Income Taxes
The components of income from continuing operations before income tax expense are as follows:
|
| | | | | | | | | | | |
| For the years ended December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | 39,370 |
| | $ | 31,076 |
| | $ | 38,115 |
|
Foreign | 6,423 |
| | (231 | ) | | 5,338 |
|
| $ | 45,793 |
| | $ | 30,845 |
| | $ | 43,453 |
|
The income tax provision from continuing operations consisted of the following amounts:
|
| | | | | | | | | | | |
| For the years ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | (1,101 | ) | | $ | (621 | ) | | $ | (1,846 | ) |
Foreign | (1,731 | ) | | (1,064 | ) | | (1,667 | ) |
State and local taxes | (2,317 | ) | | (3,951 | ) | | (956 | ) |
| $ | (5,149 | ) | | $ | (5,636 | ) | | $ | (4,469 | ) |
Deferred: | | | | | |
Federal | $ | (75,928 | ) | | $ | (12,550 | ) | | $ | (11,289 | ) |
Foreign | 1,631 |
| | 2 |
| | (1,088 | ) |
State and local taxes | (280 | ) | | 490 |
| | (1,572 | ) |
| (74,577 | ) | | (12,058 | ) | | (13,949 | ) |
| $ | (79,726 | ) | | $ | (17,694 | ) | | $ | (18,418 | ) |
The reconciliation between the United States federal statutory rate of 35% to the Company's effective rate is as follows:
|
| | | | | | | | |
| For the years ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. Federal statutory tax rate | 35 | % | | 35 | % | | 35 | % |
Permanent items | 10 | % | | 10 | % | | 3 | % |
Effect of the Tax Cuts and Jobs Act | 152 | % | | — | % | | — | % |
Equity-based compensation | (24 | )% | | — | % | | — | % |
State and local taxes, net of federal benefit | 5 | % | | 7 | % | | 2 | % |
International tax (reflects effect of losses for which tax benefit not realized) | (4 | )% | | — | % | | 1 | % |
Valuation reserve for income taxes and other | — | % | | 5 | % | | 2 | % |
Effective tax rate | 174 | % | | 57 | % | | 43 | % |
For the year ended December 31, 2017, the Company's overall effective tax rate was different from the statutory rate of 35% primarily due to the impact of tax reform enacted in the United States on December 22, 2017 reducing the corporate tax rate from 35% to 21% beginning January 1, 2018. This resulted in an expense of $69,378 attributable to the re-measurement of the Company's deferred tax assets as of December 31, 2017. The Company does not currently estimate a material impact associated with the repatriation tax or other facets of the TCJA. Due to the timing of the enactment and the complexity involved in applying the provisions of the TCJA, the Company has made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. As we collect further information and interpret the TCJA and any additional guidance issued by the U.S. Treasury Department, the IRS and other regulatory bodies, we may make adjustments to the provisional amounts. The Company will continue to analyze the effects of the TCJA on the Company’s operations and will record any adjustments associated with the enactment of the legislature during the measurement period as provided by SAB 118.
On January 1, 2017, the Company adopted ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting". Previously, excess tax benefits were recognized in additional paid-in capital on the consolidated balance sheet to the extent they reduced income taxes payable. Beginning in 2017, any excess tax benefits or shortfalls were recorded in the income tax provision upon vest or exercise. During 2017, the Company recorded a net benefit of $11 million related to excess tax benefits.
For the year ended December 31, 2016, the Company's overall effective tax rate was different than the statutory rate of 35% primarily due to the permanent adjustment for the contingent consideration relating to the acquisition of Nexmo.
For the year ended December 31, 2015, the Company's overall effective tax rate was different than the statutory rate of 35% primarily due to the limitation of the deductibility of compensation expense to certain executives as well as costs related to the acquisitions which occurred during the year.
The temporary differences which gave rise to the Company's deferred tax assets consisted of the following:
|
| | | | | | | |
| December 31, 2017 | | December 31, 2016 |
Assets and liabilities: | | | |
Accounts receivable and inventory allowances | $ | 553 |
| | $ | 816 |
|
Deferred rent | 862 |
| | 630 |
|
Contingent consideration | — |
| | 1,482 |
|
Acquired intangible assets and property and equipment | (39,077 | ) | | (61,486 | ) |
Accrued expenses | 5,182 |
| | 10,145 |
|
Research and development and alternative minimum tax credit | 958 |
| | 8,039 |
|
Stock option compensation | 17,734 |
| | 24,026 |
|
Capital leases | 37 |
| | (7,762 | ) |
Cumulative translation adjustments | (714 | ) | | — |
|
Deferred revenue | 6,994 |
| | 11,362 |
|
Derivatives | (319 | ) | | — |
|
Net operating loss carryforwards | 141,072 |
| | 215,504 |
|
| 133,282 |
| | 202,756 |
|
Valuation allowance | (22,390 | ) | | (18,546 | ) |
Deferred tax assets, net, non-current | $ | 110,892 |
| | $ | 184,210 |
|
Deferred tax assets and valuation allowance
Net deferred tax balance - As of December 31, 2017 and 2016, Vonage recorded a net deferred tax asset of $110,892 and $184,210, respectively. The Company believes that the net deferred tax assets related to its United Kingdom subsidiary Vonage Limited may not be realizable under a "more likely than not" measurement and as such, a valuation allowance has been established to reduce the asset accordingly.
NOL carryforwards - As of December 31, 2017, the Company has U.S. Federal and state NOL carryforwards of $556,368 and $146,254, respectively, which expire at various times through 2037. We have NOLs for United Kingdom tax purposes of $50,142 with no expiration date. Under Section 382 of the Internal Revenue Code, if we undergo an “ownership change” which is generally defined as a greater than 50% change by value in our equity ownership over a three-year period, our ability to use our pre-change of control NOLs and other pre-change tax attributes against our post-change income may be limited. The Section 382 limitation is applied annually so as to limit the use of our pre-change NOLs to an amount that generally equals the value of our stock immediately before the ownership change multiplied by a designated federal long-term tax-exempt rate. At December 31, 2017, there were no limitations on the use of our NOLs except for certain of the NOLs of Vocalocity as of the date of acquisition for which the Company has reflected in the deferred tax asset.
Valuation Allowance - As of December 31, 2017, the Company's tax effected valuation allowance was $22,390, primarily consisting of NOLs associated with Vonage Limited and state NOLs for certain legal entities.
Uncertain tax benefits
The Company had uncertain tax benefits of $1,086 and $0 as of December 31, 2017 and 2016, respectively. The Company recognizes interest and penalties related to uncertain tax benefits in income tax expense. The Company did not have any interest or penalties related to these uncertain tax benefits as of December 31, 2017 and 2016. The following table reconciles the total amounts of uncertain tax benefits:
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Balance as of January 1 | $ | — |
| | — |
|
Increase due to current year positions | 1,086 |
| | — |
|
Uncertain tax benefits as of December 31 | $ | 1,086 |
| | $ | — |
|
Tax jurisdictions
Business is conducted in various countries throughout the world and is subject to tax in numerous jurisdictions. A significant number of tax returns that are filed are subject by various Federal, state and local tax authorities. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2014. With few exceptions, state and local income tax examinations are no longer open for years before 2013.