The Company reports income taxes using an asset and liability approach, under which deferred income taxes are provided based upon enacted tax laws and rates applicable to periods in which the taxes become payable. The Company is subject to income taxes in the U.S. federal and various state jurisdictions. Presently, there are no income tax examinations on-going in the jurisdictions where the Company operates.
The components of the provision for income taxes are as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2014 | | 2015 | | 2016 |
Current: | | | | | |
Federal | $ | (9,459 | ) | | $ | (9,873 | ) | | $ | (16,370 | ) |
State | (1,539 | ) | | (3,296 | ) | | (2,089 | ) |
| (10,998 | ) | | (13,169 | ) | | (18,459 | ) |
Deferred: | | | | | |
Federal | (828 | ) | | (2,902 | ) | | 5,740 |
|
State | (117 | ) | | 1,034 |
| | 743 |
|
| (945 | ) | | (1,868 | ) | | 6,483 |
|
Total provision for income taxes | $ | (11,943 | ) | | $ | (15,037 | ) | | $ | (11,976 | ) |
Deferred tax assets (liabilities) consist of the following (in thousands):
|
| | | | | |
| December 31,
2015 | | December 31,
2016 |
Deferred tax assets | | | |
Net operating loss carryforwards | 1,725 |
| | 1,349 |
|
Stock-based compensation | 14,970 |
| | 20,122 |
|
R&D and other credits | 4,270 |
| | 5,541 |
|
Reserves-noncurrent | 7,018 |
| | 8,080 |
|
Gross deferred tax assets | 27,983 |
| | 35,092 |
|
Deferred tax liabilities | | | |
Property and equipment | (4,123 | ) | | (4,779 | ) |
Intangible assets | (4,122 | ) | | (285 | ) |
Goodwill | (9,901 | ) | | (13,719 | ) |
Gross deferred tax liabilities | (18,146 | ) | | (18,783 | ) |
| | | |
Net deferred tax assets and liabilities | 9,837 |
| | 16,309 |
|
Reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended December 31, 2014, 2015 and 2016:
|
| | | | | | | | |
| Year Ended December 31, |
| 2014 | | 2015 | | 2016 |
Tax provision at U.S. statutory rate | 35 | % | | 35 | % | | 35 | % |
State income taxes, net of federal benefit | 5 |
| | 5 |
| | 3 |
|
Permanent items - other | 1 |
| | 1 |
| | 1 |
|
R&D credits | — |
| | (1 | ) | | (2 | ) |
Other | (1 | ) | | — |
| | — |
|
Provision (benefit) for tax | 40 | % | | 40 | % | | 37 | % |
The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of the Company’s deferred tax assets. Assessing the realizability of deferred tax assets is dependent upon several factors, including the likelihood and amount, if any, of future taxable income in relevant jurisdictions during the periods in which those temporary differences become deductible. The Company’s management forecasts taxable income by considering all available positive and negative evidence including its history of operating income or losses and its financial plans and estimates which are used to manage the business. The Company has concluded there was sufficient positive evidence at the end of 2014, 2015 and 2016 to continue to support the position that the Company does not need to maintain a valuation allowance on deferred tax assets. These assumptions require significant judgment about future taxable income. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are reduced.
At December 31, 2016, unrecognized tax benefits approximated $4.7 million, which would impact income tax expense if recognized. Included in the balance at December 31, 2016 is $0.2 million of current year tax positions, which would affect the Company’s income tax expense if recognized. The Company does not anticipate that any adjustments would result in a material change to its financial position within the next twelve months. For the years ended December 31, 2014, 2015 and 2016, the Company did not recognize any interest or penalties related to unrecognized tax benefits.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2014 | | 2015 | | 2016 |
Balance, beginning of year | 3,716 |
| | 4,109 |
| | 4,429 |
|
Increase in tax positions for prior years | — |
| | 134 |
| | 201 |
|
Decrease in tax positions for prior years | (90 | ) | | — |
| | — |
|
Increase in tax positions for current year | 483 |
| | 319 |
| | 236 |
|
Other decreases | — |
| | (133 | ) | | (136 | ) |
Balance, end of year | $ | 4,109 |
| | $ | 4,429 |
| | $ | 4,730 |
|
The Company files income tax returns in the U.S. federal jurisdiction and various states jurisdictions. As a result of the Company’s net operating loss carryforwards, the 2002 through 2015 tax years are open and may be subject to potential examination in one or more jurisdictions.
At December 31, 2016, the Company has federal and state operating loss carryforwards of approximately $0.1 million and $22.7 million, respectively, available to offset future regular and alternative minimum taxable income. The Company’s state net operating loss carryforward is on a post-apportionment basis. The Company’s federal net operating loss carryforwards expire in the year 2033, if not utilized. The state net operating loss carryforwards expire in the years 2017 through 2033.
In addition, the Company had federal and California and other state research and development credit carryforwards of approximately $6.6 million and $3.5 million, respectively, available to offset future tax liabilities. The federal research credit carryforwards expire beginning in the years 2023 through 2036, if not fully utilized. The state research credit carries forward indefinitely for the state of California and other states begin to expire in years 2035 through 2036. In addition, we have $0.1 million of state investment tax credits that will begin to expire in years 2017 through 2019, if not fully utilized.
The Company’s ability to utilize the net operating losses and tax credit carryforwards are subject to limitations in the event of an ownership change as defined in Section 382 of the Internal Revenue Code (“IRC”) of 1986, as amended, and similar state tax law. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). The Company has considered Section 382 of the IRC and concluded that any ownership change would not diminish the Company’s utilization of its net operating loss or its research and development credits during the carryover periods.
The Company elected to follow the tax law method of determining realization of excess tax benefits for stock-based compensation. During 2016, the Company recorded approximately $17.9 million of excess tax benefits related to stock-based compensation that was credited to stockholders’ equity during the year.