Entity information:
8. Income Taxes

The domestic and foreign components of income (loss) before provision for (benefit from) income taxes are as follows (in thousands):

 

     Years Ended December 31,  
     2015      2016     2017  

Domestic

    $ 1,059      $ (15,748 )    $ (25,027 ) 

Foreign

      16,459        18,956       13,050  
  

 

 

     

 

 

    

 

 

  

Total income (loss) before provision for (benefit from) income taxes

    $ 17,518      $ 3,208     $ (11,977 ) 
  

 

 

     

 

 

    

 

 

  

The provision for (benefit from) income taxes is as follows (in thousands):

 

     Years Ended December 31,  
     2015      2016      2017  

Current:

         

Federal

    $ 2,521      $ 1,264      $ 33,474  

State

      274        647        3,701  

Foreign

      1,227        1,963        6,568  
  

 

 

     

 

 

     

 

 

  

Total

      4,022        3,874        43,743  
  

 

 

     

 

 

     

 

 

  

Deferred:

         

Federal

      (1,281 )       (2,705 )       (150,038 ) 

State

      278        (428 )       4,558  

Foreign

      (59 )       (171 )       (9,763 ) 
  

 

 

     

 

 

     

 

 

  

Total

      (1,062 )       (3,304 )       (155,243 ) 
  

 

 

     

 

 

     

 

 

  

Total provision for (benefit from) income taxes

    $ 2,960      $ 570      $ (111,500 ) 
  

 

 

     

 

 

     

 

 

  

A reconciliation of the Company’s effective tax rate to the statutory federal income tax rate is as follows:

 

     Years Ended December 31,  
     2015     2016     2017  

Statutory tax rate

      35.0 %      35.0 %      (35.0 )% 

Change in valuation allowance

      —       —       8.0  

Impact of permanent differences

      1.1       27.1       27.4  

Non-deductible stock-based compensation

      8.4       27.4       9.2  

Non-deductible transaction related costs

      —       82.1       19.5  

Foreign tax rate differential

      (26.7 )      (165.3 )      (71.3 ) 

Research and development credits

      (1.3 )      (10.6 )      (36.4 ) 

State taxes, net of federal benefit

      2.4       0.4       (21.1 ) 

Impact of uncertain tax positions

      1.4       18.6       29.3  

Effect of U.S. Tax Act

      —       —       (714.9 ) 

Section 199 deduction

      —       (0.1 )      (20.0 ) 

Excess benefit on stock compensation

      —       —       (133.6 ) 

Other

      (3.4 )      3.2       7.9  
  

 

 

    

 

 

    

 

 

  

Effective tax rate

      16.9 %      17.8 %      (931.0 )% 
  

 

 

    

 

 

    

 

 

  

The Company recorded a tax provision for income taxes of $3.0 million, $0.6 million and a benefit from income taxes of $111.5 million on profit before income taxes of $17.5 million, $3.2 million and a loss before income taxes of $12.0 million for the years ended December 31, 2015, 2016 and 2017, respectively. The Company’s effective tax rates for the years ended December 31, 2015 and December 31, 2016 were lower than the U.S. federal statutory rate of 35% due to profits earned in certain foreign jurisdictions, primarily by the Company’s Irish subsidiaries, which are subject to significantly lower tax rates than the U.S. federal statutory rate. The tax rate for 2017 was significantly higher than the U.S. federal statutory rate of 35% due to the impact of the Tax Cut and Jobs Act of 2017 (the “U.S. Tax Act”) on the Company’s net deferred tax liability position, recognition of stock-based awards’ excess tax benefits, and partially offset by the U.S. Tax Act’s one-time mandatory transition tax on accumulated foreign earnings and due to profits earned in certain foreign jurisdictions, primarily by our Irish subsidiaries, which are subject to significantly lower tax rates than the U.S. federal statutory rate.

As a result of the U.S. Tax Act, the Company calculated its best estimation of the impact of the U.S. Tax Act and recognized a one-time mandatory transition tax of $14.8 million on cumulative foreign subsidiary earnings, remeasured the Company’s U.S. deferred tax assets and liabilities, which resulted in a benefit from income taxes of $105.1 million, and reassessed the net realizability of the Company’s deferred tax assets and liabilities, which resulted in a tax provision of $4.7 million. Further, on January 1, 2017, the Company adopted ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). Previously, excess tax benefits were recognized in additional paid-in capital on the consolidated balance sheet to the extent they reduced income taxes payable. Beginning in 2017, any excess tax benefits or shortfalls were recorded in the income tax provision upon vest or exercise. In 2017, the Company recorded a net benefit of $16.0 million related to excess tax benefits.

