Note 10 — Income Taxes
On December 22, 2017, the U.S. government enacted “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”, which is commonly referred to as “The Tax Cuts and Jobs Act” (the “Tax Act”). The Tax Act provides for comprehensive tax legislation that reduces the U.S. federal statutory corporate tax rate from 35.0% to 21.0% effective January 1, 2018, broadens the U.S. federal income tax base, requires companies to pay a one-time repatriation tax on earnings of certain foreign subsidiaries that were previously tax deferred (“transition tax”), and creates new taxes on certain foreign sourced earnings.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), expressing its views regarding the FASB’s Accounting Standards Codification 740, Income Taxes, in the reporting period that includes the enactment date of the Tax Act. SAB 118 recognizes that a registrant’s review of certain income tax effects of the Tax Act may be incomplete at the time financial statements are issued for the reporting period that includes the enactment date, including interim periods therein. Specifically, SAB 118 allows a company to report provisional estimates in the reporting period that includes the enactment date if the company does not have the necessary information available, prepared, or fully analyzed for certain income tax effects of the Tax Act. The provisional estimates would be adjusted during a measurement period not to exceed 12 months from the enactment date of the Tax Act, at which time the accounting for the income tax effects of the Tax Act is required to be completed.
The Company has not completed its accounting for the income tax effects of the enactment of the Tax Act; however, the Company has made a reasonable estimate of the effect on its existing deferred tax assets and corresponding valuation allowance. The table below in this footnote reflects the new income tax rate.
The transition tax is based on total post-1986 earnings and profits which were previously deferred from U.S. income taxes. At December 31, 2017, the Company did not have any undistributed earnings of our foreign subsidiaries. As a result, no additional income or withholding taxes have been provided for, for the undistributed earnings or any additional outside basis differences inherent in the foreign entities. The Company continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT). The Company has not recorded any impact associated with either GILTI or BEAT.
The Company anticipates that its assumptions and estimates may change as a result of future guidance and interpretation from the Internal Revenue Service, the SEC, the FASB, and various other taxing jurisdictions. In particular, the Company anticipates that the U.S. state jurisdictions will continue to determine and announce their conformity with or decoupling from the Tax Act, either in its entirety or with respect to specific provisions. Legislative and interpretive actions could result in adjustments to the Company’s provisional estimates when the accounting for the income tax effects of the Tax Act is completed. The Company will continue to evaluate the impact of the Tax Act on its financial statements, and will record the effect of any reasonable changes in its estimates and adjustments.
The components of income (loss) before income taxes are as follows:
| Year ended December 31, | ||||||||||||
| (in thousands) | 2017 | 2016 | 2015 | |||||||||
| Domestic | $ | 7,122 | $ | 18,629 | $ | 1,517 | ||||||
| Foreign | (14,044 | ) | (48,603 | ) | (9,628 | ) | ||||||
| LOSS BEFORE INCOME TAXES | $ | (6,922 | ) | $ | (29,974 | ) | $ | (8,111 | ) | |||
Significant components of the Company’s deferred income tax assets consist of the following:
| December 31 (in thousands) | 2017 | 2016 | ||||||
| Deferred income tax assets: | ||||||||
| Bad debt reserve | $ | 302 | $ | 70 | ||||
| Accrued expenses | 4,425 | 3,821 | ||||||
| State taxes | 117 | 221 | ||||||
| Charitable contributions | 265 | 470 | ||||||
| Net operating loss | 37,435 | 37,568 | ||||||
| Stock options and restricted stock | 908 | 1,456 | ||||||
| Depreciation | 7,026 | 11,153 | ||||||
| Total deferred income tax assets | 50,478 | 54,759 | ||||||
| Valuation allowance | (48,337 | ) | (52,978 | ) | ||||
| DEFERRED INCOME TAX ASSETS, NET | $ | 2,141 | $ | 1,781 | ||||
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The (provision for) benefit from income taxes consists of the following:
