Note 7 - Income taxes

Loss before income taxes for the years ended December 31, 2019 and 2018 was $25.3 million and $57.4 million, respectively. Income tax expense (benefit) for the years ended December 31, 2019 and 2018 was $0.7 million and ($1.7 million), respectively. The income tax expense for each of the years ended December 31, 2019 and 2018 was for federal and state income tax at statutory rates applied to the adjusted pre-tax income for each of the periods.

The following summarizes the (benefit) / provision for income taxes:


Years Ended December 31,	2019		2018
(in thousands)

Current:
Federal	$	(124)	$	(507)
State and local		31		(167)
		(93)		(674)
Deferred:
Federal		366		(693)
State and local		383		(337)
		749		(1,030)
(Benefit) expense for income taxes	$	656	$	(1,704)

Reconciliation of the Company’s actual tax rate to the U.S. Federal statutory rate is as follows:


Years ended December 31,	2019		2018
Income tax rates
- Statutory U.S. federal rate	21	%	21	%
- State income taxes, net of federal benefit	0	%	0	%
- Excess tax benefits related to stock compensation	0	%	—	%
- AMT credit	1	%	—	%
- Effect of 2017 Tax Act	0	%	2	%
- Change in valuation allowance	(25)	%	(20)	%

Total	(3)	%	3	%

As of December 31, 2019, the Company had NOLs of approximately $46.4 million, of which $41.0 million have no expiration date (subject to annual limitations of 80% of tax earnings) and $5.4 million expire through 2023 (subject to annual limitations of approximately $1.3 million). As of December 31, 2019, the Company had state tax NOLs of approximately $23.7 million expiring in various years.

Deferred income tax represents the tax effect of the differences between the book and tax bases of assets and liabilities. The net deferred income tax assets (liabilities) consisted of the following at:


December 31,	2019		2018
(in thousands)
- Depreciation & amortization	$	(4,899)	$	(5,865)
- Reserves for doubtful accounts		163		159
- Inventory reserve		2,083		2,503
- Non qualified stock options		965		778
- Net operating losses		11,016		9,574
- AMT credit		47		86
- Deferred interest		8,351		3,637
- Valuation allowance		(18,918)		(11,315)
Total		(1,192)		(443)

We review the likelihood that we will realize the benefit of our deferred tax assets, and therefore the need for valuation allowances, on an annual basis in the fourth quarter of the year, and more frequently if events indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results are considered, along with all other available positive and negative evidence.

Concluding that a valuation allowance is not required is difficult when there is significant negative evidence that is objective and verifiable, such as cumulative losses in recent years. We utilize a rolling twelve quarters of pre-tax income or loss adjusted for significant permanent book to tax differences, as well as non-recurring items, as a measure of our cumulative results in recent years. Based on the operating loss experienced as of December 31, 2018 and 2019, our analysis indicated that we had cumulative three year historical losses on this basis, which represented significant negative evidence that is objective and verifiable and, therefore, difficult to overcome. Based on our assessment as of December 31, 2018 and 2019, we concluded that due to the uncertainty that the deferred tax assets will not be fully realized in the future, we recorded a valuation allowance of approximately $11.3 million during the year ended December 31, 2018 and increased the valuation allowance to $18.9 million as of December 31, 2019 due to additional losses.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“2017 Tax Act”), which lowered the federal statutory income tax rate from, generally, 35% to 21% for tax years beginning after December 31, 2017. As a result of the enactment of the 2017 Tax Act, the Company recorded a benefit of approximately $1.4 million during the fourth quarter of 2017 to reflect the net impact of lower future federal income tax rates on the NOLs and the other cumulative differences in financial reporting and tax bases assets and liabilities, which were, primarily, fixed assets and accumulated depreciation.

The Company’s 2015 and prior federal tax years have been closed. The Company operates in many states throughout the United States and, as of December 31, 2019, the various states’ statutes of limitations remain open for tax years subsequent to 2014. The Company recognizes interest and penalties, if any, relating to income taxes as a component of the provision for income taxes.