Income Taxes

The components of our income (loss) before provision (benefit) for income taxes were as follows (in thousands):



	Year Ended December 31,
	2018		2017			2016
United States	$	2,458	$	(9,242	)	$	3,087
Foreign	848		972			885
Income (loss) before provision (benefit) for income taxes	$	3,306	$	(8,270	)	$	3,972

The federal and state income tax provision (benefit) is summarized as follows (in thousands):



	Year Ended December 31,
	2018			2017			2016
Current:
Federal	$	5		$	(275	)	$	(948	)
State	48			(1,433		)	(214		)
Foreign	213			179			178
Total current	266			(1,529		)	(984		)
Deferred:
Federal	165			(28,161		)	4,306
State	2,648			(3,992		)	361
Foreign	(14		)	(14		)	(15		)
Total deferred	2,799			(32,167		)	4,652
Provision (benefit) for income taxes	$	3,065		$	(33,696	)	$	3,668

In 2018, we had worldwide consolidated income before tax of $3.3 million, and tax expense of $3.1 million, with an annual effective tax rate of 92.7%. Our 2018 effective income tax rate differed from the U.S. statutory rate primarily due to a $2.4 million valuation allowance related to state net operating loss carryforwards that are expected to expire unutilized.

The effective tax rate of our provision (benefit) for income taxes differs from the federal statutory rate as follows:



	Year Ended December 31,
	2018		2017		2016
Statutory rate	21.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	(7.2	)	31.7		14.1
Non-qualified stock option shortfalls (windfalls), net	(29.4	)	1.9		23.0
Stock-based compensation	21.6		(9.7	)	18.3
Lobbying	15.2		(9.1	)	8.9
Research and development credits	(17.1	)	(1.5	)	(20.4	)
Changes in valuation allowance	72.8
Tax reform - tax rate change	—		355.9		—
Foreign income tax and income inclusion	6.8		2.7		10.9
Non-deductible parking expense	3.1		—		—
Other permanent differences	5.9		0.7		2.4
Effective tax rate	92.7	%	407.6	%	92.2	%

The Tax Cuts and Jobs Act ("Jobs Act") was passed on December 22, 2017, which has various impacts on our income tax provision. The main impact of the Jobs Act on our provision (benefit) for income taxes is the decrease in our statutory federal income tax rate from 35% to 21%. During the year ended December 31, 2017, we made reasonable estimates of the effects of the Jobs Act and recorded provisional amounts. During the year ended December 31, 2018, we finalized the accounting for the enactment of the Jobs Act, without any material adjustments to our previous estimates. In addition, our tax provision for the year ended December 31, 2018 has been adjusted for other impacts of the Jobs Act including, among other things, certain limitations on deductions, taxes on Global Intangible Low-Taxed Income ("GILTI") earned by our China subsidiary and changes to the Section 162(m) limitation rules for executive compensation. An accounting policy election is allowed to either treat taxes due to GILTI inclusions as a current period expense or account for GILTI in the measurement of deferred tax assets. We have elected to treat GILTI as a current period expense. As such, we have not recognized any deferred taxes related to GILTI.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, together with operating losses and tax credit carryforwards.

The tax effects of significant items comprising our deferred taxes as of December 31, 2018 and 2017 were as follows (in thousands):



	December 31, 2018			December 31, 2017
Deferred tax assets:
Accruals and reserves	$	6,349		$	2,499
Stock-based compensation	2,388			2,443
Intangible assets	61			448
Net operating losses	22,181			12,055
Tax credits	4,508			3,569
Other	250			178
Total deferred tax assets	35,737			21,192
Valuation allowance	(2,407		)	—
Total deferred tax assets net of valuation allowance	33,330			21,192
Deferred tax liabilities:
Intangible assets	(710		)	(1,083		)
Commissions receivable	(80,289		)	(64,911		)
Fixed assets	—			(55		)
Total deferred tax liabilities	$	(80,999	)	$	(66,049	)
Net deferred tax liabilities	$	(47,669	)	$	(44,857	)

