12. Income Taxes

The components of the income tax provision (benefit) from continuing operations for the fiscal years are as follows (in thousands):


	Year Ended September 30,
	2018		2017		2016
Current income tax provision (benefit):
Federal	$	—	$	—	$	(145)
State		917		402		(193)
Foreign		7,608		7,499		4,709
Total current income tax provision		8,525		7,901		4,371
Deferred income tax provision (benefit):
Federal		(48,815)		(4,247)		59,906
State		(5,518)		(249)		4,000
Foreign		(1,443)		(25)		(2,027)
Total deferred income tax provision (benefit)		(55,776)		(4,521)		61,879
Income tax provision (benefit)	$	(47,251)	$	3,380	$	66,250

The components of income (loss) from continuing operations before income taxes and equity in earnings of equity method investments for the fiscal years are as follows (in thousands):


	Year Ended September 30,
	2018		2017		2016
Domestic	$	3,122	$	(13,211)	$	(26,775)
Foreign		17,344		27,731		8,633
	$	20,466	$	14,520	$	(18,142)

The differences between the income tax provision (benefit) on income (loss) from continuing operations including income from equity in earnings (losses) of equity method investments and income taxes computed using the applicable U.S. statutory federal tax rates for the fiscal years ended September 30, 2018, 2017 and 2016 are as follows (in thousands):


	Year Ended September 30,
	2018		2017		2016
Income tax provision computed at federal statutory rate	$	5,014	$	4,923	$	(6,722)
State income taxes, net of federal benefit		692		137		(374)
Foreign income taxed at different rates		920		(1,644)		(690)
Impact of investments in subsidiaries		(729)		(965)		(971)
Change in deferred tax asset valuation allowance		(75,918)		319		76,486
Net increase (reduction) in uncertain tax positions		220		731		(1,543)
Impact of U.S. federal tax rate change		15,287		—		—
Compensation		(701)		579		743
Tax credits		(1,633)		(1,151)		(1,555)
Merger costs		1,405		—		503
Transition Tax		8,027		—		—
Other		165		451		373
Income tax provision (benefit)	$	(47,251)	$	3,380	$	66,250

The Company has not provided income taxes on the outside basis differences of its foreign subsidiaries consistent with the indefinite reinvestment assertion. As of September 30, 2018, the cumulative unremitted earnings contributing to the outside basis difference amounted to approximately $164.0 million. The basis difference for U.S. tax purposes is lower because the Company has U.S. tax basis in the foreign earnings as a result of the toll charge recognized during fiscal year 2018. The foreign earnings are expected to be reinvested in foreign operations and acquisitions. The Company has not accrued foreign withholding tax costs on unremitted earnings.

The significant components of the net deferred tax assets and liabilities as of September 30, 2018 and 2017 are as follows (in thousands):


	September 30,
	2018		2017
Accruals and reserves not currently deductible	$	14,581	$	18,747
Federal, state and foreign tax credits		27,923		25,413
Other assets		175		42
Equity compensation		5,926		7,615
Net operating loss carryforwards		16,790		50,882
Inventory reserves and valuation		6,520		9,847
Deferred tax assets		71,915		112,546
Depreciation and intangible amortization		(19,476)		(21,200)
Deferred tax liabilities		(19,476)		(21,200)
Valuation allowance		(18,581)		(93,402)
Net deferred tax asset (liability)	$	33,858	$	(2,056)

The deferred tax assets on the balance sheet for September 30, 2018 also includes a $2.8 million deferred tax charge related to the company’s intercompany profit elimination. This amount is included in the net deferred tax asset recorded on the balance sheet.

ASC Topic 740, Income Taxes, requires that all available evidence, both positive and negative, be considered in determining, based on the weight of that evidence, whether a valuation allowance is needed. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, (a) the more positive evidence is necessary and (b) the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion or the entire deferred tax asset. A cumulative loss in recent years is considered a significant piece of negative evidence that is difficult to overcome in assessing the need for a valuation allowance.

The Company evaluates the realizability of its deferred tax assets by tax-paying component and assesses the need for a valuation allowance on an annual and quarterly basis. The Company evaluates the profitability of each tax-paying component on a historic cumulative basis and a forward-looking basis in the course of performing this analysis. The Company evaluated all positive and negative evidence in concluding it was appropriate to establish a full valuation allowance against U.S. net deferred tax assets during fiscal year 2016. The company maintained this position throughout fiscal year 2017 and the first quarter of fiscal year 2018.

