8. Income Taxes
Income (loss) before income taxes is as follows:
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (in thousands) | ||||||||||||
|
United States |
$ | 17,778 | $ | 12,600 | $ | 10,469 | ||||||
|
Foreign |
3,328 | 3,642 | 955 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
$ | 21,106 | $ | 16,242 | $ | 11,424 | ||||||
|
|
|
|
|
|
|
|||||||
Certain of our foreign subsidiaries are included in the U.S. tax return as branches but are included as foreign for purposes of the table above.
The provision (benefit) for income taxes is as follows:
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (in thousands) | ||||||||||||
|
Current: |
||||||||||||
|
Federal |
$ | 2,451 | $ | 4,409 | $ | 3,218 | ||||||
|
State |
292 | 393 | 333 | |||||||||
|
Foreign |
886 | 710 | 499 | |||||||||
|
|
|
|
|
|
|
|||||||
| 3,629 | 5,512 | 4,050 | ||||||||||
|
Deferred: |
||||||||||||
|
Federal |
(268 | ) | 197 | (12 | ) | |||||||
|
State |
390 | 166 | (466 | ) | ||||||||
|
Foreign |
178 | (223 | ) | 94 | ||||||||
|
|
|
|
|
|
|
|||||||
| 300 | 140 | (384 | ) | |||||||||
|
|
|
|
|
|
|
|||||||
|
Provision for income taxes |
$ | 3,929 | $ | 5,652 | $ | 3,666 | ||||||
|
|
|
|
|
|
|
|||||||
We have reviewed the tax positions taken, or to be taken, in our tax returns for all tax years currently open to examination by a taxing authority. As of December 31, 2017, the gross amount of unrecognized tax benefits exclusive of interest and penalties was $0.5 million, which may increase within the twelve months ending December 31, 2018. We remain subject to examination until the statute of limitations expires for each respective tax jurisdiction. The statute of limitations will be open with respect to these tax positions through 2025. A reconciliation of beginning and ending amount of our unrecognized tax benefits is as follows:
| 2017 | 2016 | 2015 | ||||||||||
| (in thousands) | ||||||||||||
|
Unrecognized tax benefits at the beginning of year |
$ | 390 | $ | 82 | $ | 23 | ||||||
|
Additions for tax positions of current year |
83 | 95 | — | |||||||||
|
Additions for tax positions of prior years |
57 | 213 | 59 | |||||||||
|
Reductions for settlements with taxing authorities. |
— | — | — | |||||||||
|
Reductions for lapses of the applicable statutes of limitations |
(5 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
|
Unrecognized tax benefits at the end of the year |
$ | 525 | $ | 390 | $ | 82 | ||||||
|
|
|
|
|
|
|
|||||||
Deferred taxes are attributable to the following temporary differences:
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| (in thousands) | ||||||||
|
Deferred tax assets: |
||||||||
|
Inventory |
$ | 569 | $ | 753 | ||||
|
Net operating loss carryforwards |
1,898 | 2,272 | ||||||
|
Tax credit carryforwards |
760 | 491 | ||||||
|
Capital loss carryforwards |
1,168 | 1,077 | ||||||
|
Reserves and accruals |
629 | 655 | ||||||
|
Intangible assets |
1,138 | 1,299 | ||||||
|
Stock options |
322 | 585 | ||||||
|
Other |
65 | 35 | ||||||
|
|
|
|
|
|||||
|
Total deferred tax assets |
6,549 | 7,167 | ||||||
|
Deferred tax liabilities: |
||||||||
|
Property and equipment |
(1,203 | ) | (571 | ) | ||||
|
Goodwill |
(2,932 | ) | (3,956 | ) | ||||
|
Foreign branch deferred offset |
(1,177 | ) | (1,374 | ) | ||||
|
Other |
(44 | ) | (43 | ) | ||||
|
|
|
|
|
|||||
|
Total deferred tax liabilities |
(5,356 | ) | (5,944 | ) | ||||
|
|
|
|
|
|||||
|
Net deferred tax assets before valuation allowance |
1,193 | 1,223 | ||||||
|
Valuation allowance |
(1,991 | ) | (1,765 | ) | ||||
|
|
|
|
|
|||||
|
Net deferred tax liabiltity |
$ | (798 | ) | $ | (542 | ) | ||
|
|
|
|
|
|||||
|
Deferred tax classification |
||||||||
|
Long-term deferred tax asset |
$ | 1,378 | $ | 1,399 | ||||
|
Long-term deferred tax liability |
(2,176 | ) | (1,941 | ) | ||||
|
|
|
|
|
|||||
|
Net long-term deferred tax liability |
$ | (798 | ) | $ | (542 | ) | ||
|
|
|
|
|
|||||
We elected to early adopt ASU 2016-09 during the third quarter of 2016. Consequently, we recorded excess tax benefits related to certain stock option exercises of $0.3 million and $3.7 million in 2016 and 2017 respectively. In 2015, these excess benefits were recorded to additional paid-in capital.
In 2015, we released approximately $0.4 million of valuation allowances on certain deferred assets associated with state research and development credits. In 2016, we released approximately $0.3 million of valuation allowances on deferred assets in Spain and Switzerland. In 2015 and 2016, our assessment considered evidence such as current profitability, utilization of certain available tax assets and liabilities, and projected future earnings. Based on this evidence, we concluded that it was more likely than not that we would generate sufficient pre-tax income in future periods to utilize all of these deferred tax assets for which the valuation allowance was removed. In 2017, we increased our valuation by a net $0.2 million mainly attributable to Massachusetts credit carryforwards.
