Income Taxes
The components of our loss before income tax expense consisted of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
United States | $ | (134,723 | ) | | $ | (100,725 | ) | | $ | (27,779 | ) |
International | (43,976 | ) | | (36,702 | ) | | (23,028 | ) |
Total | $ | (178,699 | ) | | $ | (137,427 | ) | | $ | (50,807 | ) |
Income tax expense (benefit) consisted of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
United States | $ | (592 | ) | | $ | 2,147 |
| | $ | 28,630 |
|
International | 7,453 |
| | 4,875 |
| | 4,263 |
|
Total | $ | 6,861 |
| | $ | 7,022 |
| | $ | 32,893 |
|
The provision (benefit) for income taxes consisted of the following: |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Current: | | | | | |
Federal | $ | — |
| | $ | 1,447 |
| | $ | 4,009 |
|
State | 233 |
| | 402 |
| | 771 |
|
Foreign | 10,704 |
| | 5,230 |
| | 5,240 |
|
Total current income tax expense | 10,937 |
| | 7,079 |
| | 10,020 |
|
Deferred: | | | | | |
Federal | (892 | ) | | 258 |
| | 22,011 |
|
State | 67 |
| | 40 |
| | 1,839 |
|
Foreign | (3,251 | ) | | (355 | ) | | (977 | ) |
Total deferred income tax expense (benefit) | (4,076 | ) | | (57 | ) | | 22,873 |
|
Total income tax expense | $ | 6,861 |
| | $ | 7,022 |
| | $ | 32,893 |
|
A reconciliation of the U.S. federal statutory income tax provision (benefit) to the effective income tax expense for each year follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Income tax benefit at statutory rate | $ | (62,545 | ) | | $ | (48,098 | ) | | $ | (17,783 | ) |
State taxes, net of federal tax benefit | (4,714 | ) | | (3,466 | ) | | (896 | ) |
Impact of foreign income taxes | 23,232 |
| | 14,566 |
| | 10,582 |
|
Impact of Tax Cuts and Jobs Act of 2017 | 87,584 |
| | — |
| | — |
|
Research and development and other tax credits | (12,563 | ) | | (8,462 | ) | | (10,187 | ) |
Stock-based compensation | (13,466 | ) | | 5,098 |
| | 3,174 |
|
Non-deductible meals and entertainment expenses | 1,182 |
| | 1,212 |
| | 1,395 |
|
Impact of valuation allowance | (13,598 | ) | | 46,174 |
| | 46,737 |
|
Other, net | 1,749 |
| | (2 | ) | | (129 | ) |
Total income tax expense | $ | 6,861 |
| | $ | 7,022 |
| | $ | 32,893 |
|
Our effective tax rate differs from the U.S. federal statutory rate primarily due to the impact of the valuation allowance on our U.S. federal and state deferred income tax assets and losses in jurisdictions where a tax benefit is not available. In addition, due to the adoption of ASU 2016-09 in 2017, all excess tax benefits and deficiencies are recognized as an income tax benefit in the current year.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed with an effective date of January 1, 2018. The Act, which significantly revised U.S. tax law, included many important changes, including but not limited to a reduction of the U.S. corporate tax rate from 35%, down to 21%, a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings and fundamental changes to the taxation of multinational entities including a shift from a worldwide tax system to a territorial system. The Act had minimal impact to our income tax provision in 2017, mostly due to our domestic valuation allowance. Based on available guidance we recorded $87.6 million of additional income tax expense in the fourth quarter of 2017, mostly caused by the change in the U.S. corporate tax rate, applied to our U.S. federal and state deferred income tax assets, based on the rates applicable when these assets reverse in the future. This additional income tax expense was offset by a decrease in the domestic valuation allowance of $88.1 million.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to assist in addressing uncertainty in applying GAAP to the accounting and reporting of tax reform changes related to the Act. We have considered these changes, including all available guidance, in determining our income tax provision for 2017. Additional work is necessary to do a more detailed analysis of historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts may be recorded to current income tax expense when the analysis is complete.
The tax effects of temporary differences and carryforwards that gave rise to deferred income tax assets and liabilities consisted of the following:
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (in thousands) |
Deferred income tax assets: | | | | |
Net operating loss carryforwards | | $ | 133,187 |
| | $ | — |
|
Tax credit carryforwards | | 59,343 |
| | 17,904 |
|
Stock-based compensation | | 15,512 |
| | 18,589 |
|
Accrued compensation | | 11,487 |
| | 14,268 |
|
Deferred revenue | | 5,334 |
| | 3,728 |
|
Deferred rent | | 12,483 |
| | 9,037 |
|
Depreciation and amortization(1) | | 966 |
| | 4,839 |
|
Other(1) | | 1,149 |
| | 699 |
|
Total deferred income tax assets | | 239,461 |
| | 69,064 |
|
Deferred income tax liabilities: | | | | |
Prepaid assets | | 4,177 |
| | 4,231 |
|
Total deferred income tax liabilities | | 4,177 |
| | 4,231 |
|
Net deferred income tax assets before valuation allowance | | 235,284 |
| | 64,833 |
|
Less: valuation allowance | | (230,545 | ) | | (63,384 | ) |
Net deferred income tax assets | | $ | 4,739 |
| | $ | 1,449 |
|
| | | | |
Reported as: | | | | |
Deferred income taxes | | 5,287 |
| | 1,449 |
|
Other long-term liabilities | | (548 | ) | | — |
|
Net deferred income tax assets | | $ | 4,739 |
| | $ | 1,449 |
|
(1) Certain amounts within the components of deferred taxes as of December 31, 2016 have been reclassified to conform to the presentation as of December 31, 2017.
