For the years ended December 31, 2019 and 2018, the Company estimated its income tax provision based upon the annual pre-tax loss. Although the Company is forecasting a return to profitability, it incurred cumulative losses which make realization of a deferred tax asset difficult to support in accordance with ASC 740. Accordingly, a valuation allowance has been recorded against all federal and state deferred tax assets as of December 31, 2019 and December 31, 2018, with the exception of a net deferred tax liability relating to the amortization of intangibles for tax purposes.

As of January 1, 2018, all adjusted foreign income amounts became taxable due to a change in U.S. tax law under the recent tax reform legislation discussed below. For state tax purposes, the Company’s foreign earnings may be taxable depending on each individual state’s legislative stance on the recent tax reform legislation. The activity in the deferred tax valuation allowance was as follows for the years ended December 31, 2019 and 2018:

The adjustments/true-ups for 2019 primarily represent the deferred tax effect of the Company’s adoption of ASC 606. The adjustments/true-ups for 2018 primarily represent the use of federal net operating losses to offset the Transition Tax as defined below. Accordingly, additional valuation allowances needed to be provided. Since a full valuation allowance is recorded on the Company’s deferred tax assets, there was no effect on the Company’s consolidated balance sheet.

The loss before tax for financial reporting purposes during the years ended December 31, 2019 and 2018 consisted of the following:

The provision (benefit) for income taxes for the years ended December 31, 2019 and 2018 consisted of the following:

The components of the Company’s deferred income taxes as of December 31, 2019 and 2018 are as follows:

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss carryforwards. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years.

The Company has recorded goodwill as a result of its acquisitions. Goodwill is generally not amortized for financial reporting purposes. For tax purposes, goodwill is tax deductible and amortized over 15 years. As such, deferred income tax expense and a deferred tax liability arise as a result of the tax-deductibility of this indefinitely lived asset (also known as a naked credit). The resulting deferred tax liability, which is expected to continue to increase over the amortization period, will have an indefinite life. As a result of the Company incurring a tax loss for 2018 which has an indefinite life under the recent tax reform legislation, the federal deferred tax liability resulting from the amortization of goodwill was offset against the 2019 federal operating net loss, to the extent allowable. This resulted in a deferred tax benefit of approximately $208,000 in 2018. The remaining deferred tax liability could remain on the Company’s consolidated balance sheet indefinitely unless there is an impairment of goodwill (for financial reporting purposes) or a portion of the business is sold.

Due to the fact that the aforementioned deferred tax liability could have an indefinite life, it is not netted against the Company’s deferred tax assets when determining the required valuation allowance in accordance with ASC 740 guidelines. Doing so would result in the understatement of the valuation allowance and related deferred income tax expense.

A reconciliation of the federal statutory income tax rate (21%) for 2019 and 2018 to the Company’s effective income tax rate (determined in dollars) for the years ended December 31, 2019 and 2018 is as follows:

At December 31, 2019 and 2018, the Company did not record any uncertain tax positions based on the technical merits. Therefore, a tabular roll forward was excluded and there has been no accrued interest and penalties. The Company is subject to taxation in the United States, various states, Pakistan and Sri Lanka. As of December 31, 2019, tax years 2016 through 2018 remain open to examination in the United States by major taxing jurisdictions in which the Company is subject to tax. The Pakistan Federal Board of Revenue issued a tax holiday, which precludes the Pakistan subsidiary from being subject to income taxes through June 2025. It is the Company’s policy that any assessed penalties and interest on uncertain tax positions would be charged to income tax expense.

The Pakistan tax holiday does not have a significant impact on the Company’s effective tax rate as all of its earnings in Pakistan have been fully included in the U.S. federal tax rate of 21% for 2019 and 2018. The Pakistan statutory corporate tax rate is 29% before consideration of the aforementioned tax holiday.

The Company has a federal NOL carry forward of approximately $19.8 million of which approximately $15.8 million will expire between 2034 and 2037 and $4.0 million has an indefinite life. The Company has state NOL carry forwards which mainly consists of approximately $38.5 million, of which $17.9 million relates to the State of New Jersey. These NOLs expire between 2034 to 2039.

The Company has a full valuation allowance on its deferred tax assets in the U.S. which results in there being no U.S. deferred tax assets or liabilities recorded on the consolidated balances sheet. Other than the deferred tax liability related to the amortization of goodwill.