Our effective tax rate in the future will depend upon the proportion of our income before provision for income taxes earned in the United States and in jurisdictions with a tax rate lower than the U.S. statutory rate, as well as several other factors, including excess tax benefits from share-based compensation, changes to the Company’s provisional accounting for the effects of the U.S. Tax Act during the measurement period, and the impact of new legislation. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of generally accepted accounting principles in the United States, or 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 U.S. Tax Act. The ultimate impact of the U.S. Tax Act may differ from this estimate, possibly materially, due to changes in interpretations and assumptions, and guidance that may be issued and actions the Company may take in response to the U.S. Tax Act. The U.S. Tax Act is highly complex and the Company will continue to assess the impact that various provisions will have on its business. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.

 

The Company has deferred tax assets related to temporary differences and operating loss carryforwards as follows (in thousands):

 

     December 31,  
     2016      2017  

Deferred tax assets:

      

Net operating loss carryforwards

    $ 3,190      $ 8,117  

Deferred revenue

      1,161        709  

Amortization

      756        3,808  

Stock-based compensation

      10,903        9,165  

Accrued bonus

      4,409        717  

Other

      1,989        11,611  
  

 

 

     

 

 

  

Total deferred tax assets

      22,408        34,127  

Deferred tax asset valuation allowance

      (1,708 )       (3,112 ) 
  

 

 

     

 

 

  

Net deferred tax assets

      20,700        31,015  
  

 

 

     

 

 

  

Deferred tax liabilities:

      

Depreciation

      (1,314 )       (3,247 ) 

Goodwill amortization

      (1,542 )       (2,838 ) 

Intangible assets not deductible

      (19,814 )       (241,517 ) 

Other

      (59 )       (4,290 ) 
  

 

 

     

 

 

  

Total deferred tax liabilities

      (22,729 )       (251,892 ) 
  

 

 

     

 

 

  

Total

    $ (2,029 )     $ (220,877 ) 
  

 

 

     

 

 

  

As a result of the U.S. Tax Act, the U.S. statutory tax rate was lowered from 35% to 21%, effective January 1, 2018. The Company is required to remeasure its U.S. deferred tax assets and liabilities to the new tax rate. The Company recorded $105.1 million of income tax benefit for the remeasurement of the U.S. net deferred tax liabilities primarily associated with indefinite-lived intangible assets that will reverse at the new 21% rate.

Deferred tax assets, related valuation allowances, current tax liabilities, and deferred tax liabilities are determined separately by tax jurisdiction. In making these determinations, the Company estimates deferred tax assets, current tax liabilities, and deferred tax liabilities, and the Company assesses temporary differences resulting from differing treatment of items for tax and accounting purposes. As of December 31, 2017, the Company maintained a full valuation allowance against the deferred tax assets of its Hungarian subsidiary. This entity has historical tax losses and the Company concluded it was not more likely than not that these deferred tax assets are realizable. During the years ended December 31, 2015 and 2016, the valuation allowance decreased by $0.4 million and $0.2 million, respectively, as a result of a tax return provision adjustment, which decreased the Hungarian subsidiary’s net operating loss carryforwards. During 2017, as a result of the Merger, the valuation allowance increased by $1.4 million primarily due to the recording of a valuation allowance for California and Massachusetts state net operating losses.

For U.S. tax return purposes, net operating losses and tax credits are normally available to be carried forward to future years, subject to limitations as discussed below. As of December 31, 2017, the Company had federal and state net operating loss carryforwards of $5.7 million and $20.0 million, respectively, which expire on various dates from 2033 through 2036.

The Company has performed an analysis of its ownership changes as defined by Section 382 of the Internal Revenue Code and has determined that the net operating loss carryforwards acquired from its 2014 and 2015 acquisitions are subject to limitation. The Company also analyzed the historical LogMeIn net operating loss carryforwards due to the Merger. As of December 31, 2017, all net operating loss carryforwards (except for Massachusetts and California) generated by the Company, including those subject to limitation, are available for utilization. Subsequent ownership changes as defined by Section 382 could potentially limit the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income.

