Income Taxes

Income tax expense (benefit) was as follows:



(in thousands)	For the Year Ended December 31,
	2017		2016			2015 (Restated)			2014 (Restated)
Current tax expense (benefit):
Federal	$	127	$	(6,568	)	$	(859	)	$	7,476
State	77		60			215			1,892
Total	$	204	$	(6,508	)	$	(644	)	$	9,368

Deferred tax expense (benefit)
Federal	$	100	$	13,907		$	(6,713	)	$	(1,183	)
State	139		4,214			(2,345		)	(441		)
Total deferred tax expense (benefit)	239		18,121			(9,058		)	(1,624		)
Total tax expense (benefit)	$	443	$	11,613		$	(9,702	)	$	7,744

The Company received net cash refunds for income taxes of $6.3 million and $4.6 million in 2017 and 2016, respectively, and made net cash payments for income taxes of $7.1 million and $5.3 million in 2015 and 2014, respectively.

A reconciliation between the Company’s effective tax rate on (loss) income before income taxes and the statutory tax rate was as follows:



(in thousands)	For the Year Ended December 31,
	2017					2016					2015 (Restated)					2014 (Restated)
	Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent
Income tax (benefit) expense at federal statutory rate	$	(16,037	)	34.0	%	$	(12,192	)	34.0	%	$	(4,282	)	34.0	%	$	9,935		34.0	%
State income tax, net of federal benefit	(2,283		)	4.8	%	(1,758		)	4.9	%	(1,101		)	8.7	%	1,295			4.4	%
Non-deductible warrants (income)/expense	1,360			(2.9	)%	(481		)	1.3	%	(3,162		)	25.1	%	(2,098		)	(7.2	)%
Domestic production activity	—			—	%	—			—	%	—			—	%	(334		)	(1.1	)%
Other permanent differences	106			(0.2	)%	110			(0.3	)%	137			(1.1	)%	191			0.7	%
Research and development tax credits	(426		)	0.9	%	(837		)	2.3	%	(1,632		)	13.0	%	(1,953		)	(6.7	)%
Tax reserve reassessment	104			(0.2	)%	(141		)	0.4	%	412			(3.3	)%	246			0.8	%
Federal tax rate change	10,899			(23.1	)%	—			—	%	—			—	%	—			—	%
Change in valuation allowance	4,956			(10.4	)%	26,846			(74.9	)%	—			—	%	—			—	%
3PI Settlement	1,976			(4.2	)%	—			—	%	—			—	%	—			—	%
Other, net	(212		)	0.4	%	66			(0.1	)%	(74		)	0.6	%	462			1.6	%
Income tax expense (benefit)	$	443		(0.9	)%	$	11,613		(32.4	)%	$	(9,702	)	77.0	%	$	7,744		26.5	%

For the year ended December 31, 2017, the Company recognized a pretax loss of $47.2 million, which included $4.0 million of permanently excludable loss associated with the change in the valuation of the Weichai Warrant. For the year ended December 31, 2016, the Company recognized a pretax loss of $35.9 million, which included $1.4 million of permanently excludable income associated with the change in the valuation of its Private Placement Warrants. For the year ended December 31, 2015, the Company recognized a pretax loss of $12.6 million, which included $9.3 million of permanently excludable income associated with the change in the valuation of its Private Placement Warrants. For the year ended December 31, 2014, the Company recognized pretax income of $29.2 million, which included $6.2 million of permanently excludable income associated with the change in the valuation of the Private Placement Warrants.

On December 22, 2017, the President of the U.S. signed the Tax Act, which made broad and complex changes to the U.S. Tax Code, including, but not limited to, (i) reducing the U.S. federal corporate income tax rate from 34.0% to 21.0%, (ii) requiring companies to pay a one-time transitional tax on certain un-repatriated earnings of foreign subsidiaries, (iii) generally eliminating U.S. federal income tax on dividends from foreign subsidiaries of U.S. corporations, (iv) repealing the domestic production activity deduction, (v) providing for the full expensing of qualified property, (vi) adding a new provision designed to tax global intangible low-taxed income (“GILTI”), (vii) revising the limitation imposed on deductions for executive compensation paid by publicly-traded companies, (viii) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be utilized, (ix) creating a base erosion-anti-abuse tax (“BEAT”), a new minimum tax on payments made by certain U.S. corporations to related foreign parties, (x) imposing a new limitation on the deductibility of interest expense, (xi) allowing for a deduction related to foreign-derived intangible income (“FDII”) and (xii) changing the rules related to the uses and limitations of net operating loss carryforwards generated in tax years beginning after December 31, 2017.

The Company calculated the impact of the Tax Act in accordance with its understanding of the act and guidance available as of December 31, 2017, and, as a result, recorded $10.8 million as additional income tax expense, offset with an $11.3 million tax benefit from the change in the valuation allowance in the fourth quarter of 2017, the period in which the legislation was enacted.

In December 2015, the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”) was signed into law making the research and development tax credit permanent. The Company’s income tax expense for the year ended December 31, 2015 was favorably affected by the recognition of federal tax credits in 2015. Partially offsetting the increase in income tax expense for the year ended December 31, 2014 were research and development tax credits recorded in 2014, net of unrecognized tax benefits, arising from the one-year extension of the federal research and development tax credit as well as continuing state research tax credits.

