Entity information:
Income Taxes
The domestic and foreign components of net income before income taxes for the years ended December 31, were as follows:
 
 
2017
 
2016
 
2015
Income before income taxes
 
 
 
 
 
 
   U.S. income
 
$
57,227

 
$
15,510

 
$
43,544

   Foreign loss
 
(1,673
)
 
(1,268
)
 
(1,843
)
Net income before income taxes
 
$
55,554

 
$
14,242

 
$
41,701


The provision (benefit) for income taxes consisted of the following for the years ended December 31,:
 
 
 
2017
 
 
 
2016
 
 
 
2015
 
Current expense:
 
 
 
 
 
 
 
 
 
 
 
 
     Federal
 
$
1,112

 
 
$
944

 
 
$
1,000

 
     State
 
 
1,721

 
 
 
1,044

 
 
 
835

 
     Foreign
 
 
1,379

 
 
 
550

 
 
 
147

 
    Total current tax expense
 
 
4,212

 
 
 
2,538

 
 
 
1,982

 
Deferred expense (benefit):
 
 


 
 
 


 
 
 


 
     Federal
 
 
(6,302
)
 
 
 
9,096

 
 
 
(49,301
)
 
     State
 
 
4,700

 
 
 
(1,289
)
 
 
 
(820
)
 
     Foreign
 
 
(685
)
 
 
 
(93
)
 
 
 
(121
)
 
    Total deferred tax (benefit) expense
 
 
(2,287
)
 
 
 
7,714

 
 
 
(50,242
)
 
Total income tax expense (benefit)
 
$
1,925

 
 
$
10,252

 
 
$
(48,260
)
 


As of December 31, 2017 and 2016, the Company had federal net operating loss carry forwards (“NOLs”) at December 31, 2017 and 2016 of $182.2 million and $159.8 million. These NOLs expire in varying amounts beginning in 2020 through 2036 and are included in the schedule of deferred tax assets in the table below. See Note 2 for additional information related to the adoption of ASU 2016-09.
As of December 31, 2017, the Company had state NOLs of $378.6 million, which substantially expire in varying amounts beginning in 2020 through 2037. As of December 31, 2016, the Company had state NOLs of $324.6 million.
As of December 31, 2017 and December 31, 2016, the Company had foreign NOLs in the United Kingdom of $57.5 million and $51.5 million, respectively, which do not expire.
As of December 31, 2017 and 2016, the Company had Foreign Tax Credit (“FTC”) carry forwards of $1.2 million which expire 2018 through 2020. As of December 31, 2017 and 2016, the Company had Research & Development (“R&D”) Tax Credit carry forwards of $0.5 million. The R&D credits begin to expire in 2028. As of December 31, 2017 and 2016, the Company had Alternative Minimum Tax (“AMT”) Credit carry forwards of approximately $5.2 million and $4.1 million, respectively which are included in the noncurrent deferred income tax accounts. The Act provides for the refund of AMT Credits in tax years 2018 through 2021.
On December 22, 2017, the Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. We have estimated our provision for income taxes in accordance with the Act and guidance available as of the date of this filing and as a result have recorded $22.9 million net tax benefit in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount consisted of $26.1 million related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, offset by a $3.8 million increase in valuation allowance for certain state deferred tax assets in jurisdictions in which a valuation allowance was required to reflect the amount more likely than not be realized, a $1.9 million benefit from the reversal of a liability associated with the prior year earnings and profits, a $0.8 million deferred tax expense associated with the one-time transition tax on the mandatory deemed repatriation of foreign earnings based on cumulative foreign earnings of $5.1 million and a $0.5 million tax expense related to writing off certain deferred tax assets associated with the deductibility of certain compensation amounts.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 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, the Company has determined that $22.9 million was the estimated benefit from the implementation of the Act was a provisional amount and a reasonable estimate at December 31, 2017. Additional work is necessary for a more detailed analysis of our deferred tax assets and liabilities and our historical foreign earnings as well as potential correlative adjustments. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax and any additional outside basis difference inherent in these entities as these amounts continue to be indefinitely reinvested in foreign operations. Any subsequent adjustment to these amounts will be recorded to tax expense in 2018 when the analysis is complete.
In establishing its deferred tax assets and liabilities, the Company makes judgments and interpretations based on the enacted tax laws and published tax guidance that are applicable to its operations. Deferred tax assets and liabilities are measured and recorded using currently enacted tax rates, which the Company expects will apply to taxable income in the years in which those temporary differences are recovered or settled.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31 (in thousands):
 