As of December 31, 2017, we have provided a valuation allowance of $2.0 million for deferred tax assets primarily related to Australian net operating loss and capital loss carry forwards and Massachusetts tax credit carry forwards that are not expected to be realized. The valuation allowance against our deferred tax assets may require adjustment in the future based on changes in the mix of temporary differences, changes in tax laws, and operating performance.
Realization of our deferred tax assets is dependent on our generating sufficient taxable income in future periods. Although we believe it is more likely than not that future taxable income will be sufficient to allow us to recover substantially all of the value of our deferred tax assets remaining after we apply the valuation allowances, realization is not assured and future events could cause us to change our judgment. In the event that actual results differ from our estimates, or we adjust these estimates in the future periods, further adjustments to our valuation allowance may be recorded, which could materially impact our financial position and net income (loss) in the period of the adjustment.
As of December 31, 2017, we have net operating loss carryforwards in Australia of $2.3 million that do not expire, in France of $2.9 million that do not expire, in Spain of $1.1 million that do not expire, in Italy of $0.3 million that do not expire, in Sweden of $0.1 million that do not expire, in Norway of $0.1 million that do not expire and in Switzerland of $11,000 that begin to expire in 2021. We have a capital loss carryforward in Australia of $3.9 million that does not expire. We also have state tax credit carryforwards of approximately $1.3 million that are available to reduce future tax liabilities, which begin to expire in 2020, or can be carried forward indefinitely.
The Tax Cuts and Jobs Act (the Tax Act) was signed into law on December 22, 2017. The Tax Act changed many aspects of U.S. corporate income taxation and included reduction of the corporate income tax rate from 35% to 21%, implementation of a territorial tax system, and imposition of a tax on deemed repatriated earnings of foreign subsidiaries (the Transition Tax). Accounting for the income tax effects of the Tax Act which impact our current year tax provision has been estimated and included in our financial statements as of December 31, 2017. As a result, we recorded $0.6 million in tax expense related to the Transition Tax and recognized $1.0 million in tax benefit related to the remeasurement of deferred taxes to the 21% tax rate. In 2018, we may identify adjustments to our estimated tax provision while preparing the 2017 U.S. tax return, finalizing foreign earnings and profits calculations, or taking into account additional guidance issued by the IRS. Any such revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.
We historically reinvested all the undistributed earnings of our international subsidiaries. With the enactment of the Tax Act, our undistributed foreign earnings were subject to the Transition Tax. As a result, we recognized a one-time tax expense in the amount of $0.6 million. As of December 31, 2017, we had cash and cash equivalents of $19.1 million, of which $8.6 million was held by our international subsidiaries. We plan to keep these amounts permanently reinvested overseas. If these funds were repatriated, we would be required to accrue and pay additional U.S. tax (if any) and applicable non-U.S. taxes. It is not practicable to estimate the amount of deferred tax liability associated with the hypothetical repatriation of undistributed earnings.
A reconciliation of the Federal statutory rate to our effective tax rate is as follows:
| 2017 | 2016 | 2015 | ||||||||||
|
Federal statutory rate |
35.0 | % | 35.0 | % | 34.0 | % | ||||||
|
State tax, net of federal benefit |
1.7 | % | 1.3 | % | (2.1 | %) | ||||||
|
Effect of foreign taxes |
(0.6 | %) | (1.9 | %) | 1.4 | % | ||||||
|
Subpart F income |
1.7 | % | 1.6 | % | 2.2 | % | ||||||
|
Valuation allowance |
0.1 | % | (2.6 | %) | 0.4 | % | ||||||
|
Foreign deferred tax liability offset |
(0.2 | %) | 1.5 | % | (0.9 | %) | ||||||
|
Manufacturing deduction |
(1.5 | %) | (2.5 | %) | (2.8 | %) | ||||||
|
Research & development tax credits |
(0.6 | %) | (0.7 | %) | (1.5 | %) | ||||||
|
Stock options exercises |
(15.8 | %) | (0.7 | %) | 0.6 | % | ||||||
|
Uncertain tax positions |
0.6 | % | 2.0 | % | 0.6 | % | ||||||
|
Other permanent differences |
1.0 | % | 1.2 | % | 1.3 | % | ||||||
|
Change in tax laws |
2.9 | % | 0.0 | % | 0.0 | % | ||||||
|
Deferred tax remeasurement |
(5.0 | %) | 0.0 | % | 0.0 | % | ||||||
|
Other |
(0.7 | %) | 0.5 | % | (1.1 | %) | ||||||
|
|
|
|
|
|
|
|||||||
|
Effective tax rate |
18.6 | % | 34.8 | % | 32.1 | % | ||||||
|
|
|
|
|
|
|
|||||||
In 2016 the Internal Revenue Service completed an audit of our 2013 and 2014 U.S. federal tax returns. As a result of the audit we paid $0.2 million in additional federal income taxes. Additionally, the adjustment settled on for this audit resulted in an additional $0.2 million increase to our uncertain tax provisions for a state carryforward. We are not currently under audit in any other tax jurisdictions.
As of December 31, 2017, a summary of the tax years that remain subject to examination in our most significant tax jurisdictions are:
|
United States |
2014 and forward | |||
|
Foreign |
2010 and forward |