The Company generates R&D tax credits as a result of its R&D activities, which reduce the Company’s effective income tax rate. In general, these credits are general business credits and may be carried forward up to 20 years to be offset against future taxable income.

Significant components of deferred income tax assets and liabilities consisted of the following:



(in thousands)	As of December 31,
	2017			2016			2015 (Restated)			2014 (Restated)
Deferred tax assets:
Net operating loss carryforwards	$	15,399		$	1,154		$	66		$	—
Research and development credits	2,806			2,118			139			—
Other state credits	989			407			164			—
Inventory	2,560			5,837			5,094			3,035
Allowances and bad debts	596			501			334			119
Accrued warranty	3,387			3,820			1,413			948
Accrued wages and benefits	351			786			893			917
Stock-based compensation	645			1,021			756			576
Capitalized research and development costs	1,090			2,291			2,617			2,316
Intangible amortization	1,734			4,519			4,311			—
Other	3,397			6,638			5,069			3,615
Total deferred tax assets	32,954			29,092			20,856			11,526
Valuation allowance	(31,992		)	(26,847		)	—			—
Total deferred tax assets, net of valuation allowance	$	962		$	2,245		$	20,856		$	11,526

Deferred tax liabilities:
Intangible amortization	$	—		$	—		$	—		$	(1,091	)
Tax depreciation in excess of book depreciation on property, plant and equipment	(1,665		)	(2,709		)	(3,199		)	(1,870		)
Total deferred tax liabilities	$	(1,665	)	$	(2,709	)	$	(3,199	)	$	(2,961	)

Net deferred tax (liability) asset	$	(703	)	$	(464	)	$	17,657		$	8,565

The Company’s net deferred tax assets and liabilities are presented as follows in the Consolidated Balance Sheets:



(in thousands)	As of December 31,
	2017			2016			2015 (Restated)		2014 (Restated)
Current deferred tax assets, net	$	—		$	—		$	—	$	8,552
Non-current deferred tax asset/(liabilities), net	(703		)	(464		)	17,657		13
Net deferred tax (liability) asset	$	(703	)	$	(464	)	$	17,657	$	8,565

In preparing the Consolidated Statements of Operations, the Company has assessed the likelihood that its deferred income tax assets will be realized from future taxable income. In evaluating the ability to recover its deferred income tax assets, the Company considers all available evidence, positive and negative, including the Company’s operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred income tax assets will not be realized. The Company exercises significant judgment in determining the Company’s income tax expense, its deferred income tax assets and liabilities, and its future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred income tax assets.

Although the Company believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of each reporting date, the Company considers new evidence, both positive and negative, that could impact the Company's view with regard to future realization of deferred tax assets.

During the second quarter of 2016, the Company considered both the positive and the negative evidence available in order to assess the realizability of its deferred tax assets. As a result of this evaluation, the Company concluded that the negative evidence outweighed the positive evidence and recorded a full valuation allowance of the $17.8 million against its net deferred tax assets. The Company continues to maintain a full valuation allowance of $32.0 million and $26.8 million on its deferred tax assets as of December 31, 2017 and 2016, respectively.

As of December 31, 2017, the Company has, on a tax-effected basis, $2.4 million in R&D and state tax credit carryforwards and $10.8 million in federal net operating loss carryforwards that are available to offset taxable income in the future. The tax credit carryforwards will begin to expire in 2020. The federal net operating loss carryforwards begin to expire in 2037. The state net operating loss carryforwards, on a tax-effected basis and net of federal tax benefit, are $4.6 million. The state net operating loss carryforwards begin to expire in 2025.

The change in unrecognized tax benefits excluding interest and penalties were as follows:



(in thousands)	For the Year Ended December 31,
	2017		2016			2015			2014
Unrecognized Tax Benefits Excluding Interest and Penalties						(Restated)			(Restated)
Balance at beginning of year	$	1,202	$	1,338		$	894		$	614
Additions based on tax positions related to the current year	105		168			525			373
Additions/(reductions) for tax positions of prior years	—		(304		)	(81		)	(93		)
Balance at end of year	$	1,307	$	1,202		$	1,338		$	894

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2017, 2016, 2015 and 2014, the amount accrued for interest and penalties was not material. The Company reflects the liability for unrecognized tax benefits as “Other noncurrent liabilities” in its Consolidated Balance Sheets. The amounts included in “Additions/(reductions) for tax positions of prior years” represent decreases in the unrecognized tax benefits relating to settlements reached with taxing authorities during each year shown.

As of December 31, 2017, the Company believes the liability for unrecognized tax benefits, excluding interest and penalties, could decrease by $0.2 million in 2018 due to lapses in the statute of limitations. Due to the various jurisdictions in which the Company files tax returns, it is possible that there could be other significant changes in the amount of unrecognized tax benefits in 2018, but the amount cannot be estimated.

With few exceptions, the major jurisdictions subject to examination by the relevant tax authorities and open tax years, stated as the Company’s fiscal years, are as follows:



Jurisdiction	Open Tax Years
U.S. Federal	2014	-	2017
U.S. States	2013	-	2017

The Company is currently under federal income tax audit for tax years 2015 and 2016 and federal employment tax audit for tax years 2017, 2016 and 2015. The Company is currently under Illinois income tax audit for tax years 2014, 2013, 2012 and 2011.