As of December 31, 2017, the Company had foreign net operating loss carryforwards of $35.9 million, of which $18.7 million is related to the Company’s Hungarian subsidiary, which are not subject to expiration, and the Company has recognized a full valuation allowance against these carryforwards. The remaining $17.2 million of foreign net operating loss carryforwards are related to the Company’s Israel subsidiary. The Company expects to fully realize these net operating loss carryforwards prior to expiration.

As of December 31, 2017, it is management’s assertion that the earnings and profits of foreign entities may not be reinvested in the overseas businesses indefinitely however, the outside basis differences in the international subsidiaries will be permanently reinvested. As a result of the U.S. Tax Act, the Company recognized a one-time mandatory transition tax of $14.8 million on cumulative foreign subsidiary earnings of $56.6 million.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company and its subsidiaries are examined by various tax authorities, including the Internal Revenue Service in the United States. As of December 31, 2017, the Company remained subject to examination in the following major tax jurisdictions for the years indicated:

 

Major Tax Jurisdictions

    Open Tax Years  

United States (Federal)

      2014-2017  

United States (State)

      2013-2017  

Hungary

      2011-2017  

Ireland

      2012-2017  

The Company incurred expenses related to stock-based compensation for the years ended December 31, 2015, 2016 and 2017 of $26.5 million, $38.4 million and $67.3 million, respectively. Accounting for the tax effects of stock-based awards requires the recording of a deferred tax asset as the compensation is recognized for financial reporting prior to recognizing the tax deductions. Upon the settlement of the stock-based awards (i.e., exercise, vesting, forfeiture or cancellation), the actual tax deduction is compared with the cumulative financial reporting compensation cost, and any excess tax deduction is considered an excess tax benefit. In 2015 and 2016, the excess tax benefit was tracked in a “windfall tax benefit pool” to offset any future tax deduction shortfalls and were recorded as increases to additional paid-in capital in the period when the tax deduction reduced income taxes payable. Historically, the Company has followed the with-and-without approach for the direct effects or excess tax deductions to determine the timing of the recognition of benefits for excess tax deductions. In 2015 and 2016, the Company recorded excess tax benefits to additional paid-in capital of $6.9 million and $2.3 million, respectively.

On January 1, 2017, the Company adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) and recorded, using the modified retrospective approach, a cumulative-effect adjustment to accumulated deficit of a credit of $4.9 million to record $6.8 million of previously unrecognized windfall tax benefits, partially offset by $1.9 million for the accounting policy election to account for forfeitures in compensation cost when they occurred. The Company recorded $2.7 million to additional paid-in capital for the differential between the amount of compensation cost previously recorded and the amount that would have been recorded without assuming forfeitures, partially offset by its tax effect of $0.8 million recorded to deferred tax assets. Upon the adoption of ASU 2016-09, the Company, on a prospective basis, records the recognition of excess tax benefits and deficits in its provision from income taxes in the consolidated income statement and treats those amounts as discrete items in the period in which they occur. For the year ended December 31, 2017, the Company recorded a net tax benefit of $16.0 million related to excess tax benefits.

 

The Company has provided liabilities for uncertain tax positions in other long-term liabilities on the consolidated balance sheets as follows (in thousands):

 

     Years Ended December 31,  
     2015      2016      2017  

Balance beginning of period

    $ 652      $ 884      $ 1,480  

Tax positions related to prior periods:

         

Increases

      2        34        68  

Decreases

      (3 )       —        (42 ) 

Tax positions related to current period:

         

Increases

      428        588        3,661  

Settlements

      (195 )       (26 )       (78 ) 

Statute expiration

      —        —        (30 ) 
  

 

 

     

 

 

     

 

 

  

Balance end of period

    $ 884      $ 1,480      $ 5,059  
  

 

 

     

 

 

     

 

 

  

These uncertain tax positions would impact the Company’s effective tax rate if recognized. The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes or unrecognized tax benefits as a component of its income tax provision. The Company recognized $3,000, $42,000 and $50,000 of interest expense during the years ended December 31, 2015, 2016 and 2017, respectively.