INCOME TAXES
Current and Deferred Income Tax Expense
Domestic and foreign pre-tax income (loss) is as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Domestic | $ | 903 |
| | $ | (11,881 | ) | | $ | (11,675 | ) |
Foreign | (4,583 | ) | | 1,129 |
| | 1,425 |
|
Domestic and foreign pre-tax loss | $ | (3,680 | ) | | $ | (10,752 | ) | | $ | (10,250 | ) |
Income tax expense attributable to operations is comprised of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | (321 | ) | | $ | 55 |
| | $ | 55 |
|
State | 4 |
| | 2 |
| | 2 |
|
Foreign | 806 |
| | 276 |
| | 240 |
|
Total current | 489 |
| | 333 |
| | 297 |
|
Deferred: | | | | | |
Foreign | 4 |
| | 22 |
| | 23 |
|
Total deferred | 4 |
| | 22 |
| | 23 |
|
Income tax expense | $ | 493 |
| | $ | 355 |
| | $ | 320 |
|
The reconciliation of the U.S. federal statutory income tax rate to our effective income tax rate is as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 34 | % | | 34 | % | | 34 | % |
Change in valuation allowance | 887 |
| | (14 | ) | | (17 | ) |
Tax law change | (789 | ) | | — |
| | — |
|
Expiration of tax attributes | (127 | ) | | (11 | ) | | (18 | ) |
Permanent items | (8 | ) | | — |
| | — |
|
Stock-based compensation | (8 | ) | | (13 | ) | | (7 | ) |
Impact of foreign earnings | (2 | ) | | 1 |
| | 1 |
|
State income taxes, net of federal tax benefit | — |
| | 2 |
| | 3 |
|
Other | — |
| | (2 | ) | | 1 |
|
Effective income tax rate | (13 | )% | | (3 | )% | | (3 | )% |
Deferred Tax Assets, Liabilities and Valuation Allowance
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 56,461 |
| | $ | 77,357 |
|
Research and experimentation credit and deduction carryforwards | 63,796 |
| | 11,849 |
|
Foreign tax credit carryforwards | 2,216 |
| | 3,575 |
|
Deferred stock-based compensation | 802 |
| | 1,705 |
|
Depreciation and amortization | 3,068 |
| | 1,241 |
|
Reserves and accrued expenses | 511 |
| | 623 |
|
Other | 705 |
| | 438 |
|
Total gross deferred tax assets | 127,559 |
| | 96,788 |
|
Deferred tax liabilities: | | | |
Foreign earnings | — |
| | (327 | ) |
Other | (485 | ) | | (269 | ) |
Total gross deferred tax liabilities | (485 | ) | | (596 | ) |
Less valuation allowance | (126,946 | ) | | (96,079 | ) |
Net deferred tax assets | $ | 128 |
| | $ | 113 |
|
The Company adopted ASU 2016-09 in the first quarter of 2017. The Company had excess tax benefits for which a benefit could not be previously recognized of approximately $485. Upon adoption the balance of the unrecognized excess tax benefits was reversed with the impact recorded to retained earnings including the change to the valuation allowance as a result of the adoption.
The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Due to deficits in certain foreign subsidiaries we reasonably estimate that we will not have a transition tax liability for the repatriation of our foreign earnings. Additionally, a minimum tax on certain foreign earnings in excess of 10 percent of the foreign subsidiaries tangible assets (i.e., global intangible low-taxed income or “GILTI”) will be effective for future tax years. We have evaluated this change and made a policy election to treat the GILTI tax as a period expense. Our estimates may be affected as we gain a more thorough understanding of the tax law.
On December 22, 2017, Staff Accounting Bulletin No. 118 was issued to address the application of U.S. 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 Act. In accordance with SAB 118, we have determined that $28,973 of the deferred tax expense recorded in connection with the re-measurement of certain deferred tax assets and liabilities, $343 of current tax benefit recorded in connection with the refundable AMT credit and the transition tax on the mandatory deemed repatriation of foreign earnings were provisional amounts and reasonable estimates as of December 31, 2017. Additional work is necessary to do a more detailed analysis of historical foreign earnings as well as potential adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
We continue to record a full valuation allowance against our U.S. net deferred tax assets as of December 31, 2017 and 2016 as it is not more likely than not that we will realize a benefit from these assets in a future period. We have not provided a valuation allowance against any of our foreign net deferred tax assets, with the exception of Canada, as we have concluded it is more likely than not that we will realize a benefit from these assets in a future period because our subsidiaries in these jurisdictions are cost-plus taxpayers. The net valuation allowance increased $30,867, $1,555 and $1,732 for the years ended December 31, 2017, 2016, and 2015, respectively.
