| 6. | Income Taxes |
The components of income tax expense are as follows:
| For the Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Current Federal alternative minimum tax (“AMT”) expense |
$ | 20,000 | $ | 147,000 | $ | 303,000 | ||||||
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Current state and local tax expense |
225,000 | 40,000 | 662,000 | |||||||||
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Deferred Federal tax expense (A) |
5,736,000 | 1,704,000 | 4,962,000 | |||||||||
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Deferred state and local tax (benefit) expense |
(390,000) | 62,000 | (513,000) | |||||||||
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Consolidated income tax expense, including taxes attributable to discontinued operations (B) |
5,591,000 | 1,953,000 | 5,414,000 | |||||||||
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Less income tax expense attributable to discontinued operations |
— | — | 1,409,000 | |||||||||
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Income tax expense (C) |
$ | 5,591,000 | $ | 1,953,000 | $ | 4,005,000 | ||||||
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(A) Includes an AMT (benefit) of $(20,000), $(147,000) and $(303,000) in 2017, 2016 and 2015, respectively. (B) Includes income tax expense attributable to income from discontinued operations. (C) Reflects the tax expense from continuing operations as reported on the consolidated statements of operations for the periods presented. |
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The reconciliation of income tax computed at the U.S. Federal statutory rate to income tax expense on continuing operations is as follows:
| For the Years Ended December 31, | ||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
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Tax expense at U.S. statutory rate |
$ | 851,000 | 35.00% | $ | 1,657,000 | 35.00% | $ | 4,227,000 | 35.00% | |||||||||||||||
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State and local tax expense, net of Federal impact |
119,000 | 4.89% | 142,000 | 3.00% | 494,000 | 4.09% | ||||||||||||||||||
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Impact of state and local tax rate change, net of Federal impact |
10,000 | 0.41% | 7,000 | 0.15% | (714,000) | (5.90%) | ||||||||||||||||||
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Impact of Federal rate change |
5,142,000 | 211.38% | — | — | — | — | ||||||||||||||||||
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Non-deductible items |
53,000 | 2.16% | 147,000 | 3.10% | (2,000) | (0.02%) | ||||||||||||||||||
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Windfall tax benefit |
(584,000) | (24.01)% | — | — | — | — | ||||||||||||||||||
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Income tax expense |
$ | 5,591,000 | 229.83% | $ | 1,953,000 | 41.25% | $ | 4,005,000 | 33.17% | |||||||||||||||
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Due to the amount of its NOL and credit carryforwards, the Company does not anticipate paying Federal income taxes for a number of years. The Company expects, in the future, that it will be subject to cash payments for income, state and local taxes where the Company has established nexus and there are no available NOLs, and for a portion of its state and local income taxes for New York State and New York City due to laws enacted in March 2014 and April 2015, respectively, which limit the amount of existing NOLs which could be used each year.
The changes in New York City law were reflected in the second quarter of 2015 income tax expense. Given the change in the New York City law, there was a variation between the effective tax rate and the statutory tax rate for the year ended December 31, 2015.
On December 22, 2017, the Federal government of the United States enacted the U.S. Tax Cuts and Jobs Act (“the Tax Act”), which significantly changed existing U.S. tax laws, including a reduction in the Federal corporate income tax rate from 35% to 21%, repeal of corporate Federal “AMT” and a refund of certain existing AMT credits over several years, introduction of a capital investment deduction, limitation of the interest deduction, limitation of the use of net operating losses incurred on or after January 1, 2018 to offset future taxable income, limitation of the deduction for compensation paid to certain executive officers and extensive changes to the U.S. international tax system, as well as other changes. These changes generally took effect on January 1, 2018. The U.S. Treasury department is expected to release regulations implementing the Tax Act and the U.S. tax laws may be further amended in the future. The Company’s federal net operating losses that have been incurred prior to December 31, 2017 will continue to have a 20-year carryforward limitation applied and will need to be evaluated for recoverability in the future as such. Net operating losses incurred after December 31, 2017 will have an indefinite life, but usage will be limited to 80% of taxable income in any given year. On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to finalize the accounting. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply its current tax accounting on the basis of the provision of the tax laws that were in effect immediately before the enactment of the Tax Act. As a result, the consolidated statements of operations reflect a net expense of $5,142,000 for the year ended December 31, 2017 from the re-measurement of our net Federal deferred tax assets to the lower corporate tax rate, which we are reporting provisionally. While the Company was able to make reasonable estimates of the impact of the reduction in the Federal corporate rate, the final impact of the Tax Act may differ from these estimates, including, but not limited to, changes in our interpretations and assumptions, additional guidance that may be issued by the Internal Revenue Service (“IRS”) return to provision differences and state rate adjustments. The Company is continuing to gather additional information to determine the final impact.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The net deferred tax asset was approximately $12,072,000 and $16,815,000 at December 31, 2017 and 2016, respectively, all of which was classified as non-current. The significant portion of the deferred tax items relates to deferred tax assets including NOL carryforwards, Federal AMT credit carryforwards and stock based compensation, with the remainder of the deferred tax items relating to liabilities resulting from the
intangible assets recorded at the time of the Merger. The significant component of the decrease in the deferred tax asset balance in 2017 is due to the re-measurement as described above.
