Note 12. Income Taxes

Income before income taxes consisted of the following (in thousands):



	Fiscal Year Ended August 31,
	2018		2017		2016
United States	$	42,634	$	42,060	$	41,128
Foreign (1)		32,544		32,562		31,661
Income before income taxes	$	75,178	$	74,622	$	72,789

⁽¹⁾

Included in these amounts are income before income taxes for the EMEA segment of $27.4 million, $28.1 million and $28.3 million for the fiscal years ended August 31, 2018, 2017 and 2016, respectively.

The provision for income taxes consisted of the following (in thousands):



	Fiscal Year Ended August 31,
	2018		2017		2016
Current:
Federal	$	10,100	$	10,813	$	13,269
State		651		744		894
Foreign		6,750		7,465		7,593
Total current		17,501		19,022		21,756

Deferred:
United States		(7,496)		2,627		(1,100)
Foreign		(42)		43		(495)
Total deferred		(7,538)		2,670		(1,595)
Provision for income taxes	$	9,963	$	21,692	$	20,161

Deferred tax assets and deferred tax liabilities consisted of the following (in thousands):



	August 31,		August 31,
	2018		2017
Deferred tax assets:
Accrued payroll and related expenses	$	916	$	1,252
Accounts receivable		303		644
Reserves and accruals		1,496		2,393
Stock-based compensation expense		2,321		3,213
Uniform capitalization		959		1,598
Tax credit carryforwards		2,790		2,309
Other		938		1,289
Total gross deferred tax assets		9,723		12,698
Valuation allowance		(2,505)		(2,328)
Total net deferred tax assets		7,218		10,370

Deferred tax liabilities:
Property and equipment, net		(1,305)		(2,109)
Amortization of tax goodwill and intangible assets		(16,108)		(26,036)
Investments in partnerships		(222)		(679)
Other		(122)		-
Total deferred tax liabilities		(17,757)		(28,824)
Net deferred tax liabilities	$	(10,539)	$	(18,454)

The Company had state net operating loss (“NOL”) carryforwards of $3.0 million and $2.6 million as of August 31, 2018 and 2017, respectively, which generated a net deferred tax asset of $0.2 million for each of the fiscal years 2018 and 2017. The state NOL carryforwards, if unused, will expire between fiscal year 2019 and 2038. The Company also had tax credit carryforwards of $2.8 million and $2.3 million as of August 31, 2018 and 2017, respectively, of which $2.5 million and $2.1 million, respectively, is attributable to U.K. tax credit carryforwards, which do not expire. Future utilization of the U.K. tax credit carryforwards and certain state NOL carryforwards is uncertain and is dependent upon several factors that may not occur, including the generation of future taxable income in certain jurisdictions. At this time, management cannot conclude that it is “more likely than not” that the related deferred tax assets will be realized. Accordingly, a full valuation allowance has been recorded against the related deferred tax asset associated with the U.K. tax credit carryforwards and certain state NOL carryforwards.

A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows (in thousands):



	Fiscal Year Ended August 31,
	2018		2017		2016
Amount computed at U.S. statutory federal tax rate	$	19,298	$	26,118	$	25,476
State income taxes, net of federal tax benefits		453		327		397
Effect of foreign operations		(1,412)		(4,277)		(4,382)
Benefit from qualified domestic production deduction		(1,121)		(1,295)		(1,190)
Tax Cuts and Jobs Act:
Remeasurement of deferred income taxes		(6,762)		-		-
Toll tax, net of foreign tax credits		(282)		-		-
Benefit from Stock Compensation		(725)		-		-
Other		514		819		(140)
Provision for income taxes	$	9,963	$	21,692	$	20,161

