The Company files income tax returns in the United States as a C-Corporation, and in several state jurisdictions and in the United Kingdom. The Company’s subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits are allocated to its members. The Company made the acquisition of Uniroyal through UEPH, a limited liability corporation, which issued preferred ownership interests to the sellers that provide for quarterly dividends. Uniroyal’s taxable income is allocated entirely to UEPH as its sole member and since it is a pass-through entity, this income less the dividends paid to the sellers of Uniroyal is reported on the Company’s tax return. The taxable income applicable to the dividends for the preferred ownership interests is reported to the sellers who report it on their respective individual tax returns.
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”), which significantly changes existing U.S. tax laws that affect the Company’s business. These changes include, but are not limited to, reducing the U.S. federal corporate tax rate, imposing a one-time transition tax on deemed repatriation of deferred foreign income and changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. The Tax Act requires the Company to incur a one-time transition tax on deferred foreign income not previously subject to U.S. income tax at a rate of 15.5% for foreign accumulated earnings held in cash, cash equivalents and certain other net current assets, and 8% on the remaining accumulated earnings. The Tax Act also reduces the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018.
Based on guidance issued by the SEC, the Company must reflect the income tax effects of those aspects of the Tax Act for which the accounting is known, record a provisional estimate for those aspects of the Tax Act for which the accounting is incomplete but a reasonable estimate is determinable or, if a reasonable estimate is not determinable, continue to apply the tax laws that were in effect immediately before the enactment of the Tax Act.
The Company has reported provisional amounts for the income tax effects of the Tax Act for which the accounting is incomplete but a reasonable estimate could be determined, including applying the lower corporate tax rate to deferred tax assets and provisioning for the one-time transition tax on deferred foreign income. Based on a continued analysis of the estimates and further guidance and interpretations on the application of the law, additional revisions may occur throughout the allowable measurement period, which is no more than one year beyond the Tax Act enactment date.
The provision (benefit) for income taxes for the years ended December 31, 2017 and January 1, 2017 were:
|
|
|
December 31,
2017
|
|
|
January 1,
2017 |
|
|
Current
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State
|
|
|
38,044
|
|
|
|
174,323
|
|
|
Foreign
|
|
|
362,866
|
|
|
|
-
|
|
|
Total current income tax provision
|
|
|
400,910
|
|
|
|
174,323
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
2,559,887
|
|
|
|
(1,925,000
|
)
|
|
State
|
|
|
(37,979
|
)
|
|
|
-
|
|
|
Foreign
|
|
|
(6,700
|
)
|
|
|
552,120
|
|
|
Total deferred income tax provision (benefit)
|
|
|
2,515,208
|
|
|
|
(1,372,880
|
)
|
|
Total income tax provision (benefit)
|
|
$
|
2,916,118
|
|
|
$
|
(1,198,557
|
)
|
The provision (benefit) for income taxes differs from the amount computed by applying the federal statutory income tax rate to income before income taxes. The Company’s effective income tax rate, computed as the total of federal, state and foreign taxes as a percentage of income before taxes, was 103.8% and a negative 19.4% for the years ended December 31, 2017 and January 1, 2017, respectively. The effective tax rate for the year ended December 31, 2017 reflects expenses related to the Tax Act, which include $1,937,070 due to write-downs of the Company’s U.S. deferred tax assets from the reduction in the marginal tax rate and $941,960 due to the one-time transition tax on deemed repatriation of deferred foreign income. The Company will use a portion of its net operating loss carryforward to offset the transition tax owed.
The following is a reconciliation of the income tax at the U.S. federal statutory tax rate with the income tax at the effective tax rate for the years ended December 31, 2017 and January 1, 2017:
|
|
|
December 31,
2017
|
|
|
January 1,
2017
|
|
|
|
|
|
|
|
|
|
|
Income tax at statutory rates
|
|
$
|
955,028
|
|
|
$
|
2,101,508
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition tax
|
|
|
941,960
|
|
|
|
-
|
|
|
Change in deferred tax valuation
|
|
|
-
|
|
|
|
(1,904,665
|
)
|
|
Foreign tax rate differential
|
|
|
(429,227
|
)
|
|
|
(587,609
|
)
|
|
UEPH preference dividend
|
|
|
(284,767
|
)
|
|
|
(646,000
|
)
|
|
Research and development credit
|
|
|
(142,832
|
)
|
|
|
(198,539
|
)
|
|
Effect of change in tax rate on deferred items
|
|
|
1,929,167
|
|
|
|
(115,420
|
)
|
|
Other
|
|
|
(53,276
|
)
|
|
|
(22,155
|
) |
|
State tax provisions
|
|
|
65
|
|
|
|
174,323
|
|
|
Income tax expense (benefit)
|
|
$
|
2,916,118
|
|
|
$
|
(1,198,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
103.8
|
%
|
|
|
(19.4
|
)%
|
The following table summarizes the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities:
|
|
|
December 31,
2017
|
|
|
January 1,
2017
|
|
| |
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
3,226,999
|
|
|
$
|
5,748,877
|
|
|
Total deferred tax assets
|
|
|
3,226,999
|
|
|
|
5,748,877
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
(324,635
|
)
|
|
|
(316,521
|
)
|
|
Deferred gain
|
|
|
(171,632
|
)
|
|
|
(205,949
|
)
|
|
Capital allowances
|
|
|
(356,785
|
)
|
|
|
(281,379
|
)
|
|
Total deferred tax liabilities
|
|
|
(853,052
|
)
|
|
|
(803,849
|
)
|
|
Net deferred tax assets
|
|
$
|
2,373,947
|
|
|
$
|
4,945,028
|
|
Deferred tax assets as of December 31, 2017 and January 1, 2017 include $3,167,092 and $5,689,000, respectively, of carryforwards related to U.S. net operating losses and $59,907 and $59,877, respectively, of carryforwards resulting from U.K. losses. As of December 31, 2017, the Company’s deferred tax assets related to U.S. net operating losses reflected a lower marginal tax rate applied to these assets than the rate applied as of January 1, 2017 due to the reduction in the marginal tax rate by the Tax Act. The $3,167,092 and $5,689,000 of deferred tax assets for U.S. losses are included in other long-term assets. The $59,907 and $59,877 of deferred tax assets for U.K. losses are netted with deferred tax liabilities, which are all related to U.K. tax. Total net deferred tax liabilities of $793,145 and $743,971 are included in other long-term liabilities, as of December 31, 2017 and January 1, 2017, respectively.
The Company has a federal net operating loss carryforward of approximately $16 million as of December 31, 2017, which expires in years beginning 2021 through 2034. As a result of these loss carryforwards, the Company has deferred tax assets in the amount of $3,167,092. Based on evidence available at December 31, 2017 and January 1, 2017, it was determined that a valuation allowance was not required since it was more likely than not that the deferred tax asset would be realized.