Significant components of the Company’s deferred tax assets and liabilities are as follows:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
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Deferred Tax Assets |
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Net operating loss carryforwards |
$ | 9,952,569 | $ | 14,561,655 | ||||
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Liability reserves |
652,000 | 792,075 | ||||||
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Stock compensation plans |
979,947 | 1,828,185 | ||||||
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AMT credit carryforwards |
1,736,984 | 1,717,792 | ||||||
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Other |
253,538 | 57,153 | ||||||
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| 13,575,038 | 18,956,860 | |||||||
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Valuation allowance |
— | — | ||||||
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Total deferred tax assets |
13,575,038 | 18,956,860 | ||||||
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Deferred Tax Liabilities |
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Acquired asset differences — book value greater than tax |
(1,025,930) | (1,842,450) | ||||||
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Asset basis differences — carrying amount value greater than tax |
(476,990) | (299,673) | ||||||
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Total deferred tax liabilities |
(1,502,920) | (2,142,123) | ||||||
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Net deferred tax asset |
$ | 12,072,118 | $ | 16,814,737 | ||||
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The Company had Federal NOL carryforwards aggregating approximately $37,859,000 at December 31, 2017, as well as significant state and local NOL carryforwards. These NOLs included amounts generated subsequent to the Merger (including a substantial NOL realized during the year ended December 31, 2012 as a result of a litigation settlement, discussed in Note 3), losses from the Reis Services business prior to the Merger and the Company’s operating losses prior to the Merger. Approximately $5,140,000 of these Federal NOLs are subject to an annual Internal Revenue Code Section 382 limitation of $2,779,000, whereas the remaining balance of approximately $32,719,000 is not subject to the limitation. The enactment of the 2014 New York State law and the 2015 New York City law discussed above limit the amount of existing NOLs which could be used each year in those jurisdictions; however, all such NOLs are expected to be fully utilized in the future.
The next NOL expiration for the Company is in 2024 for approximately $2,513,000 of Federal NOLs. Included in the Federal NOLs at December 31, 2017 is approximately $1,723,000 attributable to excess tax deductions on equity award activity in prior years. Prior to January 1, 2017, the tax benefits attributable to those NOLs were credited directly to additional paid in capital when utilized to offset taxes payable. In 2017, these NOLs were recorded on the Company’s consolidated balance sheet upon adoption of ASU 2016-09, as described in Note 2.
The Company and its subsidiaries have been audited by the IRS for the 2012 tax year, which audit was completed in February 2015 with the IRS issuing a no change letter. The 2014, 2015 and 2016 Federal tax returns are open for examination. All prior Federal periods are closed, except to the extent that an NOL was generated in a given year and such NOL was utilized during an open tax year or will be utilized in the future.
During the third quarter of 2015, audits of the Company and its consolidated subsidiaries for tax years 2004 through 2006 were completed by New York State resulting in net payments aggregating approximately $16,000 in the period to New York State and New York City. Such amounts had been accrued in prior periods. With few exceptions, the state and local income tax returns are open to examination for the years 2014 through 2016.
The Company’s reserve for unrecognized tax benefits, including estimated interest, was $31,000 and $154,000 at December 31, 2017 and 2016, respectively. The unrecognized tax benefits as well as related interest was included in general and administrative expenses. The Company recorded additional expense, including interest, of $3,000 in 2017, a reduction in expense of $(4,000) in 2016 and additional expense, including interest, of $70,000 in 2015.
A reconciliation of the unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 follows:
| For the Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Balance at beginning of period |
$ | 154,000 | $ | 159,000 | $ | 105,000 | ||||||
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Additional provision (reduction) and interest related to prior years, net |
3,000 | (4,000) | 70,000 | |||||||||
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Resolution of matters during the period |
(126,000) | (1,000) | (16,000) | |||||||||
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Balance at end of period |
$ | 31,000 | $ | 154,000 | $ | 159,000 | ||||||
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The Company expects that a substantial portion of the 2017 balance could be resolved in 2018.