(

)

Income Taxes

For the years ended

December 31, 2018,

2017,

and

2016,

income before income taxes consists of the following:

	2018		2017		2016
	(In thousands)
U.S. Operations	$	32,056	$	32,750	$	29,848
Foreign Operations		2,653		1,533		1,508
Income before income taxes	$	34,709	$	34,283	$	31,356

Income tax expense consisted of the following components:

	2018			2017			2016
	(In thousands)
Federal:
Current	$	2,144		$	10,947		$	8,930
Deferred		1,328			(1,596	)		847
Total	$	3,472		$	9,351		$	9,777

Foreign :
Current	$	882		$	387		$	409
Deferred		(178	)		704			(18	)
Total	$	704		$	1,091		$	391

State :
Current	$	204		$	837		$	634
Deferred		282			61			36
Total	$	486		$	898		$	670

Total	$	4,662		$	11,340		$	10,838

Federal Tax Reform

December 22, 2017,

the Tax Cut and Jobs Act (the “Tax Act”) was enacted which, among other changes, reduced the U.S. federal corporate tax rate from

35%

21%

effective

January 1, 2018.

The Tax Act made broad and complex changes to the U.S. tax code. Based on the information available, and the current interpretation of the Tax Act, the Company was able to make a reasonable estimate as of

December 31, 2017,

and recorded a provisional net tax benefit related to the remeasurement of the deferred tax assets and liabilities due to the reduction in the U.S. federal corporate tax rate, offset by the

one

-time mandatory deemed repatriation tax, payable over

eight

years. In accordance with Staff Accounting Bulletin

No.

118,

the Company made reasonable estimates and recorded a provisional net tax benefit of

$1.9

million as of

December 31, 2017

related to the following elements of the Tax Act:

●

Reduction in the U.S. Federal Corporate Tax Rate: The Tax Act reduced the corporate tax rate to

21%,

effective

January 1, 2018.

Recorded a decrease related to deferred tax assets and liabilities with a corresponding net adjustment to deferred income tax benefit for the year ended

December 31, 2017.

●

Availability of

100%

bonus depreciation on assets placed in service after

September 27, 2017.

●

Certain stock compensation plans potentially subject to limitations as to deductibility.

The above items were final as of

December 31, 2018,

and

material adjustments were made to the provisional amounts recorded as of

December 31, 2017.

Under the Tax Act, the Company was also subject to a

one

-time mandatory deemed repatriation tax on accumulated non-U.S. earnings. The estimates booked as of

December 31, 2017

have been finalized and

material adjustments were made to the financials.

In addition, as a result of the Tax Act, the Company determined that it would

longer indefinitely reinvest the earnings of its Canadian subsidiary and recorded the withholding tax of

$706,000

associated with this planned repatriation in

December 2017.

December 2018,

the Canadian subsidiary declared a deemed dividend for

million to the Company. Withholding tax of

$150,000

was paid in

2018.

The Tax Act subjects a U.S. corporation to tax on its Global Intangible Low Taxed Income (“GILTI”). Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act. Under Generally Accepted Accounting Principles, the Company can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense or factor such amounts into the measurement of deferred taxes. The Company elected the current period expense method and has

not

reflected any corresponding deferred tax assets and liabilities associated with the GILTI tax in the table of deferred tax assets and liabilities. GILTI tax has been recorded as current period expense of

$40,000

2018.

The difference between the Company’s income tax expense as reported in the accompanying consolidated financial statements and the income tax expense that would be calculated applying the U.S. federal income tax rate of

21%

for

2018

and

35%

for

2017

and

2016

on pretax income was as follows:

	2018			2017			2016
	(In thousands)
Expected federal income taxes	$	7,285		$	11,999		$	10,975
Foreign tax rate differential		146			(131	)		(129	)
State income taxes, net of federal benefit and state tax credits		376			608			436
Federal tax credits		(150	)		(130	)		(165	)
Uncertain tax positions		90			151			6
Nondeductible expenses related to recapitalization		151			504			--
Share based compensation		(3,041	)		(1,564	)		(441	)
Compensation limit for covered employees		--			955			--
Impact of 2017 Tax Act		--			(2,415	)		--
Tax depreciation method change		(308	)		--			--
Valuation allowance		--			535			--
Withholding tax on repatriation of foreign earnings		--			706			--
GILTI		40			--			--
Other		73			122			156
Total	$	4,662		$	11,340		$	10,838

Deferred tax assets and liabilities at

December 31, 2018

and

2017,

were comprised of the following:

	2018			2017
	(In thousands)
Deferred tax assets:
Allowance for doubtful accounts	$	41		$	46
Accrued expenses		424			416
Share based compensation		1,264			1,457
Accrued bonuses		198			113
Foreign tax credit from repatriation		535			535
Other		46			166
Gross deferred tax assets		2,508			2,733
Less valuation allowance		(535	)		(535	)
Deferred tax assets		1,973			2,198
Deferred tax liabilities:
Prepaid expenses		95			169
Deferred contract costs		786			--
Property and equipment		1,944			856
Intangible assets		4,919			4,497
Repatriation withholding		505			706
Deferred tax liabilities		8,249			6,228
Net deferred tax liabilities	$	(6,276	)	$	(4,030	)

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than

not

that some portion, or all, of the deferred tax assets will

not

be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers projected future taxable income, carry-back opportunities, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, the Company believes it is more likely than

not

that it will realize the benefits of these deductible differences excluding the foreign tax credit carryforward.

The Company had an unrecognized tax benefit at

December 31, 2018

and

2017,

$554,000

and

$843,000,

respectively, excluding interest of

$6,000

and

$5,000

December 31, 2018

and

2017,

respectively. Of these amounts,

$482,000

and

$620,000

December 31, 2018

and

2017,

respectively, represents the net unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate. The change in the unrecognized tax benefits for

2018

and

2017

is as follows:

	(In thousands)
Balance of unrecognized tax benefits at December 31, 2016	$	662
Additions based on tax positions of prior years		(7	)
Additions based on tax positions related to the current year		188
Balance of unrecognized tax benefits at December 31, 2017	$	843
Reductions due to lapse of applicable statute of limitations		(35	)
Reductions due to tax positions of prior years		(66	)
Reductions due to settlement with taxing authorities		(300	)
Additions based on tax positions related to the current year		112
Balance of unrecognized tax benefits at December 31, 2018	$	554

The Company files a U.S. federal income tax return, various state jurisdictions returns and a Canada federal and provincial income tax return. All years prior to

2015

are now closed for US federal income tax and for years prior to

2015

for state income tax returns, and

exposure items exist for these years. The Company completed a United States federal tax examination for the tax year ended

December 31, 2013

in the

first

quarter of

2016.

The

2014

2018

Canada federal and provincial income tax returns remain open to examination.