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INCOME TAXES | 12 Months Ended
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Dec. 31, 2018
INCOME TAXES |
INCOME TAXES | NOTE 5. INCOME TAXES On December 22, 2017, the Tax Cuts and Jobs Act ("U.S. Tax Reform") was enacted. The legislation significantly changed U.S. tax law by lowering the federal corporate tax rate from 34.0% to 21.0%, effective January 1, 2018, modifying the foreign earnings deferral provisions, and imposing a one-time toll charge on deemed repatriated earnings of foreign subsidiaries as of December 31, 2017. Effective for 2018 and forward, there is a tax on global intangible low-taxed income provisions ("GILTI"). As of December 31, 2017, two provisions that affected the consolidated financial statements were the corporate tax rate reduction and the one-time toll charge. As the corporate tax rate reduction was enacted in 2017 and effective January 1, 2018, we appropriately accounted for the tax rate change in the valuation of our deferred taxes. As a result of GILTI, we recorded a tax expense of $296 in 2018. Global Intangible Low Taxed Income (GILTI): The Tax Act creates a new requirement that certain income (i.e. GILTI) earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs' U.S. Shareholder. GILTI is the excess of the shareholder's "net CFC tested income" over the net deemed tangible income return, which is currently defined as the excess of 1) 10 percent of the aggregate of the U.S. shareholder's pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over 2) the amount of certain interest expense taken into account in the determination of net CFC-tested income. Under U.S. GAAP, we are allowed to make an accounting policy choice of either 1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period cost method") or 2) factoring such amounts into a company's measurement of its deferred taxes (the "deferred method"). We have selected the period cost method. As a result, we have not provided deferred taxes related to the temporary differences that upon reversal will affect the amount of income subject to GILTI in the period. The SEC issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides us with up to one year to finalize accounting for the impacts of U.S. Tax Reform. In 2017, we estimated the provisional tax impacts related to the toll charge, deferred income taxes, including the impacts of the change in corporate tax rate, and out indefinite reinvestment assertion. As of the fourth quarter of 2018, we have completed our accounting for the tax effects of U.S. Tax Reform and determined we would not be subject to the one-time transition tax. The total impact was calculated to be $223. The income tax expense for the years ended December 31, 2018 and 2017 consists of the following:
(in thousands) |  | 2018 |  | 2017
Current taxes - Federal |  | $ | (38) |  | $ | (124)
Current taxes - State |  |  | 10 |  |  | 10
Current taxes - Foreign |  |  | 334 |  |  | 49
Deferred taxes - Federal |  |  | — |  |  | 176
Deferred taxes - State |  |  | — |  |  | 239
Deferred taxes - Foreign |  |  | 20 |  |  | 25
Income tax expense |  | $ | 326 |  | $ | 375
The statutory rate reconciliation for the years ended December 31, 2018 and 2017 is as follows:
(in thousands) |  | 2018 |  | 2017
Statutory federal tax provision (benefit) |  | $ | 107 |  | $ | (704)
State income tax benefit |  |  | (36) |  |  | (117)
Effect of foreign operations |  |  | 52 |  |  | (88)
Uncertain tax positions |  |  | (19) |  |  | —
Income tax credits |  |  | — |  |  | (112)
Valuation allowance |  |  | (199) |  |  | 1,011
Permanent differences |  |  | 15 |  |  | 8
Global Intangile Low-Taxed Income Effect |  |  | 296 |  |  | —
Return to Provision - Credits and NOL |  |  | 176 |  |  | —
Deferred adjustments |  |  | (62) |  |  | —
Loss of Section 199 due to carryback claim |  |  | — |  |  | 46
Effects of tax reform |  |  | — |  |  | 280
Other |  |  | (4) |  |  | 51
Income tax expense |  | $ | 326 |  | $ | 375
Income (loss) from operations before income taxes was derived from the following sources:
(in thousands) |  | 2018 |  | 2017
Domestic |  | $ | (1,090) |  | $ | (2,831)
Foreign |  |  | 1,582 |  |  | 760
Total |  | $ | 492 |  | $ | (2,071)
Deferred tax assets (liabilities) at December 31, 2018 and 2017, consist of the following:
(in thousands) |  | 2018 |  | 2017
Deferred Tax |  |  |  |  |  |
Allowance for uncollectable accounts |  | $ | 53 |  | $ | 49
Inventories reserve |  |  | 267 |  |  | 198
Accrued vacation |  |  | 145 |  |  | 194
Amortization |  |  | — |  |  | 191
Stock-based compensation and equity appreciation rights |  |  | 54 |  |  | 23
Net operating loss carryforwards |  |  | 175 |  |  | 359
Tax credit carryforwards |  |  | 449 |  |  | 613
Other |  |  | 76 |  |  | 24
|  |  | 1,219 |  |  | 1,651
Valuation allowance |  |  | (614) |  |  | (1,146)
Deferred tax assets |  |  | 605 |  |  | 505
Prepaid expenses |  |  | (40) |  |  | (165)
Section 481(a) adjustment |  |  | (249) |  |  | —
Property and equipment |  |  | (316) |  |  | (319)
Deferred tax liabilities |  |  | (605) |  |  | (484)
Net deferred tax assets |  | $ | — |  | $ | 21
We currently have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and U.S. GAAP income, research and development tax credit carry forwards and federal and state net operating loss carry forwards. A deferred tax asset generally represents future tax benefits to be received when temporary differences previously reported in our financial statements become deductible for income tax purposes, or when net operating loss carry forwards are applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on the guidance provided in current financial accounting standards. Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods, our experience with loss carry forwards not expiring unused and tax planning alternatives. We have concluded that a valuation allowance is needed for all of our United States based deferred tax assets due to the cumulative net losses we have sustained in the past three years and our near term financial outlook. In analyzing the need for a valuation allowance, we considered our history of operating results for income tax purposes over the past three years in each of the tax jurisdictions where we operate, statutory carry forward periods and tax planning alternatives. Finally, we considered both our near and long-term financial outlook and timing regarding when we might return to profitability. After considering all available evidence both positive and negative, we concluded that the valuation allowance is needed for all of our U.S. based deferred tax assets, no valuation allowance was placed on the foreign assets. At December 31, 2018, we had federal general business tax credit carryforwards of $284 that will begin to expire in 2028 and a federal net operating loss (“NOL”) carry forward of $23 that will begin to expire in 2037, if unused. For U.S. state tax purposes we have Minnesota R&D credit carryforwards of $198 and various state net operating loss carryforwards of $400 for Iowa, $4 for Montana, $1,168 for Minnesota, $662 for Wisconsin. The state credits and NOLs expire at various years starting in 2024. The tax effects from an uncertain tax positions can be recognized in our consolidated financial statements, only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The following table sets forth changes in our total gross unrecognized tax benefit liabilities, excluding accrued interest, for the years ended December 31, 2018 and 2017 (in thousands):
Balance as of December 31, 2016 |  | $ | 52
Tax positions related to 2017: |  |  |
Additions based on tax positions related to the current year |  |  | 22
Statute of limitations |  |  | (22)
Balance as of December 31, 2017 |  | $ | 52
Tax positions related to current year: |  |  |
Additions based on tax positions related to the current year |  |  | —
Statute of limitations |  |  | (19)
Balance as of December 31, 2018 |  | $ | 33
The $33 of unrecognized tax benefits as of December 31, 2018 includes amounts which, if ultimately recognized, will reduce our annual effective tax rate. In prior years, it was included in other long‑term liabilities on the accompanying consolidated balance sheets. In 2018, the amount has been netted against the applicable deferred tax asset as any adjustment would reduce the recorded asset. Our policy is to accrue interest and any penalties related to potential underpayment of income taxes within the provision for income taxes. The liability for accrued interest as of December 31, 2018 and 2017 was not significant. Interest is computed on the difference between our uncertain tax benefit positions and the amount deducted or expected to be deducted in our tax returns. We are subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2018, with few exceptions, the Company or its subsidiaries are no longer subject to examination prior to tax year 2012.

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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 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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