On December 20, 2017 the United States House of Representatives and the Senate passed the “Tax Cuts and Jobs Act” (the “Tax Act”), which was signed into law on December 22, 2017 and became effective beginning January 1, 2018. Due to the complexity of the Tax Act, the SEC issued guidance in SAB 118 which clarifies the accounting for income taxes under ASC 740 if information is not yet available, prepared or analyzed in reasonable detail to complete the accounting for income tax effects of the Tax Act. SAB 118 provides for a measurement period of up to one year after the enactment of the Tax Act, during which time the required analyses and accounting must be completed. During the measurement period, (i) income tax effects of the Tax Act must be reported if the accounting has been completed; (ii) provisional amounts must be reported for income tax effects of the Tax Act for which the accounting is incomplete but a reasonable estimate can be determined; and (iii) provisional amounts are not required to be reported for income tax effects of the Tax Act for which a reasonable estimate cannot be determined. During fiscal year 2018, the Company recorded provisional amounts for the income tax effects of the changes in tax law and tax rates, as reasonable estimates were determined by management during this period. These estimates include the remeasurement of the deferred income tax balance on the Company’s consolidated balance sheets due to the reduction in the corporate federal statutory tax rate from 35% to 21%, as well as the application of a mandatory one-time “toll tax” on unremitted foreign earnings.

The combined impact of the remeasurement of deferred income taxes and the measurement of the toll tax, both of which were recorded as provisional amounts and discrete items, resulted in a net favorable impact of $7.1 million to the Company’s provision for income taxes for the fiscal year ended August 31, 2018. The initial remeasurement of the Company’s net deferred income tax liability was recorded during the second quarter of fiscal year 2018 and resulted in a reduction of the net liability of $6.9 million. This provisional benefit was decreased by $0.1 million during the fourth quarter of fiscal year 2018 to reflect year-end deferred balances remeasured at the new applicable statutory tax rates, which resulted in a total provisional benefit of $6.8 million for fiscal year 2018. The Company’s initial provisional estimate of the deemed toll tax, net of foreign tax credits, was recorded as a charge to the provision for income taxes of $6.8 million during the second quarter of fiscal year 2018. As part of its year-end procedures, the Company completed additional analysis that significantly revised management’s estimate of this provisional amount. As a result of this analysis, the Company recorded a $7.1 million tax benefit during the fourth quarter of fiscal year 2018 to reflect a total provisional benefit related to the toll tax of $0.3 million for fiscal year 2018. This provisional benefit reflects the Company’s revised analysis, which estimates that foreign tax credits associated with the toll tax are expected to exceed amounts payable under the toll tax. These provisional tax benefits may be reduced or eliminated by future legislation. If such legislation is enacted, the Company will record the impact of the legislation in the quarter of enactment.

The determination of the impact of the income tax effects of the items reflected as provisional amounts may change, possibly materially, following additional review of historical records, refinement of calculations, modifications of assumptions, or future legislation, as well as further interpretation of the Tax Act based on U.S. Treasury regulations and guidance from the Internal Revenue Service and state tax authorities. The Company will report revised provisional amounts in accordance with SAB 118 when additional information and guidance has become available.

As a result of the Tax Act, the Company has been reevaluating its indefinite reinvestment assertion for its foreign subsidiaries. In May 2018, the Company completed this reevaluation and decided to change its assertion for its U.K., China and Australia subsidiaries such that unremitted earnings for these subsidiaries are no longer considered to be indefinitely reinvested. The Company did not change its assertion for its Canada or Malaysia subsidiaries as a result of its reevaluation and neither previously had an assertion of indefinite reinvestment of unremitted earnings. As a result, the Company no longer considers unremitted foreign earnings of any of its subsidiaries to be indefinitely reinvested. The Company repatriated a portion of its unremitted foreign earnings during the fourth quarter of fiscal year 2018 in the amount of $79.6 million from its U.K. subsidiary and used these funds towards repaying $80.0 million of outstanding draws on its line of credit. The costs associated with repatriating unremitted foreign earnings, including U.S. state income taxes and foreign withholding taxes, are immaterial to the Company’s consolidated financial statements.

