Income Taxes

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including: a federal corporate rate reduction from 35% to 21%; limitations on the deductibility of interest expense and executive compensation; creation of the base erosion anti-abuse tax (“BEAT”), a new minimum tax; and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system. The change to a modified territorial tax system resulted in a one-time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”), with future distributions not subject to U.S. federal income tax when repatriated. A majority of the provisions in the Tax Act are effective January 1, 2018.

In response to the Tax Act, the SEC staff issued guidance on accounting for the tax effects of the Tax Act. The guidance provides a one-year measurement period for companies to complete the accounting. The Company reflected the income tax effects of those aspects of the Tax Act for which the accounting is complete. To the extent a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, a company should record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

In connection with the Company's initial analysis of the impact of the Tax Act, the Company has recorded a provisional estimate of discrete net tax expense of $508,000 for the period ended December 31, 2017. This discrete expense consists of provisional estimates of zero expense for the Transition Tax, $173,000 net benefit for the decrease in the Company's deferred tax liability on unremitted foreign earnings, and $681,000 net expense for remeasurement of the Company's deferred tax assets and liabilities for the corporate rate reduction.

After the passage of the Tax Act on December 22, 2017, all undistributed foreign earnings before the passage became subject to U.S. federal tax at reduced rates; however, the Company’s provisional estimate is that there will be no net expense for the Transition Tax related to these undistributed earnings. Due to the change in U.S. federal tax law, management re-assessed its assertion to indefinitely reinvest unremitted foreign earnings for certain non-U.S. subsidiaries as of December 31, 2017. The Company recognized a benefit of $173,000 of deferred U.S. state and foreign withholding taxes related to certain non-U.S. subsidiaries withholding taxes on undistributed foreign earnings. This is a provisional estimate pending further legislative action from the states regarding conformity with the Tax Act. The estimated amount of the unrecognized deferred tax liability attributed to future withholding taxes on dividend distributions of undistributed earnings for certain non-U.S. subsidiaries, which the Company intends to reinvest the related earnings indefinitely in its operations outside the U.S., is approximately $441,000 at December 31, 2017.

The Company has not completed our accounting for the income tax effects of certain elements of the Tax Act. The Tax Act creates a new requirement that certain income such as Global Intangible Low-Taxed Income (“GILTI”) earned by a controlled foreign corporation (“CFC”) must be included in the gross income of the CFC U.S. shareholder. Because of the complexity of the new GILTI, the Company is continuing to evaluate these provisions of the Tax Act and whether taxes due on future U.S. inclusions related to GILTI should be recorded as a current-period expense when incurred, or factored into a company’s measurement of its deferred taxes. As a result, the Company has not included an estimate of the tax expense or benefit related to these items for the period ended December 31, 2017.

The components of income before income tax expense are as follows (in thousands):



	Year Ended December 31,
	2017			2016		2015
U.S.	$	6,953		$	7,525	$	3,442
Foreign	(2,235		)	2,474		(864		)
	$	4,718		$	9,999	$	2,578

Income tax expense consists of current and deferred components categorized by federal, state and foreign jurisdictions, as shown below. The current provision is generally that portion of income tax expense that is currently payable to the taxing authorities. The Company makes estimated payments of these amounts during the year. The deferred tax provision results from changes in the Company’s deferred tax assets (future deductible amounts) and tax liabilities (future taxable amounts), which are presented in the table below:



	Current			Deferred			Total
	(In thousands)
Year Ended December 31, 2017
Federal	$	1,988		$	24		$	2,012
State	198			(64		)	134
Foreign	905			75			980
	$	3,091		$	35		$	3,126
Year Ended December 31, 2016
Federal	$	2,403		$	(123	)	$	2,280
State	395			23			418
Foreign	1,391			(97		)	1,294
	$	4,189		$	(197	)	$	3,992
Year Ended December 31, 2015
Federal	$	(6,475	)	$	(238	)	$	(6,713	)
State	281			51			332
Foreign	454			(18		)	436
	$	(5,740	)	$	(205	)	$	(5,945	)

Income tax expense differed from the amounts computed by applying the U.S. federal statutory tax rate applicable to the Company’s level of pretax income as a result of the following (in thousands):