After evaluating all the relevant positive and negative evidence as of March 31, 2018, the Company concluded that it was more likely than not that a substantial portion of the U.S. deferred tax assets would be realized. In the second quarter of fiscal year 2018 the Company reached a significant level of cumulative profitability in the U.S., coupled with an improved outlook of U.S. earnings. During the full fiscal year 2018, the Company reduced its U.S. valuation against its U.S. net deferred tax assets resulting in a tax benefit of $77.2 million. The remaining portion of the Company’s U.S. valuation allowance is related to the realizability of certain state tax credits and net operating loss carry-forwards. The Company continues to maintain valuation allowances against net deferred tax assets in certain foreign tax-paying components as of the end of fiscal year 2018.

As of September 30, 2018, the Company had state and foreign net operating loss carry-forwards of approximately $67.4 million and $58.7 million, respectively. The state net operating losses are generated in various jurisdictions with different carryover periods and expire starting in 2019 through 2035. Certain foreign net operating loss carryovers will begin to expire in 2019.

As of September 30, 2018, the Company had federal research and development tax credit carry-forwards of $20.4 million. These credit carry-forwards will expire at various dates beginning in 2019 through 2038. The Company also has $11.0 million of state credits which begin to expire in 2019, while some of these credits have an unlimited carryover period.

During the fiscal year 2018, the Tax Cuts and Jobs Act (“Tax Reform”) was enacted in the U.S., making significant tax law changes affecting the Company. The SEC issued Staff Accounting Bulletin 118 (“SAB 118”), which provided guidance for companies that had not completed the accounting for the income tax effects of Tax Reform. Under SAB 118, a company may report provisional amounts based on reasonable estimates where the accounting is incomplete. These amounts are subject to adjustments during a measurement period of up to one year beginning in the reporting period of the enactment date.

Upon the enactment of Tax Reform, the Company is subject to a toll charge in the U.S. on its previously untaxed accumulated foreign earnings. The Company recorded a tax impact of $8.0 million, net of foreign tax credits, related to the toll charge during the fiscal year ended September 30, 2018. There are still incomplete components related to the accumulated foreign earnings and tax pools for older tax years that require additional time to analyze the data and complete the calculations. The Company will continue to refine these calculations through the quarter ended December 31, 2018 and continue to monitor legislative updates and clarifications and the related impact to the toll charge as recorded during the fiscal year 2018. The Company did not record any current cash U.S. federal tax provision for the toll charge because sufficient net operating loss carryovers and tax credits exist to offset the resulting tax.

The Company has performed studies to determine if there are any annual limitations on the federal net operating losses under the Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. As a result of these studies, the Company has determined that ownership changes have occurred primarily in connection with acquisitions when the Company has issued stock to the sellers, as well as ownership changes in the subsidiaries acquired by the Company. Certain limitations have been calculated, and the benefits of the net operating losses that will expire before utilization have not been recorded as deferred tax assets in the accompanying Consolidated Balance Sheets.

The Company maintains liabilities for uncertain tax positions. These liabilities involve judgment and estimation and are monitored based on the best information available. A reconciliation of the beginning and ending amount of the consolidated liability for unrecognized income tax benefits during the fiscal years ended September 30, 2018, 2017 and 2016 is as follows (in thousands):


	Total
Balance at September 30, 2015	$	2,191
Reductions from settlements with taxing authorities		4,165
Reductions from lapses in statutes of limitations		(897)
Foreign exchange rate adjustment		(32)
Balance at September 30, 2016		5,427
Additions for tax positions in current year		1,869
Reduction for tax positions in prior year		(3,485)
Net reductions from lapses in statutes of limitations		(431)
Foreign exchange rate adjustment		(2)
Balance at September 30, 2017		3,378
Additions for tax positions in current year		874
Reduction for tax positions in prior year		(656)
Reductions from lapses in statutes of limitations		(353)
Balance at September 30, 2018	$	3,243

Included in the ending balance of unrecognized tax benefits for the fiscal year ended September 30, 2018 are $3.0 million of tax benefits that if recognized would impact the effective tax rate. The Company recognizes interest related to unrecognized benefits as a component of the income tax provision (benefit), of which $0.1 million, $0.1 million and $0.1 million, respectively, was recognized for the fiscal years ended September 30, 2018, 2017 and 2016. The statute of limitations lapsed on several uncertain tax positions in the foreign jurisdictions during fiscal year 2018 that resulted in a $0.7 million reduction in gross unrecognized tax benefits that impacted the effective tax rate.

The Company is subject to U.S. federal income tax and state, local and international income taxes in various jurisdictions. The amount of income taxes paid is subject to the Company’s interpretation of applicable tax laws in the jurisdictions in which it files.

In the normal course of business, the Company is subject to income tax audits in various global jurisdictions in which it operates. The years subject to examination vary for the U.S. and international jurisdictions, with the earliest tax year being 2011. Based on the outcome of these examinations or the expiration of statutes of limitations for specific jurisdictions, it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the Company’s Consolidated Balance Sheets. The Company currently anticipates that it is reasonably possible that the unrecognized tax benefits will be reduced by approximately $0.1 million in the next 12 months.