INCOME TAXES

12 Months Ended

Dec. 31, 2018

Note 7 – Income Taxes

As of December 31, 2018, 2017 and 2016 the Company recorded income tax provision expense of $451,000, an income tax provision benefit of $

1,103,000

, and income tax provision expense of $943,000, respectively. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code that affect fiscal 2017, including, but not limited to requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years. The Tax Act also establishes new tax laws that will affect 2018 and later years, including, but not limited to, a reduction of the U.S. federal corporate tax rate from 34% to 21%, a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, net operating loss deduction limitations, a base erosion, anti-tax abuse tax and a deduction for foreign-derived intangible income and a new provision designed to tax global intangible low-taxed income. As a result of the Tax Act, the Company revalued its federal and state deferred tax liabilities based on a 21% tax rate as opposed to a 34% tax rate. The net effect of this change on the Company’s income tax provision for the year ended December 31, 2017 was a tax benefit of $1,546,000.

The increase in the Company’s provision for income taxes as of December 31, 2018 and December 31, 2016 is due to income from the PBRT system and operations of the Company’s subsidiaries. The income tax provision benefit recognized as of December 31, 2017 was due to the Tax Act.

The components of the provision for income taxes as of December 31, 2018, 2017 and 2016 consist of the following:

	YEARS ENDED DECEMBER 31,
	2018			2017			2016
Current:
Federal	$	13,000		$	55,000		$	24,000
State		389,000			109,000			146,000
Total current		402,000			164,000			170,000

Deferred:
Federal		259,000			(1,335,000	)		680,000
State		(210,000	)		68,000			93,000
Total deferred		49,000			(1,267,000	)		773,000

	$	451,000		$	(1,103,000	)	$	943,000

Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2018 and 2017 are as follows:

	DECEMBER 31,
	2018			2017
Deferred tax liabilities:
Property and equipment	$	(3,566,000	)	$	(5,009,000	)

Total deferred tax liabilities		(3,566,000	)		(5,009,000	)

Deferred tax assets:
Net operating loss carryforwards		80,000			1,421,000
Accruals and allowances		275,000			157,000
Tax credits		194,000			438,000
Other – net		206,000			186,000
Capital loss carryover		948,000			959,000

Total deferred tax assets		1,703,000			3,161,000

Valuation allowance		(1,096,000	)		(1,062,000	)

Deferred tax assets net of valuation allowance		607,000			2,099,000

Net deferred tax liabilities	$	(2,959,000	)	$	(2,910,000	)

These amounts are presented in the financial statements as follows:

	DECEMBER 31,
	2018			2017

Deferred income taxes (non-current)	$	(2,959,000	)	$	(2,910,000	)
	$	(2,959,000	)	$	(2,910,000	)

The (benefit) provision for income taxes differs from the amount computed by applying the U.S. federal statutory tax rate (21% in 2018, and 34% in 2017 and 2016) to income before taxes as follows:

	YEARS ENDED DECEMBER 31,
	2018			2017			2016

Computed expected federal income tax	$	313,000		$	279,000		$	637,000
State income taxes, net of federal benefit		125,000			28,000			169,000
Non-deductible expenses		(12,000	)		41,000			42,000
Impact of US Tax Reform		-			(1,546,000	)		-
Change in valuation allowance		34,000			180,000			25,000
Other		(9,000	)		(85,000	)		70,000

	$	451,000		$	(1,103,000	)	$	943,000

On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years (the "Transition Tax"), a reduction of the U.S. federal corporate tax rate from 34% to 21%, a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, net operating loss deduction limitations, a base erosion, anti-tax abuse tax (“BEAT”) and a deduction for foreign-derived intangible income (“FDII”) and a new provision designed to tax global intangible low-taxed income ("GILTI").

In December 2017, the SEC staff issued SAB No. 118 (“SAB 118”) which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740

Income taxes

(“ASC 740”). In accordance with SAB 118 a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. Additional work is necessary for a more detailed analysis of our deferred tax assets and liabilities. Any subsequent adjustment to these amounts would be recorded to current tax expense in the quarter of 2018 when the analysis was complete. We included a provisional estimate in the financial statements for the period ended December 31, 2017, as our accounting for the Tax Act under ASC 740 was not completed. As of December 31, 2018, the Company completed its analysis of the income tax effects of the Tax Act and there was no material impact to the Company’s consolidated financial statements.

Beginning in 2018, the GILTI provisions in the Tax Act require us to include, in our U.S. income tax return, foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. Per guidance issued by the FASB, companies can either account for deferred taxes related to GILTI or treat tax arising from GILTI as a period cost. Both are acceptable methods subject to an accounting policy election. On December 31, 2018, we finalized our policy and have elected to use the period cost method for GILTI. In 2018, we did not incur any GILTI inclusion as our foreign subsidiaries generated losses.

The BEAT provisions in the Tax Act eliminate the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum base erosion anti-abuse tax if greater than regular tax. In 2018, our Company was not subject to BEAT as it did not meet the requirements to be subject to BEAT.

At December 31, 2018, the Company is expected to utilize the remainder of its net operating loss carryforward for federal income tax return purposes. The Company has net operating loss carryforwards for state income tax purposes of approximately $636,000 that begin to expire in 2029. The Company has net operating loss carryforwards for Peru and UK income tax purposes of approximately $444,000.

Utilization of the domestic NOL and tax credit forwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by the Internal Revenue Code Section 382, as well as similar state provisions. In general, an “ownership change,” as defined by the code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. Any limitation may result in expiration of all or a portion of the NOL or tax credit carryforwards before utilization.

At December 31, 2018, the Company has a capital loss carryforward for federal income tax return purposes of approximately $3,873,000 which starts to expire in 2020. The Company has capital loss carryforwards for state income tax purposes of approximately $195,000 which starts to expire in 2020.

Due to uncertainty surrounding the realization of impairment losses, capital losses and foreign operating losses in future years, the Company has placed a valuation allowance against a portion of its net domestic and foreign deferred tax assets. The net valuation allowance increased by

$34,000,

and decreased

$303,000, and $25,000 for the tax years ended December 31, 2018, 2017, and 2016, respectively.

The tax return years 2014 through 2017 remain open to examination by the major domestic taxing jurisdictions to which the Company is subject. The Company is currently under examination in New York State for tax years 2015 through 2017. The Company believes the examination will conclude with no material adjustments. Net operating losses generated on a tax return basis by the Company for calendar years 1999 through 2004, 2009, 2010, 2012, 2014, 2015, 2016, 2017, and 2018 remain open to examination by the major domestic taxing jurisdictions.

The Company has adopted accounting standards which prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company's income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Additionally, these accounting standards specify that tax positions for which the timing of the ultimate resolution is uncertain should be recognized as long-term liabilities. The Company has made no reclassifications between current taxes payable and long term taxes payable under this guidance.

As of December 31, 2018, the unrecognized tax benefit was $87,000 which, if recognized, will not affect the annual effective tax rate as these unrecognized tax benefits would increase deferred tax assets which would be subject to a full valuation allowance. A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:

	YEARS ENDED DECEMBER 31,
	2018		2017		2016

Balance at beginning of year	$	-	$	-	$	-

Additions based on tax positions of prior years		87,000		-		-

Balance at end of year	$	87,000	$	-	$	-

The Company's policy for deducting interest and penalties is to treat interest as interest expense and penalties as taxes. As of December 31, 2018, the Company had no amount accrued for the payment of interest and penalties related to unrecognized tax benefits. The Company does not expect any material changes to our uncertain tax positions within the next 12 months.