10. INCOME TAXES
The provision (benefit) for income taxes is comprised of the following (in thousands):
| Year Ended December 31, | ||||||||||||
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2017 |
2016 |
2015 |
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Current federal |
$ | 1,679 | $ | (271) | $ | 3,608 | ||||||
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Current state |
895 | 877 | 1,098 | |||||||||
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Deferred federal |
(2,192) | 1,489 | 501 | |||||||||
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Deferred state |
147 | 298 | (109) | |||||||||
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Provision for income taxes |
$ | 529 | $ | 2,393 | $ | 5,098 | ||||||
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A reconciliation of income taxes at the statutory federal income tax rate to the provision for income taxes included in the accompanying consolidated statements of income is as follows (in thousands):
| Year Ended December 31, | ||||||||||||
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2017 |
2016 |
2015 |
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Federal tax provision at the statutory rate |
$ | 3,687 | $ | 2,152 | $ | 4,802 | ||||||
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State income tax provision, net of federal benefit |
424 | 539 | 673 | |||||||||
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Tax credits |
(583) | (560) | (425) | |||||||||
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Change in state valuation allowance |
322 | 308 | (8) | |||||||||
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Tax Act revaluation of deferred tax balances |
(2,685) | - | - | |||||||||
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Other |
(636) | (46) | 56 | |||||||||
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Provision for income taxes |
$ | 529 | $ | 2,393 | $ | 5,098 | ||||||
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Management periodically assesses the realizability of its deferred tax assets, and to the extent that a recovery is not likely, a valuation allowance is established to reduce the deferred tax asset to the amount estimated to be recoverable. At December 31, 2017, a valuation allowance of $1.1 million exists.
As of December 31, 2017, the Company had state net operating loss carryforwards of $19.5 million. These loss carryforwards will expire in years 2018 through 2027. The Company is subject to income taxation at the federal and various state levels. The Company is subject to U.S. federal tax examinations for tax years 2015 through 2017. Loss carryforwards and credit carryforwards generated or utilized in years earlier than 2015 are also subject to examination and adjustment. The Company has completed examinations with the Internal Revenue Service for tax years 2013 and 2014. The Company has research and development tax credit carryforwards of $2.3 million that expire in varying amounts through 2037. As of December 31, 2017, the Company had alternative minimum tax credit carryforwards of $837,000 that are available to offset future regular tax liabilities and do not expire.
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the “Tax Act”), reducing the U.S. corporate income tax rate to 21% effective January 1, 2018. Under ASC 740, the effects of new legislation are recognized in the period that includes the date of enactment. The estimated impact as of December 31, 2017 was to remeasure our deferred tax liability by $2.7 million, which has been reflected in our effective tax rate reconciliation. This impact is our most reasonable estimate at this time; however, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially impact future taxable income.
A reconciliation of the beginning and ending liability for gross unrecognized tax benefits at December 31, 2017 and 2016, are as follows (in thousands):
| December 31, | ||||||||
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2017 |
2016 |
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Balance at beginning of year |
$ | 397 | $ | 658 | ||||
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Additions for tax positions in the current year |
10 | 64 | ||||||
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Reductions for tax positions of prior years |
(47) | (325) | ||||||
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Balance at end of year |
$ | 360 | $ | 397 | ||||
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The Company recognized approximately $3,000 and $18,000 for interest and penalties related to unrecognized tax benefits within the provision for income taxes during the years ended December 31, 2017 and 2016, respectively. Unrecognized tax benefits included tax positions of approximately $337,000 and $350,000 at December 31, 2017 and 2016, respectively, that if recognized would impact the Company’s effective tax rate. The reduction for tax positions of prior years reflected in the table above as of December 31, 2017, relates to (a) an item considered to be effectively settled with the IRS, and (b) amended returns filed with the state of Wisconsin. The Company estimates that it is reasonably possible the liability for unrecognized tax benefits could decrease up to $23,000 within the next 12 months.
Deferred federal and state income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and deferred tax liabilities are as follows (in thousands):
| December 31, | ||||||||
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2017 |
2016 |
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Deferred tax assets: |
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Allowance for doubtful accounts |
$ | 548 | $ | 332 | ||||
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Accrued liabilities |
1,981 | 1,275 | ||||||
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Tax credits |
3,115 | 1,397 | ||||||
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Stock based compensation |
841 | 1,171 | ||||||
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Deferred revenue |
1,467 | 1,818 | ||||||
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Depreciation |
617 | 1,119 | ||||||
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Basis difference on investments |
327 | 316 | ||||||
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Net operating loss carryforwards |
1,015 | 743 | ||||||
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Total deferred tax assets |
9,911 | 8,171 | ||||||
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Less: Valuation allowance |
(1,110 | ) | (654 | ) | ||||
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Deferred tax assets, net of valuation allowance |
8,801 | 7,517 | ||||||
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Deferred tax liabilities: |
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Deductible goodwill |
2,917 | 3,267 | ||||||
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Nondeductible intangible assets |
1,330 | 2,523 | ||||||
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Prepaid assets |
1,881 | 1,894 | ||||||
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Capitalized software development |
4,599 | 5,801 | ||||||
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Total deferred tax liabilities |
10,727 | 13,485 | ||||||
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Net deferred tax liabilities |
$ | (1,926 | ) | $ | (5,968 | ) | ||
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