Income Taxes

Beginning in

2018,

the Tax Cuts and Jobs Act (the "Act") included

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 approximately

$500,000

and

$400,000

for the year ended

December 31, 2019

and

December 31, 2018

respectively. The Company is below the

three

year average gross receipts threshold for BEAT to apply.

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

	Year Ended December 31,
	2019		2018
Domestic	$	2,207	$	(2,802	)
Foreign		7,204		5,842
Total:	$	9,411	$	3,040

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

	Year Ended December 31,
	2019			2018
Current:
Federal	$	357		$	(155	)
Foreign		2,397			1,501
State		139			158

Deferred:
Federal		691			(54	)
Foreign		(138	)		147
State		132			(195	)
Net expense	$	3,578		$	1,402

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,
	2019			Rate			2018			Rate
Provision for income taxes at federal statutory rate	$	1,976			21.0	%	$	638			21.0	%
State income taxes, net of federal benefit		214			2.3	%		(73	)		-2.4	%
Permanent differences		251			2.6	%		(60	)		-2.0	%
Foreign tax rate differential		717			7.6	%		304			10.0	%
GILTI tax		527			5.6	%		439			14.4	%
Other		(107	)		-1.1	%		154			5.5	%
Net expense	$	3,578			38.0	%	$	1,402			46.5	%

Deferred taxes consist of the following (in thousands):	December 31,
	2019			2018
Deferred tax assets:
Net operating loss carry forwards	$	717		$	1,357
Federal Research and Development Credit		240			240
Deferred revenue		43			109
Accrued payroll		88			73
Allowance for doubtful accounts and other receivable		18			36
Share-based compensation expense		524			545
Foreign subsidiaries		932			733
Depreciation		573			396
Right To Use Assets		1,730			–
Other		485			439
Valuation allowance		(353	)		(292	)
Total deferred tax assets		4,997			3,636

Deferred tax liabilities:
Goodwill & Intangible assets of subsidiaries		879			589
Capitalized software development costs		505			479
Right To Use Liabilities		1,730			–
Total deferred tax liabilities		3,114			1,068
Net deferred taxes	$	1,883		$	2,568

December 31, 2019

, the Company has Federal and State NOL carryforwards of

$3.25

million which if unused will expire in years

2026

through

2032,

except for approximately

$670,000

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 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 continued 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,
	2019			2018
Beginning balance	$	101		$	116
Removal for tax provisions of prior years		(93	)		(15	)
Ending balance	$	8		$	101

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, 2019

, are outlined in the table below (in thousands):

	Taxes		Interest		Penalty		Total Tax Liability
Domestic
State	$	8	$	3	$	1	$	12
Federal		–		–		–		–
International		–		–		–		–
Total reserve	$	8	$	3	$	1	$	12

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

December 31, 2019

and

2018

, 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

2014

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.