INCOME TAXES
For financial reporting purposes, income (loss) before income taxes includes the following components (in thousands):
|
| | | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
United States | | $ | (48,039 | ) | | $ | 20,974 |
| | $ | 3,358 |
|
Foreign | | 305 |
| | (429 | ) | | (243 | ) |
Total income (loss) before income taxes | | $ | (47,734 | ) | | $ | 20,545 |
| | $ | 3,115 |
|
The provision for income taxes for 2017, 2016 and 2015 consists of the following (in thousands):
|
| | | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
Federal | | $ | 365 |
| | $ | 280 |
| | $ | 75 |
|
State | | 280 |
| | 1,264 |
| | 293 |
|
Foreign | | 57 |
| | 34 |
| | 44 |
|
Total current | | 702 |
| | 1,578 |
| | 412 |
|
Deferred: | | | | | | |
Federal | | 56,350 |
| | 7,311 |
| | 1,808 |
|
State | | 7,146 |
| | 410 |
| | (324 | ) |
Foreign | | (10 | ) | | (2 | ) | | (1 | ) |
Total deferred | | 63,486 |
| | 7,719 |
| | 1,483 |
|
Total provision for income taxes | | $ | 64,188 |
| | $ | 9,297 |
| | $ | 1,895 |
|
The provision for income taxes for 2017, 2016 and 2015 differ from the amounts computed by applying the U.S. federal income tax rate of 35% to income (loss) before income taxes for the following reasons (in thousands):
|
| | | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
U.S. federal income tax provision (benefit) at statutory rate | | $ | (16,707 | ) | | $ | 7,191 |
| | $ | 1,091 |
|
State income tax expense, net of federal benefit | | (2,480 | ) | | 1,232 |
| | (134 | ) |
Research and development credit | | (1,696 | ) | | (1,078 | ) | | (955 | ) |
Stock based compensation expense | | 164 |
| | 674 |
| | (32 | ) |
Lobbying expenses | | 197 |
| | 179 |
| | 243 |
|
Other | | 384 |
| | (69 | ) | | (150 | ) |
Tax Cuts and Jobs Act | | 25,287 |
| | — |
| | — |
|
Change in valuation allowance | | 59,039 |
| | 1,168 |
| | 1,832 |
|
Total provision for income taxes | | $ | 64,188 |
| | $ | 9,297 |
| | $ | 1,895 |
|
The components of our deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows (in thousands):
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Net operating loss carryforwards | | $ | 29,350 |
| | $ | 36,486 |
|
Research and development tax credits | | 12,653 |
| | 9,832 |
|
Accrued expenses | | 12,308 |
| | 13,548 |
|
Fixed and intangible assets | | 8,068 |
| | 1,678 |
|
Reserves and other | | 1,480 |
| | 2,893 |
|
AMT and other tax credits | | 220 |
| | 1,827 |
|
Gross deferred tax assets | | 64,079 |
| | 66,264 |
|
Valuation allowance | | (63,278 | ) | | (4,239 | ) |
Total deferred tax assets | | 801 |
| | 62,025 |
|
Deferred tax liabilities: | | | | |
Prepaid expenses | | (788 | ) | | (1,408 | ) |
Goodwill | | (261 | ) | | — |
|
Fixed assets | | — |
| | (4,351 | ) |
Total deferred tax liabilities | | (1,049 | ) | | (5,759 | ) |
Total deferred tax assets (liabilities), net | | $ | (248 | ) | | $ | 56,266 |
|
At December 31, 2017, we had federal net operating loss carryforwards of approximately $117.2 million and state net operating loss carryforwards of approximately $113.7 million, which may be used to offset future taxable income. Our net operating losses expire at various dates between 2020 and 2037 if unused. In accordance with an Internal Revenue Code section 382 study completed during 2014, the NOL carryforwards indicated above are not limited in future periods.
At December 31, 2017, we had foreign net operating loss carryforwards related to our international operations of approximately $491,000 which have an indefinite life and approximately $932,000 which begin to expire in 2020 if unused.
At December 31, 2017, we had federal research credit carryforwards of approximately $13.1 million and state research credit carryforwards of approximately $6.2 million. These tax credits expire at various dates between 2021 and 2037 if unused.
On December 22, 2017, the President signed into law Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act ("TCJA"), following its passage by the United States Congress. The TCJA will make significant changes to U.S. federal income tax laws, mostly effective for tax years beginning after December 31, 2017. Among many other changes, the new law lowers the corporate tax rate from 35% to 21% for tax years beginning in 2018, transitions U.S international taxation from a worldwide tax system to a territorial system, and includes a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US 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 TCJA. As of the date of this filing, we have not completed our accounting for the tax effects of the TCJA. In accordance with SAB 118, we have calculated our best estimate of the impact of the TCJA in our year end income tax provision in accordance with our understanding of the law and guidance available as of the date of this filing and as a result have recorded $25.3 million as additional income tax expense in the fourth quarter of 2017. The amount 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, was $25.2 million. Although the tax rate reduction is known, our analysis may also be affected by other analyses related to the TCJA, including, but not limited to, our calculation of the mandatory deemed repatriation of cumulative foreign earnings and the state tax effect of adjustments made to federal temporary differences, which are uncertain at this time. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings was $41,000. The net charge is subject to revisions as we complete our analysis of the TCJA, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service (“IRS”), FASB, and other standard-setting and regulatory bodies. Any subsequent adjustment to these amounts will be recorded to tax expense in the quarter when the analysis is complete. Our accounting for the tax effects of the TCJA will be completed during the measurement period, which should not extend beyond one year from the enactment date.
The TCJA includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries in excess of a deemed return on tangible assets of foreign corporations beginning in 2018. Under GAAP, we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense, or factor such amounts into our measurement of deferred taxes. Due to the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the TCJA and the application of GAAP and we have not yet elected an accounting policy.
We assess available positive and negative evidence to estimate whether we will generate sufficient future taxable income to use our existing deferred tax assets. We have no carryback ability and do not expect significant future reversals of taxable temporary differences to recover our existing deferred tax assets, therefore we must rely on future taxable income, including tax planning strategies, to support their realizability. We have concluded based on all available evidence that it is more likely than not that our deferred tax assets as of December 31, 2017 will not be realized in the future. Therefore, it is appropriate to record a valuation allowance against our deferred tax assets, net of deferred tax liabilities related to assets with a definite reversal period and we increased our existing valuation allowance by $59.0 million for a total valuation allowance of $63.3 million. In reaching these conclusions we considered, among other things, three significant pieces of negative evidence that occurred during the quarter ended December 31, 2017. First, a significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2017. We expect the trends that contributed to the loss to continue. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future taxable income, if any. Second, during the quarter ended December 31, 2017, forecasts for future years were significantly revised. We are projecting significant pretax operating losses over the next several years and it is uncertain when we will return to profitability. While forecasts of future years are a more subjective piece of evidence, these forecasted losses in the near-term are further negative evidence that we will not have sufficient future taxable income to use our existing deferred tax assets. Third, we have certain tax planning strategies that we intended to implement to accelerate taxable income into earlier periods in order to utilize loss carryforwards and tax credits prior to expiration. While these tax planning strategies previously would have been sufficient to utilize most of our deferred tax assets in periods of low pretax income, these tax planning strategies will not be sufficient to utilize deferred tax assets in periods where we generate significant pretax losses, such as our current year operating results or our newly revised projections for future years. Additionally, one of our tax planning strategies was significantly impacted and reduced in application due to the TCJA, enacted on December 22, 2017. Therefore, we no longer have prudent and feasible tax planning strategies to support the realizability of deferred tax assets. We intend to continue maintaining a valuation allowance on our net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. The amount of the deferred tax asset considered realizable 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 long-term projections for growth.
A reconciliation of the beginning and ending unrecognized tax benefits, excluding interest and penalties, as of December 31, 2017, 2016 and 2015 is as follows (in thousands):
|
| | | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
Beginning balance | | $ | 7,333 |
| | $ | 4,753 |
| | $ | 4,128 |
|
Additions for tax positions related to the current year | | 881 |
| | 1,112 |
| | 751 |
|
Additions (reductions) for tax positions taken in prior years | | 230 |
| | 1,468 |
| | (126 | ) |
Reduction for tax positions settled by utilizing tax attributes | | (1,480 | ) | | — |
| | — |
|
Ending balance | | $ | 6,964 |
| | $ | 7,333 |
| | $ | 4,753 |
|
Included in the balance of unrecognized tax benefits as of December 31, 2017, 2016 and 2015, are approximately $7.0 million, $5.9 million, and $4.8 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of unrecognized tax benefits as of December 31, 2017, 2016 and 2015, are approximately $0, $1.5 million, and $0, respectively, of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes. At December 31, 2016 we believed that it was reasonably possible that a decrease of up to $1.5 million in unrecognized tax benefits related to marketing deductions would occur upon settlement with tax authorities within the next 12 months. During the year ended December 31, 2017 those unrecognized tax benefits were settled by using tax attributes as illustrated in the table above.
Accrued interest and penalties on unrecognized tax benefits as of December 31, 2017 and 2016 were $492,000 and $345,000, respectively.
We are subject to taxation in the United States and various state and foreign jurisdictions. Tax years beginning in 2013 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. We are currently under audit in Ireland for the 2016 tax year. The IRS concluded an audit of our 2015 federal income tax return in 2017 with no changes to the return.
We have indefinitely reinvested foreign earnings of $1.3 million at December 31, 2017. The TCJA includes a mandatory deemed repatriation of cumulative foreign earnings for the year ended December 31, 2017, for which we accrued provisional tax expense. However, we would still need to accrue and pay various other taxes on this amount if repatriated. We are currently analyzing our global working capital and cash requirements and the potential tax liabilities attributable to a repatriation, including calculating any excess of the amount for financial reporting over the tax basis in our foreign subsidiaries, but we have yet to determine whether we plan to change our prior assertion and repatriate earnings. Accordingly, we have not recorded any deferred taxes attributable to our investments in our foreign subsidiaries. We will record the tax effects of any change in our prior assertion in the period that we complete our analysis and are able to make a reasonable estimate, and disclose any unrecognized deferred tax liability for temporary differences related to our foreign investments, if practicable, in the period that we are first able to make a reasonable estimate, no later than December 2018.