Income Taxes
Major components of the income tax expense from continuing operations for the years ended December 31, 2016, 2015 and 2014, are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Year ended December 31, |
| | 2016 | | 2015 | | 2014 |
Current: | | | | | |
| Federal benefit | $ | — |
| | $ | — |
| | $ | — |
|
| State expense | 63 |
| | 26 |
| | 25 |
|
Deferred (benefit) expense | 249 |
| | 59 |
| | 6 |
|
Income tax (benefit) expense | $ | 312 |
| | $ | 85 |
| | $ | 31 |
|
The differences between income taxes expected at the U.S. federal statutory income tax rate of 34 percent and the reported income tax (benefit) expense are summarized as follows (in thousands, except percentages):
|
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2016 | | 2015 | | 2014 |
| Amount | % | | Amount | % | | Amount | % |
(Benefit) expense provision at federal statutory rate | $ | (1,540 | ) | 34.0 | % | | $ | 1,394 |
| 34.0 | % | | $ | 858 |
| 34.0 | % |
State tax (benefit) expense | 70 |
| -1.5 | % | | 3 |
| 0.1 | % | | 23 |
| 0.9 | % |
Effect of tax credits | 10 |
| -0.2 | % | | (152 | ) | -3.7 | % | | (173 | ) | -6.9 | % |
Non-controlling interest | 163 |
| -3.6 | % | | (441 | ) | 10.7 | % | | — |
| — | % |
Other | (373 | ) | 8.2 | % | | 131 |
| 3.2 | % | | 286 |
| 11.3 | % |
Valuation allowance | 1,982 |
| -43.8 | % | | (850 | ) | -20.7 | % | | (963 | ) | -38.2 | % |
Income tax (benefit) expense | 312 |
| -6.9 | % | | 85 |
| 2.2 | % | | 31 |
| 1.2 | % |
Effect of discontinued operations | — |
| — | % | | — |
| — | % | | — |
| — | % |
Income tax (benefit) expense from continuing operations | $ | 312 |
| -6.9 | % | | $ | 85 |
| 2.2 | % | | $ | 31 |
| 1.2 | % |
Significant components of the net deferred tax assets and liabilities at December 31, 2016 and 2015, are as follows (in thousands):
|
| | | | | | | | | | | | | |
| December 31, |
| 2016 | | 2015 |
| Assets | Liabilities | | Assets | Liabilities |
Property and equipment | $ | — |
| $ | 1,770 |
| | $ | — |
| $ | 2,293 |
|
Brand name | — |
| 6,130 |
| | — |
| 2,461 |
|
Other intangible assets | — |
| 254 |
| | — |
| 158 |
|
RL Venture | — |
| 2,608 |
| | — |
| 2,924 |
|
RL Baltimore | — |
| 110 |
| | — |
| 71 |
|
RLH DC | 170 |
| — |
| | 271 |
| — |
|
RL Atlanta | — |
| 34 |
| | — |
| — |
|
Gain on sale leaseback | 307 |
| — |
| | 474 |
| — |
|
Tax credit carryforwards | 4,620 |
| — |
| | 4,630 |
| — |
|
Federal and state net operating losses | 7,097 |
| — |
| | 6,482 |
| — |
|
Other | 4,698 |
| — |
| | 1,054 |
| — |
|
Valuation allowance | (11,702 | ) | — |
| | (7,876 | ) | — |
|
Total | $ | 5,190 |
| $ | 10,906 |
| | $ | 5,035 |
| $ | 7,907 |
|
At December 31, 2016 and 2015, we had federal gross operating loss carryforwards of approximately $18.2 million and $16.4 million, respectively; state gross operating loss carryforwards of approximately $18.6 million and $18.9 million, respectively; and federal and state tax credit carryforwards of approximately $4.6 million in both years. The federal net operating loss carryforwards will expire beginning in 2032, and the state net operating loss carryforwards will expire beginning in 2017; the tax credit carryforwards will begin to expire in 2024.
We assess the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. There was a minimal three year cumulative income as of December 31, 2016. We do not believe this was sufficient evidence to avoid recording the valuation allowance as the profitability of the three year period was not consistent. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth.
On the basis of this evaluation, as of December 31, 2016, a valuation allowance of $11.7 million has been recorded to reduce deferred tax assets to an amount that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth. Should we determine we will be able to realize our deferred tax assets, the tax benefits relating to any reversal of the valuation allowance will be accounted for as a reduction of income tax expense.
A summary of our valuation allowance activity for the years ended December 31 is as follows (in thousands):
|
| | | | |
| | Valuation Allowance(1) |
Balances, January 1, 2014 | | $ | 5,893 |
|
Decrease during period | | (977 | ) |
Balances, December 31, 2014 | | 4,916 |
|
Increase during period | | 2,960 |
|
Balances, December 31, 2015 | | 7,876 |
|
Increase during period | | 3,826 |
|
Balances, December 31, 2016 | | $ | 11,702 |
|
(1) The change in the valuation allowance shown in this table does not correspond to the annual valuation allowance amounts show in the rate reconciliation table for the years 2014, 2015 and 2016 due to items required to be recognized through equity. |
We classify any interest expense and penalties related to tax positions and any interest income on tax overpayments as components of income tax expense.
We recognize the financial statement effect of a tax position when it is more likely than not to be sustained on the basis of its technical merits. We have no material uncertain tax positions at December 31, 2016 and 2015, and do not anticipate a significant change in any unrecognized tax benefits over the next twelve months. Accordingly, we have not provided for any unrecognized tax benefits or related interest and penalties. We account for penalties and interest related to unrecognized tax benefits as a component of income tax expense. With limited exception, we are no longer subject to U.S. federal, state and local income tax examinations by taxing authorities for years prior to 2013.