JetPay Corp

Note 13. Income Taxes

The components of income tax expense (benefit) consist of the following:

	For the Years Ended December 31,
	2017		2016
	(in thousands)
Current:
Federal	$	-	$	-
State		202		165

Deferred:
Federal		2,522		(3,122)
State		(174)		(122)
Change in valuation allowance		(2,023)		1,650
Total income tax expense (benefit)	$	527	$	(1,429)

JetPay Payments, TX is subject to and pays the Texas Margin Tax which is considered to be an income tax in accordance with the provisions of the Income Taxes Topic in FASB, ASC and the associated interpretations.

A reconciliation of income tax expense computed at the U.S. federal statutory tax rate to the Company’s effective tax rate is summarized as follows:

	For the Years Ended December 31,
	2017		2016
	(in thousands)
Tax at U.S. Federal statutory rate	$	(877)	$	(3,279)
State taxes, net of federal benefit		(44)		(7)
Nondeductible costs and other acquisition accounting adjustments		56		207
Change of federal deferred tax rate		3,415		-
Change in valuation allowance for deferred tax assets		(2,023)		1,650
Total income tax (benefit) expense	$	527	$	(1,429)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:

	As of December 31,
	2017		2016
	(in thousands)
Deferred tax assets:
Accounts receivable	$	85	$	152
Accrued expenses		170		265
Intangible assets		-		336
Property and equipment		53		41
Stock options		928		1,167
Debt		1,026		1,717
Net operating loss carryforwards		6,985		9,327
Transaction costs and other		8		174
Total deferred tax assets		9,255		13,179
Valuation allowance for deferred tax assets		(6,846)		(8,869)
Deferred tax assets after valuation allowance		2,409		4,310
Deferred tax liabilities:
Prepaid expenses		(210)		(224)
Intangible assets		(2,842)		(4,250)
Contingent consideration		(202)		(356)
Total deferred tax liabilities		(3,254)		(4,830)
Net deferred tax liabilities	$	(845)	$	(520)

As of December 31, 2017, the Company had U.S. federal net operating loss carryovers (“NOLs”) of approximately $30.0 million and state NOLs of approximately $9.2 million available to offset future taxable income, respectively. These NOLs, if not utilized, expire at various times through 2037. In accordance with Section 382 of the Internal Revenue Code, deductibility of the Company’s NOLs may be subject to an annual limitation in the event of a change in control. The Company has not conducted a Code Section 382 NOL Study in 2017.

In December 2017, the federal government enacted numerous amendments to the Internal Revenue Code of 1986 pursuant to an act known by the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act will impact the Company’s income tax (benefit) from continuing operations in future periods. The Tax Act resulted in the following impacts to the Company: (i) the federal statutory income tax rate was reduced from 34% to 21% for 2018 and tax years following; and (ii) a one-time net expense of $3.4 million was recorded in the three months ended December 31, 2017 as a result of re-measuring our deferred tax balances at the new statutory rate. Upon completion of the Company’s 2017 U.S. income tax return in 2018, additional re-measurement adjustments may be identified to the recorded deferred tax liabilities and the one-time transition tax. Management will continue to assess the provision for income taxes as future guidance is issued, but do not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all of the information available, management believes that significant uncertainty exists with respect to future realization of the deferred tax assets, and has, therefore, adjusted its valuation allowance against deferred tax assets by $(2.0) million in the year ended December 31, 2017, with a total valuation allowance of $6.8 million at December 31, 2017, representing the amount of its deferred income tax assets in excess of the Company’s deferred income tax liabilities. The deferred tax liability related to goodwill that is amortizable for tax purpose (“Intangibles”) will not reverse until such time, if any, that the goodwill, which is considered to be an asset with an indefinite life for financial reporting purposes, becomes impaired or sold. Due to the uncertain timing of this reversal, the temporary difference cannot be considered as future taxable income for purposes of determining a valuation allowance. Therefore, the deferred tax liability related to tax deductible goodwill Intangibles cannot be considered when determining the ultimate realization of deferred tax assets.

The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions and is subject to examination by the various taxing authorities. The Company considers Pennsylvania and Texas to be significant state tax jurisdictions. The Company’s federal, state and local income taxes for the years beginning in 2014 remain subject to examination. The Company is currently not subject to any income tax examinations that would be material to the Company’s financial position or results of operations.