| Year ended December 31, | ||||||||||||
| (in thousands) | 2017 | 2016 | 2015 | |||||||||
| Current: | ||||||||||||
| Federal | $ | — | $ | — | $ | — | ||||||
| State and local | (1,366 | ) | (2,349 | ) | (704 | ) | ||||||
| Foreign | — | (8 | ) | — | ||||||||
| (1,366 | ) | (2,357 | ) | (704 | ) | |||||||
| Deferred: | ||||||||||||
| Federal | — | (6 | ) | (19 | ) | |||||||
| State and local | (360 | ) | 145 | 198 | ||||||||
| Foreign | — | — | — | |||||||||
| (360 | ) | 139 | 179 | |||||||||
| PROVISION FOR INCOME TAXES | $ | (1,726 | ) | $ | (2,218 | ) | $ | (525 | ) | |||
The differences between income taxes expected at the U.S. federal statutory income tax rate and income taxes provided are as follows:
| Year ended December 31, | ||||||||||||
| (in thousands) | 2017 | 2016 | 2015 | |||||||||
| U.S. federal income tax benefit at statutory rate | $ | 2,423 | $ | 10,491 | $ | 2,840 | ||||||
| Valuation allowance | 11,694 | (21,209 | ) | (10,687 | ) | |||||||
| Foreign tax rate differential | (2,610 | ) | 9,901 | 7,674 | ||||||||
| Tax law change | (11,070 | ) | — | — | ||||||||
| Deferred income tax adjustment | (1,250 | ) | — | — | ||||||||
| Other | 66 | 95 | (20 | ) | ||||||||
| State and local income tax, net of federal benefit | (979 | ) | (1,496 | ) | (332 | ) | ||||||
| PROVISION FOR INCOME TAXES | $ | (1,726 | ) | $ | (2,218 | ) | $ | (525 | ) | |||
At December 31, 2017, the Company had U.S. federal and state net operating loss carry-forwards of approximately $30.5 million and $113.4 million, respectively. These carry-forward losses are available to offset future U.S. federal and state taxable income. The federal net operating loss carry-forwards will start to expire in 2033, with the year ended December 31, 2017’s loss expiring in 2037. The state net operating loss carry-forwards will start to expire in 2029, with the year ended December 31, 2017’s loss expiring in 2038.
At December 31, 2017, the Company had foreign net operating loss carry-forwards of approximately $98.4 million, of which $89.8 million will not expire.
The Company includes certain entities that are not included in the Company’s consolidated tax return. The entities have separate U.S. federal and state net operating loss carry-forwards of $1.0 million that begin to expire in 2036.
The change in the valuation allowance for deferred income taxes was as follows:
| (in thousands) | Balance at beginning of period | Additions charged to costs and expenses | Deductions | Balance at end of period | ||||||||||||
| Year ended December 31, 2017 | ||||||||||||||||
| Reserves for valuation allowances deducted from deferred income taxes, net | $ | 52,978 | $ | 7,053 | $ | (11,694 | ) | $ | 48,337 | |||||||
| Year ended December 31, 2016 | ||||||||||||||||
| Reserves for valuation allowances deducted from deferred income taxes, net | $ | 31,769 | $ | 21,209 | $ | — | $ | 52,978 | ||||||||
| Year ended December 31, 2015 | ||||||||||||||||
| Reserves for valuation allowances deducted from deferred income taxes, net | $ | 21,082 | $ | 10,687 | $ | — | $ | 31,769 | ||||||||
The table below summarizes the change in the balance of unrecognized income tax benefits:
| Year ended December 31, | ||||||||||||
| (in thousands) | 2017 | 2016 | 2015 | |||||||||
| Balance at beginning of period | $ | 632 | $ | 636 | $ | 543 | ||||||
| Additions based on tax positions related to the current period | 100 | 81 | 97 | |||||||||
| Additions for tax positions of prior periods | 1 | 4 | 10 | |||||||||
| Lapses of statutes of limitations | (175 | ) | (89 | ) | (14 | ) | ||||||
| Balance at end of period | $ | 558 | $ | 632 | $ | 636 | ||||||
All of the unrecognized income tax benefits at December 31, 2017 and 2016 would have affected the Company’s effective income tax rate if recognized. The Company does not expect the total amount of unrecognized income tax benefits to significantly increase or decrease within the next twelve months.
In the years ended December 31, 2017, 2016 and 2015, the Company recorded interest on income taxes of $1,000, $4,000 and $4,000, respectively. At December 31, 2017 and 2016, there was accrued interest of $35,000 and $34,000 included in current income taxes payable.
The Company currently remains subject to examinations of its tax returns as follows: U.S. federal tax returns for 2014 to 2017, state and local tax returns generally for 2013 to 2017 and foreign tax returns generally for 2013 to 2017.