13. Income Taxes
Our loss before provision for income taxes for the years ended December 31, 2017, 2016 and 2015 consisted of the following:
| For the Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Domestic |
$ | (27,703 | ) | $ | (61,390 | ) | $ | (35,219 | ) | |||
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Foreign |
287 | 626 | (528 | ) | ||||||||
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Total |
$ | (27,416 | ) | $ | (60,764 | ) | $ | (35,747 | ) | |||
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The components of income tax provision (benefit) consisted of the following for the years ended December 31, 2017, 2016 and 2015:
| For the Years Ended December 31, |
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| 2017 | 2016 | 2015 | ||||||||||
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Current provision for income taxes: |
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U.S. |
$ | 13 | $ | 12 | $ | — | ||||||
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Foreign |
281 | 351 | 191 | |||||||||
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Total current provision for income taxes |
294 | 363 | 191 | |||||||||
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Deferred tax benefit - U.S. Federal |
(956 | ) | — | — | ||||||||
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Deferred tax provision (benefit) - foreign |
72 | (16 | ) | (30 | ) | |||||||
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Total deferred benefit for income taxes |
(884 | ) | (16 | ) | (30 | ) | ||||||
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Total provision (benefit) for income taxes |
$ | (590 | ) | $ | 347 | $ | 161 | |||||
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A reconciliation setting forth the differences between our effective tax rates and the U.S. federal statutory tax rate is as follows:
| For the Years Ended December 31, |
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| 2017 | 2016 | 2015 | ||||||||||
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U.S. federal tax provision at statutory rate |
34.00 | % | 34.00 | % | 34.00 | % | ||||||
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State and local tax, net of federal benefit |
4.39 | % | 4.75 | % | 5.64 | % | ||||||
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Foreign rate differences |
0.79 | % | 0.42 | % | 0.08 | % | ||||||
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Non-deductible foreign stock compensation |
(1.73 | %) | (0.63 | %) | (1.16 | %) | ||||||
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Effect of other permanent differences |
(0.66 | %) | (0.29 | %) | (0.05 | %) | ||||||
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Uncertain tax positions |
0.13 | % | (0.03 | %) | (0.53 | %) | ||||||
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Change in valuation allowance |
33.17 | % | (39.99 | %) | (37.74 | %) | ||||||
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Federal Tax Reform Rate Change |
(68.55 | %) | 0.00 | % | 0.00 | % | ||||||
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Other adjustments |
0.62 | % | 1.16 | % | (0.69 | %) | ||||||
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Effective tax rate |
2.16 | % | (0.61 | %) | (0.45 | %) | ||||||
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Deferred 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 and for tax carryforwards. Significant components of our deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows:
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
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Deferred tax assets: |
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Federal and state net operating loss carryforwards |
$ | 37,882 | $ | 44,778 | ||||
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Tax credit carryforwards |
— | 1,024 | ||||||
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Intangible and other related assets |
312 | 347 | ||||||
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Accrued expenses |
627 | 1,826 | ||||||
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Stock compensation |
1,067 | 979 | ||||||
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Other |
120 | 251 | ||||||
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Total deferred tax assets |
40,008 | 49,205 | ||||||
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Valuation allowance |
(39,984 | ) | (49,119 | ) | ||||
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Net deferred tax assets |
$ | 24 | $ | 86 | ||||
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When realization of a deferred tax asset is more likely than not to occur, the benefit related to the deductible temporary differences attributable to operations is recognized as a reduction of income tax expense. Valuation allowances are provided against deferred tax assets when, based on all available evidence, it is considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. We cannot be certain that future U.S. taxable income will be sufficient to realize our deferred tax assets. Accordingly, a full valuation allowance has been provided against our U.S. net deferred tax assets. The valuation allowance decreased by $9.1 million and increased by $24.3 million in 2017 and 2016, respectively. The decrease in 2017 is primarily related to Federal tax reform reducing the Federal tax rate to 21% which resulted in a decrease to our deferred assets and a corresponding decrease to the valuation allowance. The increase in 2016 is primarily the result of an increase in net operating loss (“NOL”) carryforwards.
In December 2017, the Tax Cuts and Jobs Act of 2017 (“tax reform” or the “tax law”) was enacted. The tax reform reduced our U.S. corporate income tax rate from 34% to 21% beginning in 2018. Deferred tax assets and liabilities are measured using the enacted rate for the period in which they are expected to reverse. Accordingly, the reduction to the U.S. Federal corporate tax rate reduced our net U.S. deferred tax asset by $18.8 million which was offset by a corresponding reduction to its valuation allowance. In addition, the tax reform includes a transition tax in which all foreign earnings are deemed to be repatriated to the U.S. We are in the process of calculating the impact of the transition tax. Pursuant to Staff Accounting Bulletin No. 118, our measurement period for the tax impact of the transition tax is still open. At this time, we do not anticipate future material adjustments to our financial statements due to the transition tax.
