Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was enacted. The Tax Act, among other things, imposed a one-time tax on deemed repatriated accumulated earnings and profits of the Company’s foreign subsidiaries, moves from the current system of worldwide taxation to a territorial system and reduced the statutory corporate tax rate to 21%. As a result of these changes, in the fourth quarter of 2017, the Company recorded a transition tax attributable to the shift in tax regimes and also remeasured its deferred and other tax balances using enacted tax rates which will be in effect when such items are expected to reverse. Tax charges in connection with the enactment of the Tax Act may change due to, among other things, additional guidance that may be issued by the U.S. Department of the Treasury with respect to the Tax Act and revisions to the Company’s assumptions as further information and interpretations become available.
The provision for income taxes for the years ended December 31, 2017, 2016 and 2015 included U.S. federal, state, local and foreign taxes. The effective tax rate for the year ended December 31, 2017 was approximately 42.5%, which differed from the U.S. federal statutory rate primarily due to tax charges of approximately $8.4 million related to the transition tax on the deemed repatriation of foreign earnings and profits and approximately $4.3 million related to the remeasurement of deferred and other tax balances, partially offset by the release of certain tax reserves and other tax-related items aggregating to approximately $4.6 million. The effective tax rate for the year ended December 31, 2016 was approximately 35.3%, which differed from the U.S. federal statutory rate primarily due to the release of a valuation allowance associated with unrealized gains on the Company’s seed investments. The effective tax rate was approximately 42.9% for the year ended December 31, 2015.
The $8.4 million transition tax liability is payable over eight years starting in March 2019. The table below summarizes the Company’s future commitments:
|
| | | |
Year Ending December 31, | Transition Tax Liability |
2019 | $ | 675 |
|
2020 | 675 |
|
2021 | 675 |
|
2022 | 675 |
|
2023 | 675 |
|
2024 | 1,265 |
|
2025 | 1,686 |
|
2026 | 2,106 |
|
| $ | 8,432 |
|
The income before provision for income taxes and provision for income taxes for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income before provision for income taxes - U.S. | $ | 149,338 |
| | $ | 132,882 |
| | $ | 101,007 |
|
Income before provision for income taxes - Non-U.S. | 11,062 |
| | 10,521 |
| | 11,737 |
|
Total income before provision for income taxes | $ | 160,400 |
| | $ | 143,403 |
| | $ | 112,744 |
|
| | | | | |
Current taxes: | |
| | |
| | |
|
U.S. federal | $ | 58,082 |
| | $ | 42,056 |
| | $ | 32,065 |
|
State and local | 8,155 |
| | 7,423 |
| | 6,442 |
|
Non-U.S. | 1,991 |
| | 2,014 |
| | 2,508 |
|
| 68,228 |
| | 51,493 |
| | 41,015 |
|
Deferred taxes: | |
| | |
| | |
|
U.S. federal | (428 | ) | | (743 | ) | | 6,334 |
|
State and local | (412 | ) | | (86 | ) | | 1,273 |
|
Non-U.S. | 526 |
| | (71 | ) | | (215 | ) |
| (314 | ) | | (900 | ) | | 7,392 |
|
Provision for income taxes | $ | 67,914 |
| | $ | 50,593 |
| | $ | 48,407 |
|
Deferred income taxes, which have been remeasured to reflect the lower statutory corporate tax rate resulting from the Tax Act, represent the tax effects of the temporary differences between book and tax bases and are measured using enacted tax rates that will be in effect when such items are expected to reverse. The Company records a valuation allowance, when necessary, to reduce deferred tax assets to an amount that more likely than not will be realized.
Significant components of the Company’s net deferred income tax asset at December 31, 2017 and 2016 consist of the following (in thousands):
|
| | | | | | | |
| At December 31, |
| 2017 | | 2016 |
Deferred income tax assets (liabilities): | | | |
Stock-based compensation | $ | 5,437 |
| | $ | 7,797 |
|
Non-deductible realized losses on investments | 1,030 |
| | 2,685 |
|
Dividend equivalents on unvested restricted stock units | 1,715 |
| | 2,686 |
|
Net unrealized losses on investments | 2,359 |
| | 4,101 |
|
Deferred compensation | (1,325 | ) | | (4,528 | ) |
Deferred rent | 1,488 |
| | 2,407 |
|
Other | (996 | ) | | (2,743 | ) |
Subtotal | 9,708 |
| | 12,405 |
|
Less: valuation allowance | (3,896 | ) | | (6,786 | ) |
Deferred income tax asset—net | $ | 5,812 |
| | $ | 5,619 |
|
The Company had capital loss carryforwards of approximately $4,181,000 and $6,959,000 for the years ended December 31, 2017 and 2016 which, if unused, will expire in years 2018 to 2021. The valuation allowance on the net deferred income tax asset decreased approximately $2,890,000 during the year ended December 31, 2017.
At December 31, 2017, the Company had approximately $12,406,000 of total gross unrecognized tax benefits. Of this total, approximately $9,532,000 (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the Company’s effective tax rate in future periods. The Company believes it is reasonably possible that it will reduce its unrecognized tax benefits by $1,975,000 within the next twelve months due to the lapse of the statute of limitations on certain positions.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
|
| | | |
| Liability for Unrecognized Tax Benefits |
Gross unrecognized tax benefits balance at January 1, 2015 | $ | 6,346 |
|
Addition for tax positions of current year | 1,147 |
|
Addition for tax positions of prior years | 250 |
|
Reduction of tax positions from prior years | (484 | ) |
Gross unrecognized tax benefits balance at December 31, 2015 | $ | 7,259 |
|
Addition for tax positions of current year | 1,437 |
|
Addition for tax positions of prior years | 163 |
|
Reduction of tax positions from prior years | (1,007 | ) |
Gross unrecognized tax benefits balance at December 31, 2016 | $ | 7,852 |
|
Addition for tax positions of current year | 1,724 |
|
Addition for tax positions of prior years | 6,624 |
|
Reduction of tax positions from prior years | (3,794 | ) |
Gross unrecognized tax benefits balance at December 31, 2017 | $ | 12,406 |
|
The Company records potential interest and penalties related to uncertain tax positions in the provision for income taxes. At December 31, 2017 and 2016, the Company had approximately $1,933,000 and $2,250,000, respectively, in potential interest and penalties associated with uncertain tax positions.
The tax years 2011 through 2017 remain open to examination by various taxing jurisdictions.
A reconciliation of the Company’s statutory federal income tax rate and the effective tax rate for the years ended December 31, 2017, 2016 and 2015 is as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. statutory tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Tax Act | 8.0 | % | | — | % | | — | % |
State and local income taxes, net of federal income taxes | 3.1 | % | | 3.5 | % | | 4.3 | % |
Non-deductible losses on investments | 0.2 | % | | 1.3 | % | | 5.2 | % |
Reserve adjustments | (1.9 | )% | | (0.2 | )% | | — | % |
Non-taxable gains on investments | (0.2 | )% | | (3.0 | )% | | — | % |
Foreign operations tax differential | (1.4 | )% | | (1.1 | )% | | (2.1 | )% |
Other | (0.3 | )% | | (0.2 | )% | | 0.5 | % |
Effective income tax rate | 42.5 | % | | 35.3 | % | | 42.9 | % |