Income Taxes
The provision for (benefit from) income taxes attributable to continuing operations is based upon loss from operations before provision for income taxes as follows (in thousands):
|
| | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 |
Domestic | $ | (5,106 | ) | | $ | (4,632 | ) |
Foreign | 455 |
| | 711 |
|
| $ | (4,651 | ) | | $ | (3,921 | ) |
The provision for (benefit from) income taxes consists of the following (in thousands):
|
| | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 |
Federal: | | | |
Current | $ | (82 | ) | | $ | — |
|
Deferred | — |
| | — |
|
Total federal benefit | (82 | ) | | — |
|
State: | | | |
Current | 1 |
| | 18 |
|
Deferred | — |
| | — |
|
Total state provision | 1 |
| | 18 |
|
Foreign: | | | |
Current | 53 |
| | 164 |
|
Deferred | — |
| | — |
|
Total foreign provision | 53 |
| | 164 |
|
Total income tax expense (benefit) | $ | (28 | ) | | $ | 182 |
|
The provision for (benefit from) income taxes differs from the amount estimated by applying the statutory Federal income tax rate to loss before taxes as follows (in thousands):
|
| | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 |
U.S. Federal tax benefit at statutory rate | $ | (1,629 | ) | | $ | (1,372 | ) |
State tax benefit, net of federal benefit | (187 | ) | | (171 | ) |
U.S.-Foreign rate differential | (113 | ) | | (96 | ) |
Change in valuation allowance | (33,001 | ) | | 939 |
|
Rate differential impact - Tax Cuts and Jobs Act | 34,679 |
| | — |
|
Research and development credits | 281 |
| | 233 |
|
Permanent items | 30 |
| | 657 |
|
Others | (88 | ) | | (8 | ) |
Total income tax expense (benefit) | $ | (28 | ) | | $ | 182 |
|
As of December 31, 2017 and 2016, a valuation allowance has been recorded against 100% of the net deferred tax asset. A valuation allowance is recognized if, based on the weight of the available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realizable in a particular tax jurisdiction. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed for some portion or all of a deferred tax asset. The Company determined that it is more likely than not that it will not realize a benefit from its United States deferred tax assets based on historical cumulative losses incurred in the United States. Therefore, a valuation allowance has been maintained on all deferred tax assets. The components of the net deferred income tax asset are as follows (in thousands):
|
| | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 |
Deferred tax assets: | | | |
| Net operating loss carry forwards | $ | 62,635 |
| | $ | 100,378 |
|
| Tax credit carry forwards | 17,078 |
| | 19,248 |
|
| Fixed and intangible assets | 266 |
| | 597 |
|
| Capitalized research and development costs | 70 |
| | 58 |
|
| Stock based compensation and other reserves and allowances | 2,131 |
| | 3,445 |
|
| Gross deferred income tax assets | 82,180 |
| | 123,726 |
|
| Valuation allowance | (82,180 | ) | | (123,726 | ) |
| Net deferred income tax assets | $ | — |
| | $ | — |
|
As of December 31, 2017, part of the Company's valuation allowance on deferred tax assets pertains to certain tax credits and net operating loss carry forwards. In the future, it will reduce the valuation allowance associated with these credits and losses upon the earlier of the period in which it utilizes them to reduce the amount of income tax it would otherwise be required to pay on its income tax returns, or when it becomes more likely than not that the deferred tax assets are realizable. In addition, the Internal Revenue Code of 1986, as amended, contains provisions that limit the net operating loss and credit carry forwards available for use in any given period upon the occurrence of certain events, including a significant change in ownership interests. The Company performed an analysis of the ownership changes in 2016. Through the date of the analysis, the Company did not experience any ownership change that would limit its net operating loss and credit carry forwards. The Company's net operating loss and credit carry forwards may be limited if an ownership change has occurred since the analysis was performed or if one were to occur in future periods.
In general, a corporation that undergoes an "ownership change" under Section 382 of the Internal Revenue Code is subject to limitations on its ability to utilize its pre-change net operating loss carry forwards (NOLs) to offset future taxable income and its ability to utilize tax credit carry forwards. As of December 31, 2017, the Company had net operating loss carry forwards of $261.2 million for federal income tax reporting purposes and $107.3 million for state income tax reporting purposes, which expire at various dates through 2037. In addition, as of December 31, 2017, the Company had approximately $11.4 million and $16.5 million of tax credit carry forwards for increased research expenditures for federal and California purposes, respectively. The federal research tax credits will expire at various dates if not utilized by 2037 and the state tax credit can be carried over indefinitely. In accordance with current Internal Revenue Code rules, federal net operating loss carry forwards must be utilized in full before federal research and development tax credits can be used to offset current tax liabilities. As a result, depending on the Company's future taxable income in any given year, some or all of the federal research tax credits, as well as portions of the Company's federal and state net operating loss carry forwards, may expire before being utilized.
On December 22, 2017, the Tax Cuts and Jobs Act ("the Act") was signed into law. Among other changes is a permanent reduction in the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. As a result of the change in the corporate income tax rate, the Company revalued its net deferred tax asset at December 31, 2017, which resulted in a reduction of the value of the Company's net deferred tax asset of approximately $34.7 million. This reduction was offset by a change in the Company's valuation allowance, thus resulting in no impact to the Company's tax expense for the year ended December 31, 2017.
Amounts held by foreign subsidiaries are generally subject to United States income taxation on repatriation to the United States. The Company currently intends to permanently reinvest its undistributed earnings from its foreign subsidiaries outside the United States. The Act provides for a one-time "deemed repatriation" of accumulated foreign earnings for the year ended December 31, 2017. The Company does not expect that the future foreign earnings will be subject to U.S. federal income tax since the Company is in a net earnings and profits deficit position and, as noted earlier, intents to permanently reinvest such earnings outside the U.S. indefinitely.
The following is a rollforward of the Company's unrecognized tax benefits related to uncertain tax positions for the years ended December 31, 2017 and 2016 (in thousands):
|
| | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 |
Balance as of the beginning of the year | $ | 9,216 |
| | $ | 9,066 |
|
Tax positions related to current year: | | | |
Additions | 165 |
| | 152 |
|
Reductions | (9 | ) | | (14 | ) |
Tax positions related to prior years: | | | |
Additions | 26 |
| | 80 |
|
Reductions | (6 | ) | | (4 | ) |
Settlements | — |
| | — |
|
Lapses in statute of limitations | (48 | ) | | (64 | ) |
Balance as of the end of the year | $ | 9,344 |
| | $ | 9,216 |
|
Included in the balance of total unrecognized tax benefits at December 31, 2017 are potential benefits of $332,000, which if recognized, would affect the effective rate on income from continuing operations.
As of December 31, 2017, the Company had accrued interest and penalties related to the uncertain tax benefits of approximately $56,000. During 2017, the Company decreased the prior year balance by $6,000 due to lapses in statutes of limitations in certain foreign jurisdictions. During 2016, the Company decreased the prior year balance by $12,000, again due to lapses in statutes of limitations. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.
The Company is subject to taxation in the United States and various state and foreign jurisdictions. In the United States, the tax years from 1998 remain open to examination by federal and most state tax authorities due to certain net operating loss and credit carryforward positions. In the foreign jurisdictions, the number of tax years open to examination by local tax authorities ranges from three to six years.