We determine our deferred income tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and laws that will be in effect when we expect the differences to reverse.
We regularly assess the need for a valuation allowance against our deferred income tax assets by considering both positive and negative evidence related to whether it is more likely than not that our deferred income tax assets will be realized. A valuation allowance is recorded when it is more likely than not that all or some portion of the deferred income tax assets will not be realized. In evaluating our ability to recover our deferred income tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred income tax liabilities, projected future taxable income, tax-planning strategies and results of recent operations.
In 2015, we established a valuation allowance of $46.7 million for our U.S. federal and state deferred income tax assets, in part due to our three-year cumulative GAAP net loss adjusted for permanent tax differences, which is a significant piece of negative evidence for recording the valuation allowance. In 2016, we increased the valuation allowance to $63.4 million as of December 31, 2016. In 2017, we determined our U.S. federal and state deferred income tax assets continue to be currently not more likely than not to be realized; therefore, we increased the valuation allowance to $230.5 million as of December 31, 2017. The increase in the valuation allowance during 2017 was primarily attributable to an adjustment of $180.9 million related to previously unrecognized deferred tax assets that were recorded upon the adoption of ASU 2016-09. The remaining difference is associated with the current year change in U.S. federal and state deferred income tax assets, less the effect of the Act.
We have gross net operating loss carryforwards totaling $895.9 million, R&D tax credit carryforwards of $64.4 million and Federal foreign tax credits of $12.4 million. If not utilized, a portion of these attributes will begin to expire in 2034. Utilization of our net operating loss and tax credit carryforwards may be subject to limitations upon certain ownership changes as provided by the Internal Revenue Code and similar state provisions. Such limitations could result in the expiration of the net operating loss and tax credit carryforwards before their utilization.
We are subject to income taxes in the U.S. and in numerous foreign jurisdictions. The statute of limitations for adjustments to our historic tax obligations will vary from jurisdiction to jurisdiction. Furthermore, net operating loss and tax credit carryforwards may be subject to adjustment after the expiration of the statute of limitations for the year such net operating losses and tax credits originated. In general, the tax years for U.S. federal and state income tax purposes open for examination are for 2013 and forward due to our net operating loss carryforwards.
Income tax expense includes both U.S. and international income taxes. Except as required under U.S. tax law, we do not provide for U.S. income taxes on our undistributed earnings of foreign subsidiaries that have not been previously taxed because we intend to invest such undistributed earnings indefinitely outside of the U.S. As of December 31, 2017, cash held by foreign subsidiaries was $35.6 million.
We have reserves for taxes to address potential exposures involving tax positions that we believe could be challenged by taxing authorities even though we believe the positions we have taken are appropriate. We believe our tax reserves are adequate to cover potential liabilities. We review the tax reserves as circumstances warrant and adjust the reserves as events occur that affect our potential liability for additional taxes. It is often difficult to predict the final outcome or timing of resolution of any particular tax matter. Various events, some of which cannot be predicted, such as clarification of tax law by administrative or judicial means, may occur and would require us to increase or decrease our reserves and effective income tax rate.
The total gross amount of unrecognized tax benefits was $19.9 million, $12.9 million and $10.8 million as of December 31, 2017, 2016 and 2015, respectively. Of the total gross amount of unrecognized tax benefits, the portion recorded to liabilities pertaining to uncertain tax positions was $1.4 million, $0.7 million and $0.7 million as of December 31, 2017, 2016 and 2015, respectively. Our increase in unrecognized tax benefits relates primarily to the R&D tax credits generated in the current year, which are recorded net of the corresponding deferred tax asset.
These amounts represent the gross amount of exposure in individual jurisdictions and do not reflect any additional benefits expected to be realized if such positions were not sustained. To the extent that any uncertain tax positions are resolved in our favor, it may have a positive impact on our effective income tax rate. We do not expect any material decrease on our unrecognized tax position within the next twelve months. The following table shows the gross changes in our unrecognized tax position.
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Balance, beginning of year | $ | 12,909 |
| | $ | 10,781 |
| | $ | 7,116 |
|
Gross increases to tax positions related to prior periods | 1,289 |
| | 28 |
| | 545 |
|
Gross increases related to current tax positions | 5,683 |
| | 2,100 |
| | 3,120 |
|
Balance, end of year | $ | 19,881 |
| | $ | 12,909 |
| | $ | 10,781 |
|
Interest or penalties, if incurred, would be recognized as a component of income tax expense. No penalties or interest were recognized or accrued for at December 31, 2017, 2016 and 2015.
On July 27, 2015, the U.S. Tax Court issued an opinion related to litigation in Altera Corp v. Commissioner. This litigation relates to the treatment of stock-based compensation expense in an intercompany cost sharing arrangement with one of Altera's foreign subsidiaries. In its opinion, the U.S. Tax Court invalidated the portion of the Treasury regulations requiring the inclusion of stock-based compensation expense in such intercompany cost-sharing arrangements. On February 19, 2016, the IRS appealed the U.S. Tax Court's decision. As the final resolution of this litigation remains uncertain, we have not recorded potentially favorable benefits related to the current or prior periods. We will continue to monitor developments related to this case and the potential impact of those developments on our current and future financial statements.