INCOME TAXES

Within the calculation of the Company's annual effective tax rate, the Company has used assumptions and estimates that

may

change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, and the FASB and/or various other taxing jurisdictions. For example, the Company anticipates that the state jurisdictions will continue to determine and announce their conformity to the U.S. Tax Act which could have an impact on the annual effective tax rate.

March 27, 2020

the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted which enacted the following relief among others;

●

Amended federal tax laws to permit

100%

bonus depreciation for eligible qualified improvement property placed in service by the taxpayer after

December 31, 2017

and before

January 1, 2023.

●

Eliminated the

80%

of taxable income limitations by allowing corporate entities to fully utilize Net Operating Losses (NOL) carryforwards to offset taxable income in

2018,

2019

2020.

The

80%

limitation is reinstated for tax years after

2020.

●

Increased the net interest expense deduction limit to

50%

of adjusted taxable income from

30%

for tax years beginning

January 1, 2019

and

2020.

●

Allowed taxpayers with alternative minimum tax credits to claim a refund in

2020

for the entire amount of the credit instead of recovering the credit through refunds over a period of years, as originally enacted by the Tax Cuts and Jobs Act in

2017.

●

Allowed taxpayers the carryback of Net Operating Losses (NOL) as a result of tax years beginning after

December 31, 2017,

but before

January 1, 2021

for the

five

prior years of the generated loss.

The components of loss before taxes for the years ended

December

are as follows:

Origin of income before taxes	2020			2019
United States	$	(3,411	)	$	(5,803	)
Foreign		(810	)		(2,034	)
Loss before income taxes	$	(4,221	)	$	(7,837	)

Significant components of income tax benefit (expense) for the years ended

December

are as follows:

	2020			2019
Current:
Federal	$	—		$	—
State		(7	)		(14	)
Foreign		(88	)		—
Total current		(95	)		(14	)
Deferred:
Federal		22			—
State		16			—
Total deferred		38			—
Income tax expense	$	(57	)	$	(14	)

A reconciliation between the provision for income taxes calculated at the U.S. federal statutory income tax rate and the consolidated income tax expense in the consolidated statements of operations for the years ended

December

is as follows:

	2020			2019
Provision at the U.S. federal statutory rate		21.0	%		21.0	%
State taxes, net of federal benefit		1.5	%		2.7	%
Foreign tax rate differential		0.5	%		—	%
China Enterprise Tax		(2.1	)%		—	%
Valuation allowance		(13.9	)%		(29.2	)%
Share based compensation shortfall		(2.0	)%		—	%
Other true up		(2.7	)%		1.6	%
Intangible assets impairment and other non-deductibles		1.8	%		2.3	%
State rate change		(6.5	)%		—	%
Other		1.0	%		1.8	%
Income tax (expense) benefit effective rate		(1.4	)%		0.2	%

The deferred tax assets and liabilities at

December

are as follows:

	2020			2019
Deferred tax assets:
Stock compensation expense	$	1,240		$	1,882
Goodwill		986			1,490
Royalty accruals		560			560
Bad debt allowance		338			466
Net operating loss carryforwards		10,959			9,146
Credit carry-forwards		841			814
Inventory reserve		206			243
Depreciation		499			502
Other		334			340
Total deferred tax assets		15,963			15,443
Deferred tax liabilities:
Intangible assets		(126	)		(220	)
Total deferred tax liabilities		(126	)		(220	)
Net deferred tax asset before valuation allowance		15,837			15,223
Valuation allowances for deferred tax assets		(15,971	)		(15,394	)
Net deferred tax liability	$	(134	)	$	(171	)

The change in the valuation allowance for deferred tax assets for the years ended

December

is as follows:

Year	Balance at January 1		Charged to costs and expenses		(Deductions)/Other		Balance at December 31
2019	$	13,044		2,350		—	$	15,394
2020	$	15,394		577			$	15,971

For the years ended

December 31, 2020

and

2019,

there were exercises of stock options of

$296

and

$0,

respectively.

As required by ASC

740,

we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than

not

sustain the position following an audit. For tax positions meeting the more-likely-than-

not

threshold, the amount recognized in the financial statements is the largest benefit that has a greater than

50%

likelihood of being realized upon ultimate settlement with the relevant tax authority.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense for all periods presented. There were

interest and penalties recognized in income tax expense during the years ended

December 31, 2020

and

2019

. There were

unrecognized tax benefits as of

December 31, 2020

and

2019

We are subject to taxation in the U.S., various states, and in non-U.S. jurisdictions. Our U.S. income tax returns are primarily subject to examination from

2017

through

2019;

however, U.S. tax authorities also have the ability to review prior tax years to the extent loss carryforwards and tax credit carryforwards are utilized. The open years for the non-U.S. tax returns range from

2012

through

2019

based on local statutes.

April 3, 2019,

the Company received notice from the Internal Revenue Service that our U.S. income tax return for the year ended

December 31, 2016

was under audit. In

May

2020,

the audit was successfully completed with

change required.

Management periodically estimates our probable tax obligations using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which we transact business. The judgments and estimates made at a point in time

may

change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate

may

increase or decrease in any period. Tax accruals for tax liabilities related to potential changes in judgments and estimates for both federal and state tax issues are included in current liabilities on the consolidated balance sheet.

The investment in foreign subsidiaries other than Fuel Tech S.p.A (Chile) and Beijing Fuel Tech is considered to be indefinite in duration and therefore we have

not

provided a provision for deferred U.S. income taxes on the unremitted earnings from those subsidiaries. A provision has

not

been established because it is

not

practicable to determine the amount of unrecognized deferred tax liability for such unremitted foreign earnings and because it is our present intention to reinvest the undistributed earnings indefinitely.

As required by ASC

740,

a valuation allowance must be established when it is more likely than

not

that all or a portion of a deferred tax asset will

not

be realized. We have approximately

$25,486

of US net operating loss carryforwards available to offset future US taxable income as of

December 31, 2020.

The net operating loss carry-forwards related to tax losses generated in years ending

December 31, 2017

and before in the US totaling

$10,733

begin to expire in

2034.

Further, we have tax loss carry-forwards of approximately

$6,246

available to offset future foreign income in Italy as of

December 31, 2020.

We have recorded a full valuation allowance against the deferred tax asset because we cannot anticipate when or if this entity will have taxable income sufficient to utilize the net operating losses in the future. There is

expiration of the net operating loss carry-forwards related to tax losses generated in prior years in Italy. Finally, we have tax loss carry-forwards of approximately

$12,763

available to offset future foreign income in China as of

December 31, 2020.

The net operating loss carry-forwards related to tax losses generated in prior years in China expire in

2022.

As of

December 31, 2019,

the investment in Fuel Tech S.p.A (Chile) was

longer considered to be indefinite and a provision for deferred U.S income taxes of

$155

was recorded. As of

December 31, 2020,

Fuel Tech S.p.A (Chile) was still included in continuing operations, as a result an additional

$15

was recorded, adjusting the total consideration to

$170.

The deferred income taxes associated with this investment are offset by a valuation allowance of (

$170