Income taxes

12 Months Ended

Dec. 31, 2018

Note 6 - Income taxes

Income tax expense (benefit) for the years ended December 31, 2018, 2017 and 2016 was ($1.7 million), $0.8 million and $6.6 million, respectively. The income tax expense for each of the years ended December 31, 2018, 2017 and 2016 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,	2018			2017			2016
(in thousands)

Current:
Federal	$	(507	)	$	(3,690	)	$	4,981
State and local		(167	)		532			567
		(674	)		(3,158	)		5,548
Deferred:
Federal		(693	)		4,293			949
State and local		(337	)		(288	)		131
		(1,030	)		4,005			1,080
(Benefit) expense for income taxes	$	(1,704	)	$	847		$	6,628

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

Years ended December 31,	2018			2017			2016
Income tax rates
- Statutory U.S. federal rate		21	%		35	%		35	%
- State income taxes, net of federal benefit		0	%		4	%		3	%
- Excess tax benefits related to stock compensation		—	%		(20	)%		—
- Effect of 2017 Tax Act		2	%		(12	)%		—
- Effect of 2018 net deferred tax asset valuation		(20	%)		—			—

Total		3	%		7	%		38	%

As of December 31, 2018, the Company had NOLs of approximately $38.3 million: $32.9 million have no expiration date and are subject to annual limitations of 80% of earnings, $5.4 million expiring through 2023, which are subject to annual limitations of approximately $1.3 million. As of December 31, 2018, the company had state tax NOLs of approximately $21.9 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 ,	2018			2017
(in thousands)
- Depreciation & amortization	$	(5,865	)	$	(3,665	)
- Reserves for doubtful accounts		159			115
- Inventory reserve		2,503			218
- Non qualified stock options		778			409
- Net operating losses		9,574			1,450
- Amt credit		86			-
- Deferred interest		3,637			-
- Valuation allowance		(11,315	)		-
Total		(443	)		(1,473	)

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, 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, 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.

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.

As a result of an Internal Revenue Service audit, the 2013 and prior federal tax years have been closed. The Company operates in many states throughout the United States and, as of December 31, 2018, the various states’ statutes of limitations remain open for tax years subsequent to 2010. The Company recognizes interest and penalties, if any, relating to income taxes as a component of the provision for income taxes.

The Company evaluates uncertain tax positions, if any, by determining if it is more likely than not to be sustained upon examination by the taxing authorities. As of December 31, 2018 and 2017, the Company had no uncertain tax positions.