Income Taxes
The components of the provision for income taxes were as follows:
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Current | | | | | |
Federal | $ | 156 |
| | $ | 9,428 |
| | $ | 8,070 |
|
State | 305 |
| | 1,664 |
| | 1,894 |
|
| 461 |
| | 11,092 |
| | 9,964 |
|
Deferred | | | | | |
Federal | (11,793 | ) | | 7,124 |
| | 1,899 |
|
State | 3,876 |
| | 614 |
| | 356 |
|
| (7,917 | ) | | 7,738 |
| | 2,255 |
|
Income tax provision (benefit) | $ | (7,456 | ) | | $ | 18,830 |
| | $ | 12,219 |
|
The provision for income taxes differed from the amount of income taxes determined by applying the U.S. statutory federal income tax rate as follows:
|
| | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Tax at federal statutory rate | 35 | % | | 35 | % | | 35 | % |
State taxes, net of federal benefit | 7 |
| | 4 |
| | 5 |
|
Excess tax benefits related to stock-based compensation(1) | (35 | ) | | 1 |
| | 1 |
|
Research and development tax credits | (12 | ) | | (6 | ) | | (7 | ) |
Re-measurement of net deferred tax liabilities arising from The Tax Act | (19 | ) | | — |
| | — |
|
Other non-deductible items(2) | 4 |
| | — |
| | 1 |
|
Other | 4 |
| | (1 | ) | | — |
|
Income tax provision (benefit) | (16 | )% | | 33 | % | | 35 | % |
________________
(1) In 2017, due to the adoption of ASU 2016-09, the excess tax benefits resulted from the vesting or the settlement of the stock awards were recorded in the tax provision.
(2) Certain reclassifications of prior period amounts have been made to conform to the current period presentation, such reclassification did not materially change previously reported consolidated financial statements.
The components of net deferred tax assets (liabilities) were as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (in thousands) |
Deferred tax assets | | | |
Research and development credits | $ | 29,461 |
| | $ | 5,089 |
|
Stock-based compensation | 8,765 |
| | 12,551 |
|
Reserves and accruals | 5,894 |
| | 11,896 |
|
Net operating loss carryforwards | 16,422 |
| | — |
|
Total deferred tax assets | 60,542 |
| | 29,536 |
|
Valuation allowance | (11,908 | ) | | (5,089 | ) |
Total deferred tax assets, net of valuation allowance | 48,634 |
| | 24,447 |
|
| | | |
Deferred tax liabilities | | | |
Depreciation and amortization | (50,360 | ) | | (28,749 | ) |
Book/tax basis in acquired assets | (1,360 | ) | | (1,262 | ) |
Total deferred tax liabilities | (51,720 | ) | | (30,011 | ) |
Net deferred tax liabilities | $ | (3,086 | ) | | $ | (5,564 | ) |
The Company continues to maintain a valuation allowance against the deferred tax assets related to certain state research and development tax credits, the realization of which is uncertain as the Company expects to generate additional credits at a faster rate than it is able to utilize them. The valuation allowance increased by $6.8 million, $1.2 million and $1.0 million in 2017, 2016 and 2015, respectively.
As of December 31, 2017, the Company had federal net operating loss (“NOL”) carryforwards of $68.7 million, available to reduce future taxable income and $38.6 million of state NOL carryforwards. These federal and state NOL carryforwards will begin to expire commencing 2021 and 2018, respectively.
As of December 31, 2017, the Company also had federal and state research and development tax credit carryforwards of $22.0 million and $20.3 million, respectively. The federal tax credit carryforwards begin to expire commencing in 2020. The state tax credit carryforwards may be carried forward indefinitely.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“The Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code. Changes impacting the Company include, but are not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (3) creating a new limitation on deductible interest expense; (4) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (5) bonus depreciation that will allow for full expensing of qualified property; (6) the repeal of the domestic production activity deduction; and (7) limitations on the deductibility of certain executive compensation.
The SEC staff issued Staff Accounting Bulletin No. 118 (“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 FASB Accounting Standards Board (“ASC”) 740, Income Taxes (“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.
As of December 31, 2017, the Company has not completed its accounting for the income tax effects of certain elements of The Tax Act. However, in connection with the initial analysis, the Company recorded a provisional net tax benefit based on reasonable estimates for those tax effects. The provisional net tax benefit is subject to revisions as the Company completes the analysis of The Tax Act, collects and prepares necessary data, finalizes the Velocify purchase accounting, and interprets any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service (“IRS”) and FASB. Adjustments may materially impact the provision for income taxes and effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of The Tax Act will be completed during the measurement period.
The accounting for the following elements of The Tax Act is incomplete. However, the Company is able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments as follows:
| |
• | The Tax Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. Consequently, the Company has recorded a decrease related to net deferred tax liabilities of $8.6 million, with a corresponding net adjustment to the deferred income tax benefit of $8.6 million for the year ended December 31, 2017. |
| |
• | The Tax Act creates a new limitation on the deductibility of certain executive compensation and removes the exceptions for performance-based compensation. However, The Tax Act grants a “transition rule” to compensation stemming from written binding contracts entered on or before November 2, 2017. The Company estimated the tax adjustment related to the “transition rule” is immaterial. |
Unrecognized Tax Benefits
At December 31, 2017, the Company had $10.0 million of cumulative unrecognized tax benefits. If the benefits were to be recognized, $5.5 million would affect the effective tax rate and $4.5 million would reverse the valuation allowance against the deferred tax assets. The Company does not expect a significant change to its unrecognized tax benefits over the next twelve months.
A reconciliation of the beginning and ending balance of gross unrecognized tax benefits is as follows for the periods indicated:
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Beginning balance | $ | 4,634 |
| | $ | 3,440 |
| | $ | 2,408 |
|
Additions based on tax positions related to the current year | 5,420 |
| | 1,334 |
| | 1,023 |
|
Additions (reductions) based on tax positions related to prior years including acquisitions | (26 | ) | | (140 | ) | | 9 |
|
Ending balance | $ | 10,028 |
| | $ | 4,634 |
| | $ | 3,440 |
|
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company’s tax years for 2000 and forward are subject to examination by the U.S. tax authorities and for 2000 and forward are subject to examination by the California tax authorities due to the carryforward of unutilized net operating losses and research and development credits.
The Company believes that it has provided adequate reserves for its income tax uncertainties in all open tax years, and that it does not have any tax positions that it is reasonably possible would materially increase or decrease the gross unrecognized tax benefits within the next twelve months.
The Company has a policy to classify accrued interest and penalties associated with uncertain tax positions together with the related liability, and the expenses incurred related to such accruals are included in the provision for income taxes. The Company did not incur any interest expense or penalties associated with unrecognized tax benefits during the years ended December 31, 2017, 2016 and 2015.