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Income Taxes | 12 Months Ended
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Dec. 31, 2017
Income Taxes |
Income Taxes | Note 13. Income Taxes Consolidated income before provision for income taxes includes non-U.S. income of approximately $6.4 million, $15.0 million and $15.2 million for the years ended December 31, 2017, 2016, and 2015, respectively. We recorded a current tax provision of $792,000, $733,000 and $531,000 for the years ended December 31, 2017, 2016, and 2015, respectively. The components of the provision for income taxes are summarized below (in thousands):
|  | Year Ended December 31, |
|  | 2017 |  | 2016 |  | 2015 |
Current: |  |  |  |  |  |  |  |  |  |
Federal |  | $ | — |  | $ | — |  | $ | — |
State |  |  | 2 |  |  | 4 |  |  | 2 |
Foreign |  |  | 790 |  |  | 729 |  |  | 529 |
Total current |  |  | 792 |  |  | 733 |  |  | 531 |
Deferred: |  |  |  |  |  |  |  |  |  |
Federal |  |  | — |  |  | — |  |  | — |
State |  |  | — |  |  | — |  |  | — |
Total deferred |  |  | — |  |  | — |  |  | — |
Total net provision for income taxes |  | $ | 792 |  | $ | 733 |  | $ | 531 |
A reconciliation of the effective income tax rates and the U.S. statutory federal income tax rate is summarized below:
|  | Year Ended December 31, |
|  | 2017 |  | 2016 |  | 2015 |
Statutory federal income tax rate |  | 35.0 | % | 35.0 | % | 35.0 | %
State income taxes, net of federal tax benefits |  | — |  | — |  | — |
Valuation allowance |  | (139.5) |  | (7.1) |  | (48.2) |
Rate change |  | 100.8 |  | — |  | — |
Stock-based compensation |  | (10.4) |  | 1.2 |  | (9.8) |
Foreign tax rate differential |  | (10.3) |  | (12.2) |  | 30.6 |
Foreign tax incentives |  | (7.0) |  | (13.6) |  | 25.2 |
Dividend from unconsolidated affiliates |  | — |  | 1.5 |  | (60.4) |
965(a) inclusion |  | 55.6 |  | — |  | — |
Section 78 gross up |  | 11.7 |  | — |  | — |
Foreign tax credit |  | (30.6) |  | — |  | — |
Tax effect in equity method loss or gain from unconsolidated affiliates |  | 2.9 |  | 8.3 |  | 1.2 |
Other |  | (0.9) |  | (0.2) |  | (0.1) |
Effective tax rate |  | 7.3 | % | 12.9 | % | (26.5) | %
Deferred tax assets and liabilities are summarized below (in thousands):
|  | As of December 31, |
|  | 2017 |  | 2016 |
Deferred tax assets: |  |  |  |  |  |  |
Net operating loss |  | $ | 14,203 |  | $ | 62,459 |
Accruals and reserves not yet deductible |  |  | 3,133 |  |  | 4,520 |
Credits |  |  | 4,809 |  |  | 1,488 |
|  |  | 22,145 |  |  | 68,467 |
Deferred tax liabilities: |  |  |  |  |  |  |
Valuation of investment portfolio |  |  | — |  |  | — |
|  |  | — |  |  | — |
Net deferred tax assets |  |  | 22,145 |  |  | 68,467 |
Valuation allowance |  |  | (22,145) |  |  | (68,467) |
Net deferred tax assets |  | $ | — |  | $ | — |
As of December 31, 2017, we have federal and state net operating loss (“NOL”) carryforwards of approximately $63.6 million and $0.3 million, respectively, which will expire beginning in 2022 and 2033, respectively. In addition, we have federal tax credit carryforwards of approximately $1.5 million, which will expire beginning in 2029. The deferred tax assets valuation allowance as of December 31, 2017 is attributed to U.S. federal, and state deferred tax assets, which result primarily from future deductible accruals, reserves, NOL carryforwards, and tax credit carryforwards. We believe that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance has been recorded. These factors include our history of losses related to domestic operations, and the lack of carryback capacity to realize deferred tax assets. The valuation allowance decreased by $46.3 million and increased by $2.7 million for the years ended December 31, 2017 and 2016, respectively. The China Enterprise Income Tax Law (“EIT”) imposes a single uniform income tax rate of 25% on all Chinese enterprises. Our subsidiaries in China have qualified for a preferential 15% tax rate that is available for High and New Technology Enterprises (“HTE”). In order to retain the preferential tax rate, we must meet certain operating conditions, satisfy certain product requirements, meet certain headcount requirements and maintain certain levels of research expenditures. We realized benefits from this 10% reduction in tax rate of $599,000, $489,000 and $354,000 for 2017, 2016 and 2015, respectively. The favorable tax rate is renewed every three years and our subsidiaries are in the process of applying for renewal. The preferential tax rate that we enjoy could be modified or discontinued altogether at any time, which could materially and adversely affect our financial condition and results of operations. Our subsidiaries in China also qualify for reduction in their taxable income in China for research and development (“R&D”) expenditures. Government pre-approval is required to claim R&D tax benefits. Any R&D claim is then submitted with the annual corporate income tax for the taxing authorities’ approval. We do not record such benefit until we receive the refund from the Chinese government. Our consolidated subsidiaries in China have enjoyed various tax holidays since 2000. Benefits under the tax holidays vary by jurisdiction. Utilization of the NOL and R&D credit carryforwards may be subject to a substantial annual limitation due to ownership changes that might have occurred previously or that could occur in the future, as provided by Section 382 of the Internal Revenue Code of 1986 (“Section 382”), as well as similar state provisions. Ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. If there is a change of control, utilization of our NOL or tax credit carryforwards would be subject to an annual limitation under Section 382. Any limitation may result in expiration of a portion of the NOL or research and development credit carryforwards before utilization. Subsequent ownership changes could further impact the limitation in future years. Until a Section 382 study is completed and any limitation known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against our NOL carryforwards and R&D credit carryforwards and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no net impact to the consolidated balance sheets or statements of operations if an adjustment were required. On December 22, 2017, the U.S. government enacted comprehensive tax legislation, commonly known as the Tax Cuts and Jobs Act of 2017 (“the Act”), which significantly reforms the Internal Revenue Code of 1986, as amended. The Act contains broad and complex changes to corporate taxation, including in part reduction of the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously considered permanently reinvested, and creates new taxes on certain foreign sourced earnings. As of December 31, 2017, we have not completed our accounting for the tax effects of the Act. We have calculated a decrease in net deferred tax assets of $10.9 million and a corresponding decrease of $10.9 million in the valuation allowance due to the reduction federal tax rate. Thus, the net impact to the Company's tax expense is zero. In accordance with Staff Accounting Bulletin No. 118, we were able to determine a reasonable estimate, namely the one-time transition tax and the remeasurement of deferred tax at the new tax rate. We did not recognize any provisional tax expense due to our historical significant operating losses, except some alternative minimum tax, which is offset by foreign tax credits. We expect to complete our analysis in connection with filing our 2017 U.S. corporate tax return The one-time transition tax is based on our post-1986 foreign earnings and profits which we have previously excluded from U.S. income taxes due to our position that we would permanently reinvest future earnings. The one-time transition tax is applied at a 15.5% tax rate on cash assets and an 8% tax rate for other specified assets. Since our foreign operations have accumulated positive earnings, we recognized approximately $20.9 million of foreign earnings as a deemed dividend, due to the significant amount of operating losses available, we incurred approximately $0.5 million of alternative minimum tax, which was fully offset by foreign tax credits. During fiscal year 2017 and 2016, the amount of gross unrecognized tax benefits remains unchanged. During fiscal year 2015, the amount of gross unrecognized tax benefits decreased by $1.8 million. The total amount of unrecognized tax benefits was $14.6 million as of December 31, 2017 and December 31, 2016. The Company recognizes interest and penalties related to uncertain tax positions as part of the income tax provision. To date, such interest and penalties have not been material. We recognize interest and penalties related to uncertain tax positions in income tax expense. Income tax expense for the year ended December 31, 2017 includes no interest and penalties. As of December 31, 2017, we have no accrued interest and penalties related to uncertain tax positions. We file income tax returns in the U.S. federal, various states and foreign jurisdictions. We have substantially concluded all U.S. federal and state income tax matters through 2002 and 2013, respectively. A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows (in thousands):
|  | Year Ended December 31, |
|  | 2017 |  | 2016 |  | 2015 |
Gross unrecognized tax benefits balance at beginning of the year |  | $ 14,557 |  | $ 14,557 |  | $ 16,403 |
Add: |  |  |  |  |  |  |
Additions based on tax positions related to the current year |  | — |  | — |  | — |
Additions for tax positions of prior years |  | — |  | — |  | — |
Less: |  |  |  |  |  |  |
Decrease related to lapse of statute of limitations |  | — |  | — |  | $ (1,846) |
Gross unrecognized tax benefits balance at end of the year |  | $ 14,557 |  | $ 14,557 |  | $ 14,557 |
Excluding the effects of recorded valuation allowances for deferred tax assets, $14.6 million of the unrecognized tax benefit would favorably impact the effective tax rate in future periods if recognized.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32559-109319 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32718-109319 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32537-109319 + Details
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