NOTE J — INCOME TAXES

The components of income before income taxes, equity in earnings and extraordinary item are as follows:


	Year Ended December 31,
	2017			2016			2015
	(in thousands)
Domestic	$	17,728		$	22,114		$	22,096
Foreign		(6,949	)		(112	)		(3,765	)

Total income before income taxes and equity in earnings	$	10,779		$	22,002		$	18,331

The provision for income taxes (before equity in earnings) consists of:


	Year Ended December 31,
	2017		2016			2015
			(in thousands)
Current:
Federal	$	7,041	$	8,000		$	5,584
State and local		957		498			1,879
Foreign		4		483			604
Deferred		1,030		(1,951	)		(1,440	)

Income tax provision	$	9,032	$	7,030		$	6,627

On December 22, 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act revises the U.S. corporate income tax by, among other things, lowering the corporate income tax rate from 35% to 21%, adopting a quasi-territorial income tax system and imposing a one-time transition tax on foreign unremitted earnings, and setting limitations on deductibility of certain costs (e.g., interest expense).

Due to the complexities involved in the accounting for the Tax Act, on December, 22, 2017, the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 118 was issued to provide guidance to companies that have not yet completed their accounting for the Tax Act in the period of enactment. SAB 118 provides that the Company include in its financial statements a reasonable estimate of the impact of the Tax Act on earnings to the extent such estimate has been determined. Accordingly, the U.S. provision for income tax for 2017 is based on the reasonable estimate guidance provided by SAB 118.

For the year ended December 31, 2017, the Company accrued $338,000 of tax expense for the Tax Act’s one-time transition tax on the Company’s material wholly owned foreign subsidiaries’ accumulated, unremitted earnings. A reasonable estimate cannot yet be made for the impact of the one-time transition tax on the Company’s equity investment in Grupo Vasconia due to the complexity of calculating accumulated foreign earnings and profits, foreign tax paid, and other tax components involved in foreign tax credit calculations for prior years going back to 1986, including years prior to the Company’s acquisition of its equity interest.

For the year ended December 31, 2017, the Company accrued $3.0 million in provisional expense related to the net change in deferred tax assets stemming from the Tax Act’s reduction of the U.S. federal tax rate from 35% to 21%.

The Tax Act also includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries and a base erosion anti-abuse tax (“BEAT”) that taxes certain payments between a U.S. corporation and its subsidiaries. The Company continues to analyze whether it will be subject to the GILTI and BEAT provisions effective beginning January 1, 2018.

Pursuant to the SAB 118, the Company is allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The Company will continue to calculate the impact of the U.S. Tax Act and will record any resulting tax adjustments during 2018.

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. Significant components of the Company’s deferred income tax assets are as follows:


	December 31,
	2017		2016
	(in thousands)
Deferred income tax assets:
Deferred rent expense	$	2,212	$	3,706
Stock options		2,903		4,593
Inventory		970		1,190
Operating loss carry-forward		4,114		2,568
Accounts receivable allowances		264		463
Accrued compensation		623		944
Depreciation and amortization		247		—
Other		1,882		2,784

Total deferred income tax assets	$	13,215	$	16,248

Significant components of the Company’s net deferred income tax asset (liability) are as follows:


	December 31,
	2017			2016
	(in thousands)
Deferred income tax liabilities:
Depreciation and amortization	$	—		$	(1,268	)
Intangibles		(8,732	)		(9,815	)
Equity in earnings		(56	)		24

Total deferred income tax liabilities		(8,788	)		(11,059	)

Net deferred income tax asset		4,427			5,189
Valuation allowance		(3,024	)		(2,396	)

Net deferred income tax asset	$	1,403		$	2,793

The Company has generated various state net operating loss carryforwards of which, $13.0 million remained at December 31, 2017 that begin to expire in 2026 .The Company has net operating losses in foreign jurisdictions of $10.6 million at December 31, 2017 that begin to expire in 2020.

The valuation allowance as of December 31, 2017 increased from the prior year primarily due to foreign net operating losses that the Company does not believe will more likely than not be realized.

The provision for income taxes (before equity in earnings) differs from the amounts computed by applying the applicable federal statutory rates as follows:


	Year Ended December 31,
	2017			2016			2015
Provision for federal income taxes at the statutory rate		35.0	%		35.0	%		35.0	%
Increases (decreases):
State and local income taxes, net of Federal income tax benefit		5.9			3.6			5.3
Foreign rate differences		8.0			(7.9	)		(8.6	)
Non-deductible expenses		3.7			3.4			5.5
Tax Act- revaluation of net deferred tax assets		27.7			—			—
Tax Act- transition tax		3.1			—			—
Other		0.4			(2.1	)		(1.0	)

Provision for income taxes		83.8	%		32.0	%		36.2	%

The estimated values of the Company’s gross uncertain tax positions at December 31, 2017, 2016, and 2015 are liabilities of $161,000, $109,000 and $157,000, respectively, and consist of the following:


	Year Ended December 31,
	2017			2016			2015
				(in thousands)
Balance at January 1	$	(109	)	$	(157	)	$	(572	)
Additions based on tax positions related to the current year		(82	)		—			(15	)
Reduction for tax positions of prior years		30			—			—
Settlements		—			48			430

Balance at December 31	$	(161	)	$	(109	)	$	(157	)

The Company had approximately $24,000 and $29,000, net of federal and state tax benefit, accrued at December 31, 2017 and 2016, respectively, for the payment of interest. The Company’s policy for recording interest and penalties is to record such items as a component of the provision for income taxes.

If the Company’s tax positions are ultimately sustained, the Company’s liability, including interest, would be reduced by $182,000, all of which would impact the Company’s tax provision. On a quarterly basis, the Company evaluates its tax positions and revises its estimates accordingly. The Company believes that it is reasonably possible that $32,000 of its tax positions will be resolved within the next twelve months.

The Company is no longer subject to U.S. Federal income tax examinations for the years prior to 2014. The Company has identified the following jurisdictions as “major” tax jurisdictions: U.S. Federal, California, Massachusetts, Georgia, Illinois, New York, New Jersey and the United Kingdom. At December 31, 2017, the periods subject to examination by the Company’s major state jurisdictions are generally for the years ended 2013 through 2016.