effect of the Tax Act and recorded immaterial adjustments as of December 22, 2018.

While the Tax Act provides for a modified territorial tax system, beginning in 2018, GILTI provisions will be applied providing an incremental tax on low taxed foreign income. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. During 2018, the Company made an accounting policy election to treat taxes related to GILTI as a current period expense when incurred.

During the year ended December 31, 2017, the Company remeasured its U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The Company recorded a decrease related to its deferred tax assets and liabilities of $34.7 million with a corresponding adjustment to its valuation allowance for the year ended December 31, 2017. As the Company’s deferred tax asset is offset by a full valuation allowance, this change in rates had no impact on the Company’s financial position or results of operations.

The one-time transition tax is based on the Company’s total post-1986 earnings and profits (“E&P”) that were previously deferred from U.S. income taxes. The Company recorded additional U.S. taxable income of $8.4 million, which did not result in additional tax expense due to its net operating losses.

For financial reporting purposes, loss from continuing operations before income taxes includes the following components (in thousands):



	Years Ended December 31,
	2018			2017
United States	$	(43,694	)	$	(52,720	)
Foreign	(1,844		)	(583		)
Total	$	(45,538	)	$	(53,303	)

The provision for income taxes based on loss from continuing operations before income taxes is as follows (in thousands):



	Years Ended December 31,
	2018			2017
Federal:
Current	$	—		$	—
Deferred	(5,763		)	18,646
	(5,763		)	18,646
State:
Current	7			5
Deferred	(651		)	231
	(644		)	236
Foreign:
Current	405			519
Deferred	(703		)	(1,880		)
	(298		)	(1,361		)
(Decrease) increase in valuation allowance	5,609			(16,962		)
Tax provision	$	(1,096	)	$	559

The provision for income taxes in the accompanying consolidated statements of operations differs from the amount calculated by applying the statutory income tax rate to loss before income taxes. The primary components of such difference are as follows (in thousands):



	Years Ended December 31,
	2018			2017
Taxes at federal statutory rate	$	(9,563	)	$	(18,123	)
State taxes, net of federal benefit	(97		)	(236		)
Effect of tax rate differential for foreign subsidiary	176			(340		)
Valuation allowance, including tax benefits of stock activity	5,609			(16,962		)
Tax rate change	(244		)	34,732
Discontinued operations	1,927			—
Stock-based compensation	513			224
Foreign withholding taxes	414			295
Return to provision adjustments	667			(2,931		)
Subpart F income inclusion	—			2,998
SEC settlement penalty	—			959
Business combination	—			(1,914		)
Other, net	(498		)	1,857
Tax provision	$	(1,096	)	$	559

The Company has established a valuation allowance against its U.S. federal and state deferred tax assets due to the uncertainty surrounding the realization of such assets as evidenced by the cumulative losses from operations through December 31, 2018. Management periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred assets are realizable, the valuation allowance will be reduced accordingly and recorded as a tax benefit. The Company has recorded a valuation allowance of $67.0 million as of December 31, 2018 to reflect the estimated amount of deferred tax assets that may not be realized. The Company increased its valuation allowance by $5.6 million for the year ended December 31, 2018.

At December 31, 2018, the Company has federal and state net operating loss carryforwards of approximately $235.2 million and $43.6 million, respectively. The federal tax loss carryforwards will begin to expire in 2020 and the state tax loss carryforwards will begin to expire in 2023. In addition, the Company has research and development and other tax credit carryforwards for federal and state income tax purposes as of December 31, 2018 of $7.7 million and $9.8 million, respectively. The federal credits will begin to expire in 2019 unless utilized and the state credits have an indefinite life. Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company’s federal net operating loss and credit carryforwards may be limited upon a cumulative change in ownership of more than 50% within a three-year period.

Items that give rise to significant portions of the deferred tax accounts are as follows (in thousands):



	December 31,
	2018			2017
Deferred tax assets:
Tax loss carryforwards	$	53,834		$	50,183
Accrued foreign taxes	—			1,044
Research and development and other tax credit carryforwards	1,149			792
Uniform capitalization, contract and inventory related reserves	1,388			982
Accrued vacation	327			301
Allowance for doubtful accounts	147			161
Stock-based compensation	2,309			2,029
Capitalized research and development	2,688			3,043
Tax basis depreciation less book depreciation	1,888			1,492
Pension assets	992			1,022
Deferred revenue	798			175
163(j) interest limitation	1,135			—
Other	1,741			2,367
Total	68,396			63,591
Deferred tax liabilities:
Withholding tax on undistributed earnings of foreign subsidiary	—			(4,879		)
Intangible assets	(978		)	(1,514		)
Foreign exchange gains/losses	(183		)	(351		)
Total	(1,161		)	(6,744		)
Net deferred tax assets before valuation allowance	67,235			56,847
Valuation allowance	(67,012		)	(61,403		)
Net deferred tax assets (liabilities)	$	223		$	(4,556	)

As of December 31, 2018 and 2017, deferred tax assets of $0.3 million and $0.4 million, respectively, were included in other non-current assets in the consolidated balance sheets.

The Company accounts for uncertain tax benefits in accordance with the provisions of section 740-10 of the Accounting for Uncertainty in Income Taxes Topic of the FASB ASC. Of the total unrecognized tax benefits at December 31, 2018, approximately $17.5 million was recorded as a reduction to deferred tax assets, which caused a corresponding reduction in the Company’s valuation allowance of $17.5 million. To the extent unrecognized tax benefits are recognized at a time when a valuation allowance does not exist, the recognition of the $17.5 million tax benefit would reduce the effective tax rate. The Company does not anticipate that the amount of unrecognized tax benefits as of December 31, 2018 will change materially within the 12-month period following December 31, 2018.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



Balance at December 31, 2016	$	15,579
Increase in current period positions	1,081
Decrease in prior period positions	(518		)
Balance at December 31, 2017	16,142
Increase in current period positions	1,167
Increase in prior period positions	340
Decrease in prior period positions	(32		)
Balance at December 31, 2018	$	17,617

The Company recognizes interest and penalties as a component of income tax expense. Interest and penalties for the years ended December 31, 2018 and 2017 were $(27,000) and $29,000, respectively.

The Company’s U.S. federal income tax returns for tax years subsequent to 2014 are subject to examination by the Internal Revenue Service and its state income tax returns subsequent to 2013 are subject to examination by state tax authorities. The Company’s foreign tax returns subsequent to 2012 are subject to examination by the foreign tax authorities.

Net operating losses from years for which the statute of limitations has expired (2014 and prior for federal and 2013 and prior for state) could be adjusted in the event that the taxing jurisdictions challenge the amounts of net operating loss carryforwards from such years.