Management will continue to review the Tax Act and is still in the process of determining the full impacts of the Tax Act on the Company. Management expects that the Company will lose the benefit from the Qualified Production Deduction in fiscal year 2019 but also expects to acquire certain benefits from the Foreign Derived Intangible Income section of the Tax Act. Other significant sections of the new tax law, including the Global Intangible Low-Taxed Income (“GILTI”) and the Base Erosion Anti-Abuse Tax (“BEAT”), do not apply to the Company’s fiscal year 2018. The Company will continue to evaluate the GILTI and the BEAT to determine whether they will have any significant impact on the Company’s consolidated financial statements in future years.

The provision for income taxes was 13.3% and 29.1% of income before income taxes for the fiscal years ended August 31, 2018 and 2017, respectively. The decrease in the effective income tax rate from period to period was primarily due to the favorable impacts of the reduced tax rate resulting from the Tax Act, which became effective during the second quarter of the Company’s fiscal year. Since the Company has a fiscal year which ends on August 31st, the Company is subject to a “blended” corporate federal statutory rate in its fiscal year 2018 which is calculated based on the applicable tax rates before and after passage of the Tax Act and the number of days in the fiscal year. As a result of this calculation, the Company’s blended federal statutory tax rate for fiscal year 2018 is 25.7% which is more than 9 percentage points lower than the statutory rate of 35% in the prior fiscal year. The Company also recorded two discrete items related to the Tax Act during fiscal year 2018, the $6.8 million provisional remeasurement of the Company’s net deferred tax liability and the $0.3 million provisional benefit related to the toll tax, both of which lowered the Company’s effective income tax rate from period to period. The decrease in the effective income tax rate from period to period was also driven in part by the adoption of ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, in the first quarter of the Company’s fiscal year 2018 which resulted in excess tax benefits from settlements of stock-based equity awards of $0.7 million being recognized in the provision for income taxes, whereas such benefits were recognized as an increase to additional paid-in capital in prior periods. In addition, the effective income tax rate for the fiscal year ended August 31, 2017 was higher due to the unfavorable impact of a non-recurring immaterial out-of-period correction that the Company recorded in the second quarter of fiscal year 2017 associated with the tax impacts from certain unrealized foreign currency exchange losses.

Reconciliations of the beginning and ending amounts of the Company’s gross unrecognized tax benefits, excluding interest and penalties, are as follows (in thousands):



	Fiscal Year Ended August 31,
	2018		2017
Unrecognized tax benefits - beginning of fiscal year	$	981	$	1,239
Net increases (decreases) - prior period tax positions		62		(68)
Net increases - current period tax positions		263		228
Expirations of statute of limitations for assessment		(197)		(382)
Settlements		(71)		(36)
Unrecognized tax benefits - end of fiscal year	$	1,038	$	981

Gross unrecognized tax benefits totaled $1.0 million for each of the fiscal years ended August 31, 2018 and 2017, of which $0.9 million and $0.6 million, respectively, would affect the Company’s effective income tax rate if recognized. There were no material interest or penalties included in income tax expense for the fiscal years ended August 31, 2018 and 2017. The total balance of accrued interest and penalties related to uncertain tax positions was also immaterial at August 31, 2018 and 2017.

The Company is subject to taxation in the U.S. and in various state and foreign jurisdictions. Due to expired statutes and closed audits, the Company’s federal income tax returns for years prior to fiscal year 2016 are not subject to examination by the U.S. Internal Revenue Service. Generally, for the majority of state and foreign jurisdictions where the Company does business, periods prior to fiscal year 2014 are no longer subject to examination. The Company has estimated that up to $0.2 million of unrecognized tax benefits related to income tax positions may be affected by the resolution of tax examinations or expiring statutes of limitation within the next twelve months. Audit outcomes and the timing of settlements are subject to significant uncertainty.