 
 
2017
 
 
 
2016
 
Noncurrent deferred tax assets:
 
 
 
 
 
 
 
 
     Deferred revenue
 
$
51,087

 
 
$
76,887

 
     NOLs
 
 
68,952

 
 
 
79,338

 
     Stock compensation
 
 
6,548

 
 
 
9,509

 
     Other deferred tax assets
 
 
15,986

 
 
 
20,243

 
 
 
 
142,573

 
 
 
185,977

 
     Less: valuation allowance
 
 
(30,364
)
 
 
 
(22,289
)
 
   Total noncurrent deferred tax assets
 
 
112,209

 
 
 
163,688

 
Noncurrent deferred tax liabilities:
 
 


 
 
 


 
     Intangible basis
 
 
149,328

 
 
 
218,582

 
     Discount on 2018 Notes
 
 
1,874

 
 
 
7,005

 
     Other liabilities
 
 
11,816

 
 
 
18,004

 
Total noncurrent deferred tax liabilities
 
 
163,018

 
 
 
243,591

 
Net noncurrent deferred tax asset
 
 
233

 
 
 
232

 
Net noncurrent deferred tax liability
 
 
(51,042
)
 
 
 
(80,135
)
 
Net deferred tax liability
 
$
(50,809
)
 
 
$
(79,903
)
 

In 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21% in accordance with the Act. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The largest driver for the decrease in the net noncurrent deferred tax liabilities of $29.1 million was related to the adoption of ASU 2016-09 (See Note 2, New Accounting Standards) partially offset by deferred tax liabilities associated with the DonWeb acquisition of $1.2 million.
Net noncurrent deferred tax assets of $0.2 million above as of December 31, 2017 and 2016 are included in Other Assets in the consolidated balance sheets.
The valuation allowance at December 31, 2017 of $30.4 million includes $19.0 million and $10.2 million related to certain state and foreign net deferred tax assets, respectively, and $1.2 million related to FTC carry forwards, that are not more likely than not to be realized.
During the year ended December 31, 2017, the valuation allowance increased by $8.1 million. The net increase attributable to the Company's state valuation allowance was $6.6 million, mainly related to the increase in state deferred tax assets due to the federal tax rate change. The net increase attributable to the Company's foreign valuation allowance was $1.5 million, driven by current year foreign losses in jurisdictions in which a full valuation allowance was still required and foreign currency translation adjustments associated with the underlying foreign net deferred tax assets for which a full valuation allowance was required.
During the year ended December 31, 2016, the valuation allowance decreased by $4.3 million. The net decrease attributable to the Company's state valuation allowance was $0.9 million, which included a $1.5 million increase related to current year book losses attributable to state jurisdictions in which a full valuation allowance was still required, offset by a $2.4 million decrease in our beginning-of-the-year valuation allowance to reflect the amount more likely than not to be realized. The $2.4 million decrease related to a state jurisdiction in which the applicable combined legal entities no longer operated on a 3-year cumulative pre-tax book loss position as of the fourth quarter of 2016. In addition to this positive evidence, the Company also determined that positive evidence associated with forecasted 2017 and future estimated taxable income for this state jurisdiction outweighed the negative evidence in the assessment of the portion of the valuation allowance release in the fourth quarter of 2016. The net decrease attributable to the Company's foreign valuation allowance was $3.4 million, which included a $0.6 million increase related to current year foreign losses for which a full valuation allowance was still required, offset by a $1.8 million decrease related to the decrease in foreign net deferred tax assets attributable to a UK tax rate change and a $2.2 million decrease related to foreign currency translation adjustments associated with the underlying foreign deferred tax assets for which a full valuation allowance was required. The net impact of this foreign currency translation adjustment included in Accumulated Other Comprehensive Loss is zero.
During the year ended December 31, 2015, the valuation allowance decreased by $66.9 million. In December 2015, after weighing all evidence available, the Company determined that it was more likely than not that the Company would be able to realize substantially all its net U.S. Federal deferred tax assets and a portion of its net U.S. state deferred tax assets. As a result, the Company reversed $68.8 million of its beginning-of-the-year valuation allowance related to these deferred tax assets, which was partially offset by current year increases of $1.9 million related to certain foreign and state deferred tax assets for which it was determined that a valuation allowance was still required.
The positive evidence that outweighed the negative evidence used in the Company’s assessment of the portion of the valuation allowance released in the fourth quarter of 2015 included, but was not limited to, the following:
•
The Company was no longer in a 3-year cumulative pre-tax book loss position as of the fourth quarter of 2015;

•
Strong positive trend in financial performance over the last two fiscal years, including each of the previous four quarters; and

•
Forecasted 2016 and future period taxable income.

