Income Taxes

December 22, 2017,

the Tax Cuts and Jobs Act ("the Act") significantly revised U.S. corporate income tax law. The Act includes, among other things, a reduction in the U.S. federal corporate income tax rate from

35%

21%

effective for taxable years beginning after

December 31, 2017,

and the implementation of a modified territorial tax system that includes a

one

-time transition tax on deemed repatriated earnings of foreign subsidiaries ("Transition Tax") that is payable over a period of up to

eight

years.

December 22, 2017,

the SEC staff issued Staff Accounting Bulletin

No.

118

to address the application of GAAP in situations when a registrant did

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 Act. The Company recognized the provisional tax impacts related to the deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended

December 31, 2017.

The final impact differed from these provisional amounts, due to additional analysis and regulatory guidance issued. The accounting was completed in the

fourth

quarter of

2018.

Beginning in

2018,

the Act includes

two

new U.S. corporate tax provisions, the global intangible low-taxed income ("GILTI") and the base-erosion and anti-abuse tax ("BEAT"). The GILTI provision requires the Company to include in its U.S. income tax return non-U.S. subsidiary earnings in excess of an allowable return on the non-U.S. subsidiary's tangible assets. The Company has elected to treat GILTI as a period cost. The Company evaluated the GILTI resulting in a financial statement impact of

$0.4

million for the year ended

December 31, 2018.

The Company is below the

three

year average gross receipts threshold for BEAT to apply.

Income before income taxes is summarized as follows (in thousands):

	Year Ended December 31,
	20 18			20 17
Domestic	$	(2,802	)	$	289
Foreign		5,842			3,865
Total:	$	3,040		$	4,154

The income tax expense is summarized as follows (in thousands):

	Year Ended December 31,
	20 18			20 17
Current:
Federal	$	(155	)	$	79
Foreign		1,501			1,131
State		158			128

Deferred expense (benefit):
Federal		(54	)		1,571
Foreign		147			(117	)
State		(195	)		185
Net expense	$	1,402		$	2,977

The provision for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The items causing this difference are as follows (dollars in thousands):

	Year Ended December 31,
	2018			Rate			2017			Rate
Provision for income taxes at federal statutory rate	$	638			21.0	%	$	1,421			34.0	%
State income taxes, net of federal benefit		(73	)		(2.4%	)		17			0.4	%
Permanent differences		(60	)		(2.0%	)		85			2.1	%
Federal Research and Development Credit		–			–			41			1.0	%
Foreign tax rate differential		304			10.0	%		(494	)		(11.8%	)
GILTI tax		439			14.4	%		798			19.0	%
Reduction in deferred tax asset – Reduction of corporate tax rate		–			–			1,043			24.8	%
Other		154			5.5	%		66			1.7	%
Net expense	$	1,402			46.5	%	$	2,977			71.2	%

Deferred taxes consist of the following (in thousands):	December 31,
	20 18			20 17
Deferred tax assets:
Net operating loss carry forwards	$	1,357		$	1,313
Federal Research and Development Credit		240			240
Deferred revenue		109			360
Accrued payroll		73			–
Allowance for doubtful accounts and other receivable		36			59
Share-based compensation expense		545			646
Foreign subsidiaries		733			588
Depreciation		396			360
Other		439			26
Federal Alternative Minimum Tax		–			156
Valuation allowance		(292	)		–
Total deferred tax assets		3,636			3,748

Deferred tax liabilities:
Goodwill		76			224
Intangible assets of subsidiaries		513			–
Capitalized software development costs		479			469
Total deferred tax liabilities		1,068			693
Net deferred taxes	$	2,568		$	3,055

December 31, 2018,

the Company has Federal and State NOL carryforwards of

$5.4

million which if unused will expire in years

2026

through

2029,

except for approximately

$350,000

that has

expiration.

Approximately

$300,000

of the NOLs were incurred prior to the acquisition of PIA Merchandising Services, Inc. in

1999.

The acquisition resulted in a change of ownership under Internal Revenue Code ("IRC") section

382

and placed a limit on the amount of pre-acquisition NOLs that

may

be used each year to reduce taxable income. This NOL of approximately

$300,000

was unused in

2018

and was written off, resulting in a

$84,000

tax expense.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing net deferred tax assets. For our U.S. based net deferred tax assets, which are approximately

million, management continues to monitor its operating performance and currently believes that the achievement of the required future U.S. taxable income necessary to realize these deferred assets is more-likely-than-

not.

Key considerations in this assessment includes current tax law that is expected to continue to generate future U.S. taxable income based on the results of our foreign operations (GILTI tax), our expectation of improvements in U.S. operating results and the period of time available to generate future taxable income. It is reasonably possible that this belief could change in the near term requiring the establishment of a valuation allowance which could significantly impact our operating results.

A reconciliation of the beginning and ending amount of uncertain tax position reserves is as follows (in thousands):

	Year Ended December 31,
	20 18			20 17
Beginning balance	$	116		$	116
Removal for tax provisions of prior years		(15	)		–
Ending balance	$	101		$	116

Interest and penalties that the tax law requires to be paid on the underpayment of taxes should be accrued on the difference between the amount claimed or expected to be claimed on the return and the tax benefit recognized in the financial statements. The Company's policy is to record this interest and penalties as additional tax expense.

Details of the Company's tax reserves at

December 31, 2018,

are outlined in the table below (in thousands):

	Taxes		Interest		Penalty		Total Tax Liability
Domestic
State	$	101	$	50	$	8	$	159
Federal		–		–		–		–
International		–		–		–		–
Total reserve	$	101	$	50	$	8	$	159

In management's view, the Company's tax reserves at

December 31, 2018

and

2017,

for potential domestic state tax liabilities were sufficient. The Company has evaluated the tax liabilities of its international subsidiaries and does

not

believe a reserve is necessary at this time.

SPAR and its subsidiaries file numerous consolidated, combined and separate company income tax returns in the U.S. Federal jurisdiction and in many U.S. states and foreign jurisdictions. With few exceptions, SPAR is subject to U.S. Federal, state and local income tax examinations for the years

2013

through the present. However, tax authorities have the ability to review years prior to the position taken by the Company to the extent that SPAR utilized tax attributes carried forward from those prior years.