	Year Ended December 31,
	2017			2016			2015
Federal tax at statutory rates	$	1,651		$	3,500		$	902
State taxes, net of federal income tax benefit	113			276			219
Change of valuation allowance	1,577			895			816
Uncertain tax positions	(907		)	(132		)	(7,935		)
Foreign income taxed at different rates	72			(509		)	(124		)
U.S. tax reform (the Tax Act)	681			—			—
Tax on undistributed earnings	(173		)	—			—
Non-deductible expenses and other	112			(38		)	177
Total income tax expense	$	3,126		$	3,992		$	(5,945	)

The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities are as follows (in thousands):



	December 31,
	2017			2016
Deferred tax assets:
Net operating loss carryforwards	$	9,250		$	7,239
State income taxes	65			159
Accruals and allowances	287			447
Stock based compensation	744			771
Unrealized foreign exchange losses	191			149
Deferred revenue	87			113
Deferred rent	418			625
Total deferred tax assets	11,042			9,503
Valuation allowance	(9,249		)	(7,168		)
Total deferred tax assets net of valuation allowance	1,793			2,335
Deferred tax liabilities:
U.S. tax on undistributed earnings	—			(173		)
Property, equipment and intangible assets	(277		)	(351		)
Total deferred tax liabilities	(277		)	(524		)
Net deferred tax assets	$	1,516		$	1,811

Changes in the deferred tax assets valuation allowance for the years ended December 31, 2015, 2016 and 2017 are as follows (in thousands):



	Balance at the beginning of the year		Charged (Credited) to expenses	Charged (Credited) to other account (*)		Balance at end of year
Deferred tax assets valuation allowance
2015	$	6,431	816	(307	)	$	6,940
2016	$	6,940	895	(667	)	$	7,168
2017	$	7,168	1,577	504		$	9,249

(*) Amounts not charged (credited) to expenses are charged (credited) to stockholder's equity or deferred tax assets (liabilities).

As of December 31, 2017, the Company has a valuation allowance of approximately $9.2 million related to foreign net operating loss carryforwards (“NOL”) of approximately $38.2 million for which it is more likely than not that the tax benefit will not be realized. The amount of the valuation allowance represented an increase of approximately $2.1 million over the amount recorded as of December 31, 2016, and was due to the increase in foreign operating losses. If not utilized, foreign NOL of $22.2 million may be carried forward indefinitely, and foreign NOL of $16.0 million will expire at various times between 2017 and 2025.

The total amount of gross unrecognized tax benefits was $725,000 as of December 31, 2017, of which up to $588,000 would affect the Company’s effective tax rate if realized. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits in 2015, 2016, and 2017 is as follows (in thousands):



Gross unrecognized tax benefits balance at January 1, 2015	$	10,025
Increase related to prior year tax positions	898
Decrease related to prior year tax positions	—
Increase related to current year tax positions	11
Settlements	—
Lapse of statute of limitations	(8,264		)
Gross unrecognized tax benefits balance at December 31, 2015	2,670
Increase related to prior year tax positions	10
Decrease related to prior year tax positions	—
Increase related to current year tax positions	—
Settlements	—
Lapse of statute of limitations	(323		)
Gross unrecognized tax benefits balance at December 31, 2016	2,357
Increase related to prior year tax positions	21
Decrease related to prior year tax positions	(737		)
Increase related to current year tax positions	4
Settlements	(920		)
Lapse of statute of limitations	—
Gross unrecognized tax benefits balance at December 31, 2017	$	725

The Company’s policy is to include interest and penalties related to unrecognized tax positions in income tax expense. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction in the overall income tax provision in the period that such determination is made. At December 31, 2017, the Company had approximately $651,000 in accrued interest, of which $136,000 was a net increase in the amount accrued in 2017.

The Company files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company settled the 2009 tax examination with federal tax authorities and settled the 2012, 2013 and 2014 tax examination with New York tax authorities. The Company is subject to U.S. federal and certain state tax examinations for certain years after 2010 and is subject to California tax examinations for years after 2005. The material foreign jurisdictions where the Company is subject to potential examinations by tax authorities are the France, Germany, Spain and United Kingdom for tax years after 2009.

Although the timing of initiation, resolution and/or closure of audits is highly uncertain, it is reasonably possible that the balance of the gross unrecognized tax benefits related to the method of computing income taxes in certain jurisdictions and losses reported on certain income tax returns could significantly change in the next 12 months. These changes may occur through settlement with the taxing authorities or the expiration of the statute of limitations on the returns filed. The Company is unable to estimate the range of possible adjustments to the balance of the gross unrecognized tax benefits.