Income Taxes
The jurisdictional components of loss before income taxes consist of the following (amounts in thousands):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Domestic | $ | (76,078 | ) | | $ | (122,277 | ) | | $ | (123,499 | ) |
Foreign | (3,243 | ) | | (16,846 | ) | | (69,220 | ) |
Loss before income taxes | $ | (79,321 | ) | | $ | (139,123 | ) | | $ | (192,719 | ) |
The components of our income tax expense (benefit) consist of the following (amounts in thousands):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | (81 | ) | | $ | (219 | ) | | $ | (535 | ) |
State | 146 |
| | (95 | ) | | 401 |
|
Foreign | 978 |
| | 1,189 |
| | 1,238 |
|
| 1,043 |
| | 875 |
| | 1,104 |
|
Deferred: | | | | | |
Federal | (5,417 | ) | | (12,500 | ) | | (42,113 | ) |
State | 143 |
| | 902 |
| | 29 |
|
Foreign | 28 |
| | (9 | ) | | 3,401 |
|
| (5,246 | ) | | (11,607 | ) | | (38,683 | ) |
| | | | | |
Income tax benefit | $ | (4,203 | ) | | $ | (10,732 | ) | | $ | (37,579 | ) |
The difference between the income tax benefit and the amount computed by applying the federal statutory income tax rate of 35% to loss before income taxes consists of the following (amounts in thousands):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Expected tax expense (benefit) | $ | (27,762 | ) | | $ | (48,693 | ) | | $ | (67,452 | ) |
Valuation allowance: | | | | | |
Valuation allowance on operations | 24,265 |
| | 38,324 |
| | 20,329 |
|
Impact of Tax Reform Act on valuation allowance | (25,564 | ) | | — |
| | — |
|
Change in tax rate | 20,147 |
| | 516 |
| | — |
|
State income taxes | 339 |
| | (3,033 | ) | | (2,066 | ) |
Foreign currency translation loss | 599 |
| | 838 |
| | 8,660 |
|
Net tax benefits and nondeductible expenses in foreign jurisdictions | 1,493 |
| | 407 |
| | 2,135 |
|
Incentive stock options | 1,297 |
| | 97 |
| | 83 |
|
Nondeductible expenses for tax purposes | 796 |
| | 386 |
| | 577 |
|
Expiration of capital loss | — |
| | 641 |
| | — |
|
Other, net | 187 |
| | (215 | ) | | 155 |
|
Income tax benefit | $ | (4,203 | ) | | $ | (10,732 | ) | | $ | (37,579 | ) |
Income tax expense (benefit) was allocated as follows (amounts in thousands):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Continuing operations | $ | (4,203 | ) | | $ | (10,732 | ) | | $ | (37,579 | ) |
Shareholders’ equity | — |
| | 2,287 |
| | 962 |
|
| $ | (4,203 | ) | | $ | (8,445 | ) | | $ | (36,617 | ) |
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. The components of our deferred income tax assets and liabilities were as follows (amounts in thousands):
|
| | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Domestic net operating loss carryforward | $ | 94,598 |
| | $ | 122,769 |
|
Foreign net operating loss carryforward | 11,619 |
| | 8,640 |
|
Intangibles | 18,058 |
| | 33,722 |
|
Property and equipment | 9,280 |
| | 11,809 |
|
Employee benefits and insurance claims accruals | 5,652 |
| | 6,802 |
|
Employee stock-based compensation | 3,753 |
| | 6,732 |
|
Accounts receivable reserve | 284 |
| | 626 |
|
Inventory | 295 |
| | 613 |
|
Accrued expenses not deductible for tax purposes | — |
| | 232 |
|
Accrued revenue not income for book purposes | 316 |
| | 277 |
|
| 143,855 |
| | 192,222 |
|
Valuation allowance | (59,766 | ) | | (57,820 | ) |
| | | |
Deferred tax liabilities: | | | |
Accrued expenses not deductible for book purposes | (112 | ) | | — |
|
Property and equipment | (87,128 | ) | | (142,582 | ) |
Net deferred tax assets (liabilities) | $ | (3,151 | ) | | $ | (8,180 | ) |
As of December 31, 2017, we had $106.2 million of deferred tax assets related to domestic and foreign net operating losses that are available to reduce future taxable income. In assessing the realizability of our deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not 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.
In performing this analysis as of December 31, 2017 in accordance with ASC Topic 740, Income Taxes, we assessed the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets. A significant piece of negative evidence evaluated is the cumulative loss incurred during previous years. Such negative evidence limits the ability to consider other positive evidence that is subjective, such as projections for taxable income in future years. Due to the downturn in our industry, we are in a net deferred tax asset position, and as a result, we recognized a benefit only to the extent that reversals of deferred income tax liabilities are expected to generate taxable income in each relevant jurisdiction in future periods which would offset our deferred tax assets.
