INCOME TAXES
The components of the provision for income taxes attributable to operations consist of the following (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 41,453 |
| | $ | 32,198 |
| | $ | 10,295 |
|
State | 3,518 |
| | 3,682 |
| | 1,503 |
|
Foreign | 295 |
| | 76 |
| | 40 |
|
Total current | 45,266 |
| | 35,956 |
| | 11,838 |
|
Deferred: | |
| | |
| | |
|
Federal | (7,917 | ) | | 12,586 |
| | (8,382 | ) |
State | 4,695 |
| | 3,014 |
| | 2,590 |
|
Foreign | 319 |
| | 35 |
| | — |
|
Total deferred | (2,903 | ) | | 15,635 |
| | (5,792 | ) |
Total provision for income taxes | $ | 42,363 |
| | $ | 51,591 |
| | $ | 6,046 |
|
| |
9. | INCOME TAXES — (CONTINUED) |
The components of deferred tax assets and liabilities consist of the following (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Reserve for bad debts | $ | 1,636 |
| | $ | 2,437 |
|
Accrued compensation | 6,706 |
| | 5,562 |
|
Stock compensation | 10,568 |
| | 14,268 |
|
Net operating losses | 25,899 |
| | 30,319 |
|
Accrued reserve and other | 1,393 |
| | 2,097 |
|
Unrealized loss on securities | 185 |
| | 326 |
|
Deferred rent | 6,533 |
| | 7,814 |
|
Deferred gain on the sale of building | 4,741 |
| | 8,166 |
|
Total deferred tax assets, prior to valuation allowance | 57,661 |
| | 70,989 |
|
| | | |
Valuation allowance | (13,032 | ) | | (8,557 | ) |
Total deferred tax assets, net of valuation allowance | 44,629 |
| | 62,432 |
|
| | | |
Deferred tax liabilities: | |
| | |
|
Prepaids | (1,239 | ) | | (1,753 | ) |
Depreciation | (6,229 | ) | | (13,045 | ) |
Intangibles | (43,800 | ) | | (58,747 | ) |
Total deferred tax liabilities | (51,268 | ) | | (73,545 | ) |
| | | |
Net deferred tax assets (liabilities) | $ | (6,639 | ) | | $ | (11,113 | ) |
As of December 31, 2017 and 2016, a valuation allowance has been established for certain deferred tax assets due to the uncertainty of realization. The valuation allowance as of December 31, 2017 and 2016 includes an allowance for unrealized losses on ARS investments, foreign deferred tax assets and state net operating losses and tax credits. The valuation allowance for the deferred tax asset for unrealized losses on ARS has been recorded as an adjustment to accumulated other comprehensive loss.
The Company established the valuation allowance because it is more likely than not that a portion of the deferred tax asset for certain items will not be realized based on the weight of available evidence. A valuation allowance was established for the unrealized losses on securities as the Company has not historically generated capital gains, and it is uncertain whether the Company will generate sufficient capital gains in the future to absorb the capital losses. A valuation allowance was established for the foreign deferred tax assets due to the cumulative loss in recent years in those jurisdictions. The Company has not had sufficient taxable income historically to utilize the foreign deferred tax assets, and it is uncertain whether the Company will generate sufficient taxable income in the future to utilize the deferred tax assets. Similarly, the Company has established a valuation allowance for net operating losses and tax credits in certain states where it is uncertain whether the Company will generate sufficient taxable income to utilize the net operating losses and tax credits before they expire.
The Company’s change in valuation allowance was an increase of approximately $4 million for the year ended December 31, 2017 and a decrease of approximately $1 million for the year ended December 31, 2016. The increase for the year ended December 31, 2017 is due to an increase in the valuation allowance for foreign deferred tax assets related to foreign net operating losses of approximately $4 million . The decrease for the year ended December 31, 2016 is due to a decrease in the valuation allowance for foreign deferred tax assets of approximately $1 million.
The Company had U.S. income before income taxes of approximately $167 million, $135 million , and $2 million for the years ended December 31, 2017, 2016 and 2015, respectively. The Company had a foreign loss before income taxes of approximately $2 million for the year ended December 31, 2017. The Company had foreign income before income taxes of approximately $2 million and $1 million for the years ended December 31, 2016 and 2015, respectively.