At December 31, 2017, we had U.S. Federal and state NOL carryforwards totaling approximately $146.4 million and $113.1 million, respectively, that expire at various dates through 2037. At December 31, 2017, we had no Israeli NOL carryforwards, and approximately $1.0 million of U.S. Federal alternative minimum tax credit carryforwards that do not expire. The tax reform also allows us to receive the U.S. Federal alternative minimum tax credit carryforward in the form of a refund from 2018 through 2021. We have a history of generating losses and are forecasting that we will not generate taxable income through 2021 which would otherwise limit our ability to realize the U.S. Federal alternative minimum tax credit. Accordingly, we have recorded a receivable of $1.0 million for the U.S. Federal alternative minimum tax credit refund in the accompanying consolidated balance sheet as of December 31, 2017.
Under Section 382 of the Internal Revenue Code of 1986, as amended, substantial changes in our ownership may limit the amount of NOL carryforwards that can be utilized annually in the future to offset our U.S. Federal taxable income. Specifically, this limitation may arise in the event of a cumulative change in our ownership of more than 50% within any three-year period. We have determined that we experienced an ownership change for purposes of Section 382 in August 2005 and May 2008. These ownership changes resulted in annual limitations to the amount of NOL carryforwards that can be utilized to offset future taxable income, if any, at the U.S. Federal level. The annual limit is approximately $0.1 million for 2008, and each year thereafter. We are currently in the process of performing a Section 382 study for our year ended December 31, 2017. At this point in time, it is uncertain if we have undergone an ownership change as defined by Section 382. If we have in fact undergone an ownership change, our NOL carryforwards may be substantially limited.
Our Israeli subsidiary has been recognized as a research and development company by the Head of the Israeli Administration of Industrial Research and Development and is entitled to tax benefits by virtue of the “beneficiary enterprise” status granted to part of its business activities under the Israeli Law for the Encouragement of Capital Investments 1959. The tax benefits include reduced tax rates on the research and development portion of its income during the first ten years of the benefit period (commenced in 2008). We benefit from a 20.6% tax rate for its income derived from research and development activities. Our tax rate on income from non-research and development activities is 24.0%. The continued application of the tax benefits is subject to certain conditions as defined by Israeli law.
As part of the transition tax provision, we have a deemed repatriation of all of our undistributed earnings as of December 31, 2017. However, our subsidiary’s earnings, if distributed, would still be subject to local withholding tax and state income taxes. The subsidiary has undistributed earnings of approximately $2.3 million as of December 31, 2017, which is considered to be permanently reinvested in the operations of the subsidiary. If the earnings were to be distributed to the U.S. parent, they would be subject to Israeli withholding and state income tax liabilities. The unrecognized deferred tax liability is approximately $0.3 million.
We file U.S. federal, various state and Israeli income tax returns. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate. As we are in a loss carry-forward position, we are generally subject to U.S. Federal and state examinations for all years for which the Company generated losses that are included in the available losses carried forward to the current period. As of December 31, 2017, a summary of the tax years that remain subject to examination in our taxing jurisdictions is as follows:
| United States | 2003 and forward | |||
| Israel | 2013 and forward |
We have reviewed the tax positions taken, or to be taken, in our tax returns for all tax years currently open to examination by a taxing authority. We have recorded minimal interest or penalties related to uncertain tax positions. We remain subject to examination until the statute of limitations expires for each respective tax jurisdiction. The statute of limitations will be open with respect to these tax positions until 2021. A reconciliation of the beginning and ending amount of our unrecognized tax benefits is as follows:
| For the Years Ended December 31, |
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| 2017 | 2016 | 2015 | ||||||||||
| ($ in thousands) | ||||||||||||
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Uncertain tax position at the beginning of year |
$ | 460 | $ | 429 | $ | 241 | ||||||
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Additions for uncertain tax positions of prior year |
45 | — | — | |||||||||
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Additions for uncertain tax positions of current year |
— | 40 | 188 | |||||||||
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Reductions for settlements with taxing authorities |
— | — | — | |||||||||
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Reductions for lapses of the applicable statutes of limitations |
(34 | ) | (9 | ) | — | |||||||
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Uncertain tax position at the end of the year |
$ | 471 | $ | 460 | $ | 429 | ||||||
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