As a result of our adoption of ASC 606 using the full retrospective method, we recognized a significant deferred tax liability in our recasted opening balance sheet due to the resulting acceleration of revenue recognition while revenue for tax purposes will continue to be recognized as we collect cash. This deferred tax liability is a source of income that can be used to support the realizability of our deferred tax assets. As a result of the significantly increased deferred tax liability, we reversed the valuation allowance recorded against our U.S. deferred tax assets as of January 1, 2015, the earliest period to which the retrospective adoption of ASC 606 was applied. We continue to recognize all our deferred tax assets as of December 31, 2018, as we believe it is more likely than not that the net deferred tax assets will be fully realized, other than $2.4 million of deferred tax assets related to California net operating losses that is not expected to be realized prior to expiration.

Assessing the realizability of our deferred tax assets is dependent upon several factors, including the likelihood and amount, if any, of future taxable income in relevant jurisdictions during the periods in which those temporary differences become deductible. We forecast taxable income by considering all available positive and negative evidence, including our history of operating income and losses and our financial plans and estimates that we use to manage the business. These assumptions require significant judgment about future taxable income. As a result, the amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income change. As of December 31, 2018, a partial valuation allowance of $2.4 million is recorded against California net operating losses. The valuation allowance was recorded as a result of increased uncertainty regarding our future taxable income and a lack of sources of other taxable income to realize those net operating losses.

We had net operating loss carryforwards at December 31, 2018 of approximately $81.0 million and $82.6 million for federal income tax and state income tax purposes, respectively. Federal and state net operating loss carry forwards begin expiring in 2034 and 2021, respectively. At December 31, 2018, we had tax credit carry forwards of approximately $3.9 million and $4.9 million for federal income tax and state income tax purposes, respectively. The federal tax credit carryforwards begin expiring in 2021. The state tax credits carry forward indefinitely.

Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to ownership changes that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), and similar state provisions. These ownership change limitations may limit the amount of net operating loss carryforwards and other tax attributes that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points (by value) of the outstanding stock of a company by certain stockholders. Our ability to use the remaining net operating loss carryforwards may be further limited if we experience a Section 382 ownership change as a result of future changes in our stock ownership.

A reconciliation of the beginning and ending amount of our unrecognized tax benefits is as follows (in thousands):



	Unrecognized Tax Benefits
Balance at December 31, 2015	$	6,184
Lapse of statute of limitations	(1,236		)
Additions based on tax positions related to the current year	305
Balance at December 31, 2016	5,253
Decrease based on tax positions related to the prior year	(862		)
Lapse of statute of limitations	(1,637		)
Additions based on tax positions related to the current year	342
Balance at December 31, 2017	3,096
Increase based on tax positions related to the prior year	579
Lapse of statute of limitations	(5		)
Additions based on tax positions related to the current year	70
Balance at December 31, 2018	$	3,740

Tax positions are evaluated in a two-step process. We first determine whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

As of December 31, 2018, the total amount of gross unrecognized tax benefits was $3.7 million, of which $3.3 million, if recognized, would affect our effective tax rate. As of December 31, 2017, the total amount of gross unrecognized tax benefits was $3.1 million, of which $2.7 million, if recognized, would affect our effective tax rate.

We record interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2018, the amount accrued for estimated interest related to uncertain tax positions was immaterial. We did not record an accrual for penalties.

Included in the balance of income tax liabilities and accrued interest at December 31, 2018 is an immaterial amount related to tax positions for which it is reasonably possible that the statute of limitations will expire in various jurisdictions and income tax exams will close within the next twelve months.

We are subject to taxation in various jurisdictions, including federal, state and foreign. Our federal and state income tax returns are generally not subject to examination by taxing authorities for fiscal years before 2007 due to our net operating losses. The examination of our 2009 and 2010 California income tax returns by the California Franchise Tax Board was completed in the first quarter of 2017. We assessed the impact on our unrecognized tax benefits for all open years and recorded any necessary adjustments in the first quarter of 2017.