| |
9. | INCOME TAXES — (CONTINUED) |
The Company’s provision for income taxes resulted in effective tax rates that varied from the statutory federal income tax rate as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Expected federal income tax provision at statutory rate | $ | 57,770 |
| | $ | 47,832 |
| | $ | 903 |
|
State income taxes, net of federal benefit | 4,776 |
| | 3,638 |
| | (678 | ) |
Foreign income taxes, net effect | (3,540 | ) | | (31 | ) | | 469 |
|
Increase (decrease) in valuation allowance | 3,624 |
| | (103 | ) | | 1,956 |
|
Nondeductible compensation | 230 |
| | 141 |
| | 574 |
|
Nondeductible transaction costs | — |
| | 103 |
| | 229 |
|
Meals and entertainment | 958 |
| | 712 |
| | 1,032 |
|
Tax rate changes | (7,340 | ) | | 283 |
| | 1,203 |
|
Research credits | (20,547 | ) | | (920 | ) | | — |
|
Excess tax benefit | (7,010 | ) | | — |
| | — |
|
Tax reserves | 12,646 |
| | (150 | ) | | 71 |
|
Other adjustments | 796 |
| | 86 |
| | 287 |
|
Income tax expense | $ | 42,363 |
| | $ | 51,591 |
| | $ | 6,046 |
|
The Company’s U.K. subsidiaries with foreign losses are disregarded entities for U.S. income tax purposes. Accordingly, the losses from these disregarded entities are included in the Company’s consolidated federal income tax provision at the statutory rate. Federal income taxes attributable to income from these disregarded entities are reduced by foreign taxes paid by those disregarded entities.
The Company paid approximately $41 million, $34 million , and $1 million in income taxes for the years ended December 31, 2017, 2016, and 2015, respectively.
The Company recognized an income tax benefit during the year ended December 31, 2017 for research credits of $21 million for tax years December 31, 2013 through December 31, 2017. These research credits relate to eligible activities including the development of new products, product enhancements and new or improved processes.
The Company has net operating loss carryforwards for international income tax purposes of approximately $49 million, which do not expire. The Company has federal net operating loss carryforwards of approximately $38 million that begin to expire in 2020, state net operating loss carryforwards with a tax value of approximately $6 million that begin to expire in 2020 and state income tax credit carryforwards with a tax value of approximately $3 million that begin to expire in 2020. The Company realized a cash benefit relating to the use of its tax loss carryforwards of approximately $7 million, $5 million, and $1 million in December 31, 2017, 2016, and 2015, respectively.
The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands):
|
| | | |
Unrecognized tax benefits as of December 31, 2014 | $ | 5,749 |
|
Increase for current year tax positions | — |
|
Increase for prior year tax positions | 1,954 |
|
Expiration of the statute of limitation for assessment of taxes | (39 | ) |
Unrecognized tax benefits as of December 31, 2015 | 7,664 |
|
Increase for current year tax positions | 368 |
|
Decrease for prior year tax positions | (6,115 | ) |
Expiration of the statute of limitation for assessment of taxes | (74 | ) |
Unrecognized tax benefits as of December 31, 2016 | 1,843 |
|
Increase for current year tax positions | 12,620 |
|
Decrease for prior year tax positions | (34 | ) |
Expiration of the statute of limitation for assessment of taxes | (66 | ) |
Unrecognized tax benefits as of December 31, 2017 | $ | 14,363 |
|
| |
9. | INCOME TAXES — (CONTINUED) |
Approximately $14 million and $1 million of the unrecognized tax benefits as of December 31, 2017 and 2016, respectively, would favorably affect the annual effective tax rate, if recognized in future periods. The increase for current year tax positions of $13 million for the year ended December 31, 2017 is primarily attributable to research credits. The Company recognized $72,000 for interest and penalties in its consolidated statement of operations for the year ended December 31, 2017. The Company reversed interest and penalties of $416,000 in its consolidated statement of operations for the year ended December 31, 2016. The Company recognized $83,000 for interest and penalties in its consolidated statements of operations for the year ended December 31, 2015. The Company had liabilities of $205,000, $133,000, and $549,000 for interest and penalties in its consolidated balance sheets as of December 31, 2017, 2016, 2015 respectively. The Company does not anticipate the amount of the unrecognized tax benefits will change significantly over the next twelve months.
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. The Company’s federal income tax returns for tax years 2011 through 2016 remain open to examination. Most of the Company’s state income tax returns for tax years 2014 through 2016 remain open to examination. For states that have a four-year statute of limitations, the state income tax returns for tax years 2013 through 2016 remain open to examination. The Company’s U.K. income tax returns for tax years 2012 through 2016 remain open to examination.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”), which significantly changed U.S. tax law. The Tax Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income. The Tax Act also created a new minimum tax on certain future foreign earnings. The Securities and Exchange Commission staff issued Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification Topic 740, ("ASC 740"). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with the Company's initial analysis of the impact of the Tax Act, the Company recorded a provisional discrete net tax benefit of $7 million in the period ending December 31, 2017. This net benefit primarily consists of a net benefit for the corporate tax rate reduction of $7.4 million and a net expense for the repatriation tax of $400,000. For various reasons, the Company has not completed its accounting for the income tax effects of certain elements of the Tax Act. The Company was able to make reasonable estimates of the effects of elements for which the Company's analysis is not yet complete and recorded provisional adjustments. As the Company completes its analysis of the Tax Act, collects and prepares necessary data, and interprets any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company may make adjustments to the provisional amounts. Those adjustments may materially impact the provision for income taxes in the period in which the adjustments are made.
Global intangible low taxed income (GILTI): Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the measurement of deferred taxes (the “deferred method”). The Company's selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only its current structure and estimated future results of global operations but also its intent and ability to modify its structure and/or its business, the Company is not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI.