Income taxes
The provision for income taxes, excluding the tax effect of equity method gains (losses), consists of the following (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, | | Year Ended December 31, | | Nine Months Ended December 31, |
| 2016 | | 2015 | | 2014 |
Current tax expense | | |
|
| |
|
|
Federal | $ | 13,527 |
| | $ | 6,225 |
| | $ | 3,613 |
|
State and local | 3,694 |
| | 1,781 |
| | 1,680 |
|
Foreign | 626 |
| | 524 |
| | 620 |
|
Total current tax expense | $ | 17,847 |
| | $ | 8,530 |
| | $ | 5,913 |
|
Deferred tax (benefit) expense | | |
|
| |
|
Federal | $ | (7,279 | ) | | $ | (6,376 | ) | | $ | (297 | ) |
State and local | 472 |
| | 13,046 |
| | (2,086 | ) |
Foreign | — |
| | — |
| | — |
|
Total deferred tax (benefit) expense | $ | (6,807 | ) | | $ | 6,670 |
| | $ | (2,383 | ) |
Provision for income taxes | $ | 11,040 |
| | $ | 15,200 |
| | $ | 3,530 |
|
The components of Income before provision for income taxes were as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, | | Year Ended December 31, | | Nine Months Ended December 31, |
| 2016 | | 2015 | | 2014 |
U.S. sources | $ | 53,433 |
| | $ | (101,386 | ) | | $ | 10,445 |
|
Non-U.S. sources | 2,179 |
| | 1,968 |
| | 2,331 |
|
Total | $ | 55,612 |
| | $ | (99,418 | ) | | $ | 12,776 |
|
The provision for income taxes differs from the amount of income taxes determined by applying the applicable income tax statutory rates to income before provision for income taxes as follows: |
| | | | | | | | |
| Year Ended December 31, | | Year Ended December 31, | | Nine Months Ended December 31, |
| 2016 | | 2015 | | 2014 |
Statutory U.S. federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Section 162(m) compensation | 0.5 | % | | (0.8 | )% | | 11.7 | % |
State income tax, net of U.S. federal income tax benefit | 4.6 | % | | 3.5 | % | | 7.4 | % |
Washington, D.C. QHTC income tax credits and D.C. law changes | — | % | | (13.4 | )% | | (9.8 | )% |
Uncertain tax position | (0.3 | )% | | 0.7 | % | | 5.4 | % |
Federal R&D credit (net of associated UTP) | (22.7 | )% | | 1.8 | % | | (25.7 | )% |
Return to provision adjustment | 1.2 | % | | (0.4 | )% | | 3.2 | % |
Goodwill impairment | — | % | | (38.3 | )% | | — | % |
Meals and entertainment | 2.7 | % | | (1.5 | )% | | 5.5 | % |
Stock-based compensation | (2.8 | )% | | — | % | | — | % |
Other permanent differences, net | 1.7 | % | | (1.9 | )% | | (5.1 | )% |
Effective tax rate | 19.9 | % | | (15.3 | )% | | 27.6 | % |
Deferred income taxes are provided for temporary differences between the tax bases of assets and liabilities and their reported amounts on the consolidated financial statements. The tax effect of these temporary differences is presented below (in thousands):
|
| | | | | | | |
| As of December 31, |
| 2016 | | 2015 |
Deferred income tax assets (liabilities): | | | |
Federal R&D credits | $ | 6,107 |
| | $ | 420 |
|
Deferred compensation accrued for financial reporting purposes | 7,139 |
| | 13,284 |
|
Stock-based compensation | 21,384 |
| | 15,724 |
|
Acquired net operating loss carryforwards | 2,794 |
| | 5,421 |
|
Reserve for uncollectible revenue | 2,508 |
| | 2,119 |
|
Basis difference on investment in unconsolidated entities | 962 |
| | 7,208 |
|
Debt issuance costs | 2,066 |
| | 2,801 |
|
Deferred rent | 3,248 |
| | 1,466 |
|
Depreciation | 1,057 |
| | — |
|
Tax credit carryforwards | 1,094 |
| | 332 |
|
Unrealized foreign exchange loss | 667 |
| | — |
|
Outside basis difference on cost method investment | 1,967 |
| | — |
|
Other | 1,490 |
| | 835 |
|
Total deferred tax assets | 52,483 |
| | 49,610 |
|
Valuation allowance | — |
| | (49 | ) |
Total deferred tax assets, net of valuation allowance | 52,483 |
|
| 49,561 |
|
Capitalized software development costs | (33,599 | ) | | (31,042 | ) |
Deferred incentive compensation and other deferred charges | (11,211 | ) | | (11,940 | ) |
Acquired intangibles and goodwill; and acquisition related costs | (94,947 | ) | | (97,278 | ) |
Depreciation | — |
| | (3,031 | ) |
Other | (1,739 | ) | | (163 | ) |
Total deferred tax liabilities | (141,496 | ) | | (143,454 | ) |
Net deferred income tax (liabilities) assets | $ | (89,013 | ) | | $ | (93,893 | ) |
The Company has $2.8 million, tax effected, of U.S. federal and state net operating loss carryforwards available at December 31, 2016, some of which are a result of recent acquisitions. These carryforwards will be used to offset future income but maybe limited by the change in ownership rules in Section 382 of the Internal Revenue Code. These net operating loss carryforwards will expire between 2021 and 2035. The Company anticipates it will be able to use all of its acquired net operating loss carryforwards. In estimating future tax consequences, the Company generally considers all expected future events in the determination and evaluation of deferred tax assets and liabilities. The Company believes that its estimated future ordinary taxable income will be sufficient for the full realization of its deferred income tax assets. The effect of future changes in existing laws or rates is not considered in the determination and evaluation of deferred tax assets and liabilities until the new tax laws or rates are enacted.
Deferred U.S. income taxes have not been provided for the portion of the difference between book and tax basis in non-U.S. subsidiaries, which is essentially permanent in duration. Determination of the amount of these taxes is not practicable.
During the year ended December 31, 2016, the Company claimed $4.6 million in federal research and development credits and $14.1 million of additional benefit for the 2012, 2013, 2014, and 2015 tax years. For the year ended December 31, 2015, the Company claimed $1.8 million in federal research and development credits on its originally filed U.S. federal income tax return.
Uncertain Tax Positions
The following table summarizes the activity related to the Company's reserve for unrecognized tax positions (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, | | Year Ended December 31, | | Nine Months Ended December 31, |
| 2016 | | 2015 | | 2014 |
Balance at beginning of the period | $ | 1,385 |
| | $ | 828 |
| | $ | — |
|
Additions based on tax positions related to the current periods | 1,126 |
| | 281 |
| | 497 |
|
Additions for tax positions of prior periods | 4,905 |
| | — |
| | 331 |
|
Positions assumed in acquisition | — |
| | 276 |
| | — |
|
Balance at end of the period | $ | 7,416 |
| | $ | 1,385 |
| | $ | 828 |
|
The Company uses a more likely than not recognition threshold based on the technical merits of the tax position taken for the financial statement recognition and measurement of a tax position. If a tax position does not meet the more likely than not initial recognition threshold, no benefit is recorded in the financial statements. The Company does not currently anticipate that the total amounts of unrecognized tax benefits will significantly change within the next twelve months. The Company classifies interest and penalties on any unrecognized tax benefits as a component of the provision for income taxes. The amount accrued for interest and penalties for the twelve months ended December 31, 2016 and 2015, respectively was $0.1 million and $0.3 million, respectively. No interest or penalties were recognized in the consolidated statements of operations for the nine months ended December 31, 2014. The Company files income tax returns in U.S. federal and state and foreign jurisdictions. During 2016, the Company underwent a U.S. federal tax audit for tax years ended December 31, 2011 and December 31, 2013 and completed with no change. With limited exceptions, tax years 2014 and forward remain open.
If the Company was able to recognize the uncertain tax positions of $7.4 million, the entire balance would affect the Company’s effective tax rate. A deferred tax liability has not been recognized because the Company indefinitely reinvests its local country earnings from foreign operations.