INCOME TAXES

12 Months Ended

Dec. 31, 2019

The Company’s effective tax rate for 2019, 2018 and 2017 was 17.4%, 20.7%, and (1.8)%, respectively. The decrease from 2018 to 2019 is primarily due to lower international taxes related to the Patent Box Decree as described below, and certain lower U.S. state taxes, partially offset by a reduction in foreign tax credits.

Italy introduced an elective tax regime (“Patent Box Decree”) that allows companies to benefit from a fifty percent exemption from corporate income tax and local tax on income derived from the direct/indirect use of qualifying intellectual property. During 2019, Balchem Italia received the required ad hoc advance tax ruling. The benefit of the Patent Box Decree had a significant beneficial impact on the Company’s effective tax rate for 2019.

Additionally, proposed and final guidance were issued by the U.S. Department of Treasury related to foreign tax credits under the U.S. Tax Cuts and Jobs Act ("U.S. Tax Reform"), which was enacted on December 22, 2017. The Company will continue to evaluate and analyze the impact of the U.S. Tax Reform and the additional guidance that has been issued, and may be issued, by the U.S. Department of Treasury, the SEC, and/or the FASB regarding this act.

The Company has analyzed any potential Base Erosion and Anti-Abuse Tax (“BEAT”) on related-party transactions and determined they met the gross receipts test but did not meet the level of base erosion payments that would subject them to BEAT in 2019.

Income tax expense consists of the following:


	2019		2018		2017
Current:
Federal	$	17,757	$	18,296	$	20,102
Foreign	1,609		4,060		3,015
State	818		3,880		2,790
Deemed Repatriation	—		(970)		1,389
Deferred:
Federal	(3,707)		(3,788)		(1,302)
Foreign	67		(69)		62
State	263		(952)		(384)
Federal Rate Change	—		—		(27,255)
Total income tax provision	$	16,807	$	20,457	$	(1,583)

The provision for income taxes differs from the amount computed by applying the Federal statutory rate of 21% for 2019, 21% for 2018 and 35% for 2017 to earnings before income tax expense due to the following:


	2019		2018		2017
Income tax at Federal statutory rate	$	20,260	$	20,796	30,971
State income taxes, net of Federal income taxes	(244)		2,742		708
Federal Rate Change	—		—		(27,255)
Stock Options	(222)		(1,293)		(2,927)
GILTI	2,507		1,027		—
FDII	(1,922)		—		—
Deemed Repatriation	—		(970)		1,389
Patent Box Decree (related to prior years)	(1,948)		—		—
Foreign Tax Credits	(1,125)		(1,136)		—
Domestic production activities deduction	—		—		(2,382)
Other	(499)		(709)		(2,087)
Total income tax provision	$	16,807	$	20,457	$	(1,583)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 were as follows:


	2019		2018
Deferred tax assets:
Inventories	$	1,844	$	1,260
Restricted stock and stock options	4,097		3,567
Lease liabilities	1,456		—
Currency and interest rate swap	442		—
Other	3,935		2,885
Total deferred tax assets	11,774		7,712
Deferred tax liabilities:
Amortization	$	28,589	$	27,080
Depreciation	37,075		23,837
Prepaid expenses	465		—
Right of use assets	1,461		—
Other	584		1,104
Total deferred tax liabilities	68,174		52,021

Valuation allowance	31		—

Net deferred tax liability	$	56,431	$	44,309

In assessing the realizability of deferred tax assets, management 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. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income 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 in which the deferred tax assets are deductible, management believes it is more likely than not the Company will not realize the benefits of these deductible differences. The amount of deferred tax asset realizable, however, could change if management’s estimate of future taxable income should change.

As of December 31, 2019, the Company has federal and state income tax net operating loss (NOL) carryforwards of $7,078, which will expire in 2034 and are expected to be realized. However, the Company also acquired an insignificant amount of NOL carryforwards with the acquisition of Chemogas. These NOLs are not expected to be realized and therefore a valuation allowance on these items was established as of December 31, 2019. There was no valuation allowance for deferred tax assets as of December 31, 2018.

The Company considers the undistributed earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside of the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and specific plans for reinvestment of those subsidiary earnings. The Company projects that foreign earnings will be utilized offshore for working capital and future foreign growth. The determination of the unrecognized deferred tax liability on those undistributed earnings is not practicable due to the Company's legal entity structure and the complexity of U.S. and local country tax laws. If Balchem decides to repatriate the undistributed foreign earnings, the income tax effects will need to be recognized in the period the Company changes its assertion on indefinite reinvestment.

Provisions of ASC 740-10 clarify whether or not to recognize assets or liabilities for tax positions taken that may be challenged by a tax authority. A reconciliation of the beginning and ending amount of unrecognized tax benefits, which is included in other long-term obligations on the Company’s consolidated balance sheets, is as follows:


	2019		2018		2017
Balance at beginning of period	$	5,709	$	4,781	$	6,637
Increases for tax positions of prior years	431		1,366		393
Decreases for tax positions of prior years	(1,978)		(1,185)		(2,711)
Increases for tax positions related to current year	600		747		462
Balance at end of period	$	4,762	$	5,709	$	4,781

All of Balchem's unrecognized tax benefits, if recognized in future periods, would impact the Company's effective tax rate in such future periods.

The Company recognizes both interest and penalties as part of the income tax provision. During the years ended December 31, 2019, 2018 and 2017, these amounted to approximately $132, $207 and $94, respectively. As of December 31, 2019 and 2018, accrued interest and penalties were $1,612 and $1,839, respectively.

Balchem files income tax returns in the U.S. and in various states and foreign countries. In the major jurisdictions where the Company operates, it is generally no longer subject to income tax examinations by tax authorities for years before 2015 and management does not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months.