Our domestic net operating losses have a 20 year carryforward period and can be used to offset future domestic taxable income until their expiration, beginning in 2030, with the latest expiration in 2037, while the majority of our foreign net operating losses (any generated prior to 2017) have an indefinite carryforward period. However, we have a valuation allowance that fully offsets our foreign and U.S. federal deferred tax assets as of December 31, 2017. We also have net operating loss carryforwards in many of the states that we operate in. Most of these are filed on a unitary or combined basis. These states have carryover periods between 5 and 20 years, with most being 15 or 20. We have determined that a valuation allowance should be recorded against some of the state benefits through December 31, 2017. The valuation allowance and the recent change in tax laws, as described further below, are the primary factors causing our effective tax rate to be significantly lower than the statutory rate of 35%. The amount of the deferred tax asset considered realizable, however, would increase if cumulative losses are no longer present and additional weight is given to subjective evidence in the form of projected future taxable income.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”) was enacted. The legislation significantly changes U.S. tax law by, among other things, permanently reducing the U.S. corporate income tax rate from a maximum of 35% to a flat rate of 21%, repealing the alternative minimum tax (AMT), implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries.
As a result of the reduction in the U.S. corporate income tax rate, we revalued our ending net deferred tax assets at December 31, 2017 and recognized a $20.1 million tax expense in 2017, which is fully offset by a $20.1 million reduction of the valuation allowance.
Due to the repeal of the AMT, we have reduced the valuation allowance by $5.2 million to remove the effects of AMT on the realizability of our deferred tax assets in future years. In addition, we reversed the valuation allowance on the AMT credit carryforward of $0.2 million that will now be refundable through 2021 and has been reclassified from a deferred tax asset to a non-current receivable.
The Tax Reform Act provides for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits through the year ended December 31, 2017. We have an accumulated deficit from our foreign operations, and therefore we have not included any tax impacts for this provision.
To minimize tax base erosion with a territorial tax system, beginning in 2018, the Tax Reform Act provides for a new global intangible low-taxed income (GILTI) provision. Under the GILTI provision, certain foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets are included in U.S. taxable income. We expect to be subject to GILTI; however, the inclusion is expected to be offset by net operating loss carry forwards in the U.S. We are still evaluating, pending further interpretive guidance, whether to make a policy election to treat the GILTI tax as a period expense or to provide U.S. deferred taxes on foreign temporary differences that are expected to generate GILTI income when they reverse in future years.
Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed. SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Reform Act.
Our accounting is complete for the year ended December 31, 2017 as related to the re-measurement of deferred taxes to the new tax rate of 21%, repeal of the AMT, and mandatory repatriation. We are awaiting further interpretive guidance regarding the possible application of deferred taxes to GILTI, and thus taxes are reflected in accordance with law prior to the enactment of the Tax Reform Act.
Other significant provisions that are not yet effective for the year ended December 31, 2017, but may impact income taxes in future years include a limitation on the current deductibility of net interest expense in excess of 30% of adjusted taxable income, and a limitation of net operating losses generated after 2017 to 80% of taxable income.
Because we have an accumulated foreign deficit of $52.4 million at December 31, 2017, we have not recorded a tax liability from the mandatory repatriation provision of the Tax Reform Act. We do not intend to distribute earnings in a taxable manner, and therefore, we intend to limit any potential distributions to earnings previously taxed in the U.S., or earnings that would qualify for the 100% dividends received deduction provided for in the Tax Reform Act. As a result, we have not recognized a deferred tax liability on our investment in foreign subsidiaries.
On December 29, 2016, the Colombian government enacted a tax reform bill that eliminated the tax for equality (“CREE”), increased the general corporate tax rate from 25% to 40% in 2017, 37% in 2018, 33% in 2019 and created a new 5% dividend tax, among other things. Deferred tax assets and liabilities were adjusted to the new rates; however, the valuation allowance fully offset the impact to tax expense. A few other notable provisions include a shorter twelve-year carryforward period for net operating losses generated after 2016, a longer statute of limitations for returns filed after 2016 and annual limits on tax depreciation allowed.
We have no unrecognized tax benefits relating to ASC Topic 740 and no unrecognized tax benefit activity during the year ended December 31, 2017.
We record interest and penalty expense related to income taxes as interest and other expense, respectively. At December 31, 2017, no interest or penalties have been or are required to be accrued. Our open tax years are 2010 and forward for our federal and most state income tax returns in the United States and 2012 and forward for our income tax returns in Colombia.