Note 12 - Income Taxes
Income tax expense is as follows:
| For the Year Ended December 31, |
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| Current | 2017 | 2016 | ||||||
| Federal | $ | 5,429,000 | $ | 1,374,000 | ||||
| State | 378,000 | 140,000 | ||||||
| Total current | 5,807,000 | 1,514,000 | ||||||
| Deferred | ||||||||
| Federal | 11,255,000 | (585,000 | ) | |||||
| State | 1,083,000 | 2,968,000 | ||||||
| Total deferred | 12,338,000 | 2,383,000 | ||||||
| Total Income Tax Expense | $ | 18,145,000 | $ | 3,897,000 | ||||
The difference between the Company's effective income tax rate and the federal statutory corporate tax rate is as follows:
| For the Year Ended December 31, |
||||||||
| 2017 | 2016 | |||||||
| Statutory federal tax rate | 34.0 | % | 34.0 | % | ||||
| State taxes, net of federal benefit | 1.6 | % | 2.1 | % | ||||
| Permanent differences: | ||||||||
| Return to provision Adjustments | - | % | 4.4 | % | ||||
| Change in expected state rate for reversal of deferred tax benefit | 3.8 | % | 43.7 | % | ||||
| Change in future federal tax rate | 60.4 | % | - | % | ||||
| Other | 2.2 | % | 2.8 | % | ||||
| Total | 102.0 | % | 87.0 | % | ||||
Significant components of deferred tax assets and liabilities as of December 31, 2017 and 2016 is as follows:
| For the Year Ended December 31, |
||||||||
| 2017 | 2016 | |||||||
| Deferred tax assets | ||||||||
| Intangible – Propel Media step-up | $ | 15,242,000 | $ | 26,354,000 | ||||
| Net operating loss carryforward | 998,000 | 1,775,000 | ||||||
| Accrued vacation | 122,000 | 146,000 | ||||||
| Amortization of intangibles | - | 380,000 | ||||||
| Non-qualified stock options | 753,000 | 1,081,000 | ||||||
| Bad debt | 58,000 | 96,000 | ||||||
| Debt amortization | 2,134,000 | 2,300,000 | ||||||
| Depreciation | 15,000 | (18,000 | ) | |||||
| Gross deferred tax assets | 19,322,000 | 32,114,000 | ||||||
| Deferred tax liabilities | ||||||||
| Amortization of intangibles | (51,000 | ) | - | |||||
| Depreciation | (331,000 | ) | (423,000 | ) | ||||
| Other | (8,000 | ) | - | |||||
| Gross deferred tax liabilities | (390,000 | ) | (423,000 | ) | ||||
| Net deferred tax assets | $ | 18,932,000 | $ | 31,691,000 | ||||
The U. S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Among other things, the Tax Act reduces the US statutory corporate income tax rate to 21% effective January 1, 2018. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. Consequently, the Company has recorded a provisional decrease in its deferred tax assets and liabilities of $10,748,000 with a corresponding net adjustment to deferred income tax expense for the year ended December 31, 2017.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does 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 Tax Act. As we collect and prepare necessary data and interpret the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of the Tax Act will be completed in 2018.
As of December 31, 2017, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $4,752,000, which were acquired in connection with the acquisition of Kitara. Internal Revenue Code (“IRC”) Section 382 limits the utilization of net operating loss carryforwards upon a change in control of a company. Pursuant to IRC Section 382, changes in control occur when the stock ownership of one or more 5% shareholders (shareholders owning 5% or more of the Company’s outstanding capital stock) has increased on a cumulative basis by more than 50 percentage points. Management cannot control the ownership changes occurring as a result of public trading of the Company’s Common Stock. Accordingly, there is a risk of an ownership change beyond the control of the Company that could trigger a limitation of the use of the loss carryover. In connection with the acquisition of Kitara, the Company prepared an analysis under IRC Section 382 and determined that (i) there was a more than 50% ownership change on January 28, 2015 and (ii) that of the $8,200,000 acquired net operating losses, only $6,535,000 would be eligible for carryover to future periods. The net operating losses are expected to expire in the years 2029 through 2034.