The Company will continue to evaluate its ability to realize our deferred tax assets. If future evidence suggests that any changes are required to reflect the amount of our deferred tax asset that is more likely than not to be realized, the Company will adjust its valuation allowance, as needed in the appropriate period.

The provision (benefit) for income taxes differs from the amount computed by applying the statutory U.S. federal income tax rates as a result of the following for the years ended December 31:
 
 
 
2017
 
 
 
2016
 
 
 
2015
 
U.S. statutory rate
 
 
35.0

%
 
 
35.0

%
 
 
35.0

%
State income taxes (net of federal tax benefit)
 
 
3.0

 
 
 
2.6

 
 
 
2.8

 
Stock-based compensation
 
 
0.6

 
 
 
24.1

 
 
 
4.7

 
Change in valuation allowance
 
 
4.7

 
 
 
(30.2
)
 
 
 
(160.5
)
 
Foreign rate differential
 
 
1.3

 
 
 
5.2

 
 
 
2.0

 
Non-deductible compensation costs
 
 
1.3

 
 
 
5.2

 
 
 
2.0

 
Change in tax rates
 
 
(1.0
)
 
 
 
13.6

 
 
 
(0.6
)
 
Foreign currency translation adjustment
 
 
(1.4
)
 
 
 
15.3

 
 
 
—

 
Unremitted foreign earnings and profits
 
 
—

 
 
 
(0.8
)
 
 
 
0.7

 
Transaction costs
 
 
0.5

 
 
 
4.9

 
 
 
—

 
Tax impacts of the Act
 
 
(41.2
)
 
 
 
—

 
 
 
—

 
Other
 
 
0.7

 
 
 
(2.9
)
 
 
 
(1.9
)
 
     Income tax expense (benefit)
 
 
3.5

%
 
 
72.0

%
 
 
(115.8
)
%


The Company applies ASC 740, Income Taxes, which clarifies the accounting for uncertainty in income tax positions recognized in financial statements. The Company has filed income tax returns for years through 2016. These returns are subject to examination by the taxing authorities in the respective jurisdictions generally for three or four years after they are filed. NOLs and certain tax credits generated in these periods, as well as any carry forwards from prior periods, remain subject to adjustment by taxing authorities generally for three or four years after the years in which such NOLs and credit carry forwards are utilized.
The Company’s policy is that it recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.
The Company’s unrecognized tax benefits are summarized as follows (in thousands):
Balance at December 31, 2014
 
$
3,431

 
Additions in unrecognized tax benefits – prior year tax positions
 
 
73

 
Additions in unrecognized tax benefits – current year tax positions
 
 
300

 
Reductions in unrecognized tax benefits – current year tax positions
 
 
(62
)
 
Lapse of statute of limitations
 
 
(248
)
 
Balance at December 31, 2015
 
$
3,494

 
Additions in unrecognized tax benefits – prior year tax positions
 
 
50

 
Additions in unrecognized tax benefits – current year tax positions
 
 
540

 
Lapse of statute of limitations
 
 
(225
)
 
Balance at December 31, 2016
 
$
3,859

 
Additions in unrecognized tax benefits – prior year tax positions
 
 
1,565

 
Additions in unrecognized tax benefits – current year tax positions
 
 
656

 
Reductions in unrecognized tax benefits – prior year tax positions
 
 
(546
)
 
Lapse of statute of limitations
 
 
(42
)
 
Balance at December 31, 2017
 
$
5,492

 


As of December 31, 2017 and 2016, the Company had $4.5 million and $3.2 million, respectively, of total unrecognized tax benefits, which could favorably affect the effective rate. The Company recorded a net expense/(benefit) related to interest and penalties of $2.5 million, $0.0 million, and $(0.2) million million, during 2017, 2016, and 2015, respectively. The total accrued interest and penalties as of December 31, 2017 and December 31, 2016, was $2.6 million and $0.1 million, respectively. Refer to footnote 5, Business Combinations for further information on current year additions to unrecognized tax benefits in connection with our DonWeb acquisition.