As of December 31, 2017, we had federal, state and foreign net operating loss carryforwards of $215,326, $11,444 and $38,578 respectively, which will expire between 2018 and 2037. As of December 31, 2017, we had available federal, state and foreign research and experimentation tax credit carryforwards of $8,962, $4,019, and $27,322 respectively. The federal and state tax credits will begin expiring in 2019 while the foreign credits have an indefinite life. In addition, our Canadian subsidiary has unclaimed scientific and experimental expenditures to be carried forward and applied against future income in Canada of approximately $119,447. We have a general foreign tax credit of $1,655 which will begin expiring in 2018. As of December 31, 2017 we recorded a receivable for our AMT tax credit carryforwards of $343 which will be refundable under the Tax Cuts and Jobs Act. Our ability to utilize our federal net operating losses may be limited by Section 382 of the Internal Revenue Code of 1986, as amended, which imposes an annual limit on the ability of a corporation that undergoes an "ownership change" to use its net operating loss carryforwards to reduce its tax liability. An ownership change is generally defined as a greater than 50% increase in equity ownership by 5% shareholders in any three-year period.
We recognized all of the earnings of our foreign subsidiaries as part of the transition tax of the Tax Cuts and Jobs Act. As of December 31, 2017, we do not have a liability for unremitted foreign earnings.
Our Chinese subsidiary is designated as an Advanced Technology Service Enterprise, allowing it to benefit from a Chinese tax holiday resulting in a reduction of its tax rate to 15% through 2018.
Uncertain Tax Positions
We have recorded tax liabilities to address potential exposures involving positions that could be challenged by taxing authorities. As of December 31, 2017 the amount of our uncertain tax positions was a liability of $1,735 and a reduction to deferred tax assets of $777. As of December 31, 2016, the amount of our uncertain tax positions was a liability of $1,419 and a reduction to deferred tax assets of $560.
The following is a summary of the change in our liability for uncertain tax positions and interest and penalties:
|
| | | | | | | |
| 2017 | | 2016 |
Uncertain tax positions: | | | |
Balance at beginning of year | $ | 1,886 |
| | $ | 1,863 |
|
Accrual for positions taken in a prior year | 40 |
| | (126 | ) |
Accrual for positions taken in current year | 263 |
| | 257 |
|
Reversals due to lapse of statute of limitations | (120 | ) | | (108 | ) |
Accrual for positions acquired in acquisition of ViXS Systems | 375 |
| | — |
|
Balance at end of year | $ | 2,444 |
| | $ | 1,886 |
|
Interest and penalties: | | | |
Balance at beginning of year | $ | 93 |
| | $ | 129 |
|
Accrual for positions taken in prior year | 8 |
| | 7 |
|
Accrual for positions taken in current year | 30 |
| | 19 |
|
Reversals due to lapse of statute of limitations | (71 | ) | | (62 | ) |
Accrual for positions acquired in acquisition of ViXS Systems | 8 |
| | — |
|
Balance at end of year | $ | 68 |
| | $ | 93 |
|
During the years ended December 31, 2017, 2016 and 2015, we recognized $46, $26 and $9, respectively, of interest and penalties in income tax expense in our consolidated statements of operations.
We file income tax returns in the U.S. and various foreign jurisdictions. A number of years may elapse before an uncertain tax position is resolved by settlement or statute of limitations. Settlement of any particular position could require the use of cash. If the uncertain tax positions we have accrued for are sustained by the taxing authorities in our favor, the reduction of the liability will reduce our effective tax rate. We reasonably expect reductions in the liability for unrecognized tax benefits and interest and penalties of approximately $8 within the next twelve months due to the expiration of statutes of limitation in foreign jurisdictions.
We are no longer subject to U.S. federal, state, and foreign examinations for years before 2014, 2013 and 2010, respectively. Our net operating loss and tax credit carryforwards from all years may be subject to adjustment for three years following the year in which utilized. We do not anticipate that any potential tax adjustments will have a significant impact on our financial position or results of operations.
We were not subject to, nor have we received any notice of, income tax examinations in any jurisdiction as of December 31, 2017.