16. Income Taxes
The components of income (loss) before provision for (benefit of) income taxes were as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Domestic |
$ | 24,460 | $ | (24,741 | ) | $ | (21,605 | ) | ||||
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Foreign |
(42,864 | ) | 691 | 333 | ||||||||
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Total |
$ | (18,404 | ) | $ | (24,050 | ) | $ | (21,272 | ) | |||
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The components of the provision for (benefit of) income taxes were as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Current: |
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Federal |
$ | 38 | $ | — | $ | — | ||||||
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State |
70 | 6 | 1 | |||||||||
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Foreign |
297 | 229 | 189 | |||||||||
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Total current income tax expense |
405 | 235 | 190 | |||||||||
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Deferred: |
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Federal |
$ | (1,564 | ) | $ | — | $ | — | |||||
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State |
— | — | — | |||||||||
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Foreign |
254 | (27 | ) | (12 | ) | |||||||
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Total deferred income tax benefit |
(1,310 | ) | (27 | ) | (12 | ) | ||||||
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Total |
$ | (905 | ) | $ | 208 | $ | 178 | |||||
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For purposes of reconciling our provision for (benefit of) income taxes at the statutory rate and our provision for (benefit of) income taxes at the effective tax rate, a notional 34% tax rate was applied as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Income tax at federal statutory rate |
$ | (6,257 | ) | $ | (8,177 | ) | $ | (7,225 | ) | |||
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Increase/(decrease) in tax resulting from: |
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State income tax expense, net of federal |
1,428 | (716 | ) | (589 | ) | |||||||
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Foreign rate differential |
15,375 | (88 | ) | (46 | ) | |||||||
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Stock-based compensation |
(1,086 | ) | 602 | 346 | ||||||||
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Change in valuation allowance |
(20,500 | ) | 8,449 | 7,549 | ||||||||
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Tax impact due to tax law change |
2,627 | — | — | |||||||||
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Change in uncertain tax position reserves |
7,854 | — | — | |||||||||
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Current year research credits |
(965 | ) | — | — | ||||||||
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Prior years research credits |
(1,284 | ) | — | — | ||||||||
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Other |
1,903 | 138 | 143 | |||||||||
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Total |
$ | (905 | ) | $ | 208 | $ | 178 | |||||
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Significant components of deferred income tax assets (liabilities) were as follows (in thousands):
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
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Deferred revenue |
$ | 764 | $ | 812 | ||||
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Net operating losses |
5,655 | 28,736 | ||||||
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Accruals and reserves |
1,022 | 75 | ||||||
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State taxes |
(212 | ) | (1,131 | ) | ||||
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Deferred commissions |
(2,467 | ) | (1,837 | ) | ||||
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Stock-based compensation |
1,572 | 690 | ||||||
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Fixed assets & intangibles |
(1,327 | ) | — | |||||
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Research & other credits |
2,407 | — | ||||||
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Other |
289 | 499 | ||||||
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Valuation allowance |
(7,304 | ) | (27,804 | ) | ||||
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Net non-current deferred tax assets |
$ | 399 | $ | 40 | ||||
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We have evaluated the available positive and negative evidence supporting the realization of our gross deferred tax assets, including our cumulative losses, and the amount and timing of future taxable income. Accordingly, we recorded a valuation allowance against our U.S. federal and state deferred tax assets to the extent that they are not expected to be recoverable as of December 31, 2017 and 2016.
The changes in the valuation allowance were as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Beginning balance |
$ | 27,804 | $ | 19,355 | $ | 11,806 | ||||||
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Decrease in valuation allowance due to Yhat acquisition |
(998 | ) | — | — | ||||||||
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Increase (decrease) in valuation allowance |
(19,502 | ) | 8,449 | 7,549 | ||||||||
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Ending balance |
$ | 7,304 | $ | 27,804 | $ | 19,355 | ||||||
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As of December 31, 2017, we had U.S. federal and state income tax net operating loss carryforwards of approximately $55.4 million and $20.3 million, respectively. The U.S. federal and state net operating losses will begin to expire in 2034 and 2025, respectively, unless previously utilized.
As of December 31, 2017 and 2016, our pre-tax unrecognized excess tax benefits of $13.6 million and $11.0 million, respectively, relating to stock-based compensation expense, were not included in the deferred tax assets, and will create a benefit to additional paid-in capital when recognized. This amount will be included in the overall adoption of ASU 2016-09, as described in Note 2.
Under Sections 382 and 383 of the Internal Revenue Code, annual use of our net operating loss carryforwards and tax credits may be limited if a cumulative change in ownership of more than 50% occurs within a three-year period. We determined that such an ownership change occurred in 2015. This ownership change resulted in limitations of the annual utilization of our net operating loss carryforwards, but did not result in permanent disallowance of any of our net operating loss carryforwards.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017, or the Tax Act became law. The legislation adopts significant changes to the Internal Revenue Code that include, among other things, reduction of the corporate income tax rate from 35% to 21%, effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and imposition of a one-time transition tax on cumulative foreign earnings at December 31, 2017. Based on our review of the Tax Act, and the applicable guidance available as of the date of this filing, we have estimated that the Tax Act will have minimal, if any, impact on our income tax provision and income tax accruals as of and for the year ended, December 31, 2017. The Tax Act requires us to measure our U.S. deferred tax assets and liabilities that will reverse after December 31, 2017 at the reduced US corporate income tax rate. As a result, we reduced our net US deferred tax asset and our valuation allowance by $2.6 million, which resulted in no net income tax expense for the year ended December 31, 2017. We have no cumulative foreign earnings at November 2, or December 31, 2017, and as a result, are not impacted by the one-time transition tax included in the Tax Act.
We have not accrued U.S. income taxes or foreign withholding taxes on the earnings of our foreign subsidiaries, as these amounts are intended to be indefinitely reinvested in operations outside the United States. As of December 31, 2017, there are no cumulative amounts of undistributed earnings at our foreign subsidiaries.
We are subject to taxation in the United States and various states and international jurisdictions. Our U.S. federal tax returns are open for examination for tax years 2014 and forward, and our state tax returns are open for examination for tax years 2013 and forward. Our tax returns for international jurisdictions are open for examination for tax years 2013 and forward. However, net operating loss and other tax attribute carryforwards utilized in subsequent years continue to be subject to examination by the tax authorities until the year to which the net operating loss and/or other tax attributes are carried forward is no longer subject to examination. Neither we nor any of our subsidiaries are currently under examination from tax authorities in the jurisdictions in which we do business.
For the year ended December 31, 2017 we recorded unrecognized tax benefits of approximately $5.8 million pertaining to transfer pricing. If fully recognized, the unrecognized tax benefits would not have an impact on our effective tax rate. We recorded no unrecognized tax benefits for each of the years ended December 31, 2016 and 2015. We had no accrual for interest or penalties related to uncertain tax positions in our consolidated balance sheets as of December 31, 2017 and 2016, and have not recognized interest or penalties in our consolidated statement of operations and comprehensive loss for the years ended December 31, 2017, 2016, and 2015.
A rollforward of the activity in the gross unrecognized tax benefits is as follows:
| Year Ended December 31, 2017 |
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Balance at beginning of year |
$ | — | ||
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Additions based on tax positions related to the current year |
5,624 | |||
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Additions for tax positions of prior years |
170 | |||
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Balance at end of year |
$ | 5,794 | ||
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