Income Taxes:

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate of

21%

for the years ended

December 31,

2019

and

December 31, 2018

and

35%

for the year ended

December 31, 2017,

to income before provision for income taxes as a result of the following (Dollar amounts in thousands of U.S. dollars):

	Year ended December 31,
	2019			2018			2017

Income for the year before provision for income taxes	$	24,571		$	26,155		$	24,075
Computed federal tax expense		5,160			5,492			8,185

Increase (reduction) in income tax expense resulting from:
State income taxes		526			846			657
Effect of the decrease in Federal tax rate on deferred taxes		-			-			(10,036	)
Change in Valuation allowance		5,277			2,811			1,276
Non-creditable Foreign Tax		515			-			2,903
Excess tax benefits on share-based compensation expense		(634	)		(697	)		(2,796	)
Permanent differences		(103	)		159			1,636
Effect of deferred tax in foreign branch		(840	)		-			-
Others		(728	)		409			(77	)
Provision for income taxes	$	9,173		$	9,020		$	1,748

December 22, 2017,

the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code, including, but

not

limited to: (

) reducing the U.S. federal corporate tax rate from

35%

21%

; (

) changing rules related to uses and limitations of net operating loss carry forwards created in tax years beginning after

December 31, 2017; (

) bonus depreciation allows for full expensing of qualified property; (

) creating a new limitation on deductible interest expense; (

) eliminating the corporate alternative minimum tax; and (

) new tax rules related to foreign operations.

In Fiscal

2019,

the Company was able to utilize the bonus depreciation with respect to its continued investment in the Ting Internet business. The impact of this, together with the reduction in tax rate to

21%,

make it unlikely we will ultimately be able to fully claim the Fiscal

2019

foreign taxes paid in future years. In addition, the Company generated net operating losses o

$0.3

million which it does

not

expect to be able to utilize in the future. As such, we have taken a valuation allowance on foreign tax credits

not

utilized for

2019

income tax purposes and net operating losses

not

expected to be utilized in the future, the net negative effect of which is a

$5.3

million addition to income tax expense.

In Fiscal

2018,

the Company was able to utilize the bonus depreciation with respect to its continued investment in the Ting Internet business. The impact of this, together with the reduction in tax rate to

21%,

make it unlikely we will ultimately be able to fully claim the Fiscal

2018

foreign taxes paid in future years. In addition, the Company generated net operating losses of

$0.2

million which it does

not

expect to be able to utilize in the future. As such, we have taken a valuation allowance on foreign tax credits

not

utilized for

2018

income tax purposes and net operating losses

not

expected to be utilized in the future, the net negative effect of which is a

$2.8

million addition to income tax expense.

In Fiscal

2017,

we reflected a net

$5.8

million non-cash tax benefit through income from continuing operations for the re-measurement impact related to the changes in tax laws included in the Tax Act. The primary driver of this re-measurement was the result of the reduction in the corporate tax rate from

35%

21%

which resulted in our recognizing, based on the rates at which they are expected to reverse in the future, a

$10.0

million non-cash tax benefit through income from continuing operations for the re-measurement of our deferred tax assets and liabilities. This amount was partially offset by our recording a valuation allowance of

$1.3

million related to prior year Foreign Tax Credits that we have determined are

longer more likely than

not

to be used as the tax rate in the jurisdiction where these Foreign Tax Credits were generated is higher than the

21%

corporate tax rate. In addition, the impact of the prepaid registry fee deduction, more fully described below, together with the reduction in the tax rate to

21%

made it unlikely we would be able to claim the Fiscal

2017

foreign taxes paid in future years and as such opted to utilize the foreign taxes paid as a deduction for

2017

income tax purposes, the net negative effect of which was a

$2.9

million addition to income tax expense.

December

22,

2017,

the SEC issued guidance to address the application of GAAP in situations when a registrant does

not

have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The completion of our

2017

income tax returns, future guidance and additional information and interpretations with the respect to the Tax Act resulted in insignificant adjustments related to provisional impact estimates from Fiscal

2017.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of

December

31,

2019

, and

2018

are presented below (Dollar amounts in thousands of U.S. dollars):

	December 31, 2019			December 31, 2018
Deferred tax assets (liabilities):
Deferred tax assets:
Deferred revenue	$	6,301		$	6,497
Foreign tax credits and general business credits		9,004			3,864
Net operating losses		1,341			1,892
Accruals, including foreign exchange and other		1,490			1,955
Sub-total Deferred tax assets		18,136			14,208
Valuation allowance		(9,365	)		(4,087	)
Total deferred tax assets	$	8,771		$	10,121
Deferred tax liabilities:
Prepaid registry fees and expenses	$	(16,237	)	$	(15,950	)
Amortization		(6,925	)		(5,871	)
Limited life intangible assets		(5,958	)		(6,115	)
Indefinite life intangible assets		(3,110	)		(3,110	)
Foreign branch deferred tax liability		(2,012	)		-
Total deferred tax liability	$	(34,242	)	$	(31,046	)

Net deferred tax asset (liability)	$	(25,471	)	$	(20,925	)

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 years in which those temporary differences become deductible. Management considers projected future taxable income, uncertainties related to the industry in which the Company operates, and tax planning strategies in making this assessment.

We believe it is more likely than

not

that our remaining deferred tax assets, net of the valuation allowance, will be realized based on current income tax laws, including those modified by the Tax Act, and expectations of future taxable income stemming from forecasted profits from ongoing operations and from the reversal of existing deferred tax liabilities.

The Company had

nil

total gross unrecognized tax benefits as of both

December 31,

2019

and

December 31,

2018

. The Company had

$15

(in thousands of U.S. dollars) total gross unrecognized tax benefits as of

December 31,

2017

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in tax expense.

The Company did

not

have any interest and penalties accrued as of

December

31,

2019,

and

December

31,

2018.

The following is a reconciliation of Tucows’ change in uncertain tax position (Dollar amounts in thousands of U.S. dollars):

Total Gross Unrecognized Tax Benefits	December 31, 2019		December 31, 2018
Balance, beginning of year	$	-	$	15
Change in uncertain tax benefits		-		(15	)
Balance, end of year	$	-	$	-

In connection with the eNom acquisition in

2017,

we acquired deferred tax liabilities primarily composed of prepaid registry fees. As a result, we aligned our tax methodology pertaining to the deductibility of prepaid registry fees for our other subsidiaries. In the

first

quarter of

2019,

we determined that we were in technical violation with respect to the administrative application of the accounting method change relating to the deductibility of prepaid registry fees for these additional subsidiaries. In

February 2019,

the Company filed an application for relief (

"9100

Relief") to correct the issue. In

November 2019,

the Company was granted

9100

Relief and was given

days to file the appropriate forms based on prescribed instructions. The Company filed the forms in

December

and now awaits the final IRS response and acceptance of the change in accounting method. Management is of the view that it is more likely than

not

that the IRS will accept the

9100

Relief and filing of the prescribed forms. As such,

additional tax uncertainties or related interest or penalties have been recorded as at

December 31, 2019.