INCOME TAXES
In December 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted. The TCJA includes a number of changes to existing U.S. tax laws that impact the Company. This includes a reduction to the federal corporate tax rate from 35 percent to 21 percent for the tax years beginning after December 31, 2017. The TCJA also provides for a one-time transition tax on certain foreign earnings as well as changes beginning in 2018 regarding the deductibility of interest expense, additional limitations on executive compensation, meals and entertainment expenses and the inclusion of certain foreign earnings in U.S. taxable income.
The Company recognized $11.9 million of tax expense in the fourth quarter of 2017 primarily due to the reduction in its net U.S. deferred tax assets for the 14% decrease in the U.S. federal statutory rate. In accordance with Staff Accounting Bulletin No. 118, which provides guidance on accounting for the impact of the TCJA, in effect allowing an entity to use a methodology similar to the measurement period in a business combination, as of March 5, 2018, the Company has not completed its accounting for the tax effects of the TCJA. As such, the Company has recorded a reasonable estimate of the impact from the TCJA, but is still analyzing the TCJA and refining its calculations. Additionally, further guidance from the IRS, SEC, or the FASB could result in changes to the Company’s accounting for the tax effects of the TCJA. The accounting is expected to be completed by the time the calendar year 2017 federal corporate tax income tax return is filed in late 2018.
The following table includes the consolidated income tax provision for federal, state, and foreign income taxes related to the Company’s total earnings before taxes for 2017, 2016 and 2015:
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
Federal | | $ | (170 | ) | | $ | 42 |
| | $ | 219 |
|
State | | 139 |
| | 89 |
| | 364 |
|
Foreign | | 438 |
| | 165 |
| | 481 |
|
| | 407 |
| | 296 |
| | 1,064 |
|
Deferred: | | | | | | |
Federal | | 15,669 |
| | (3,236 | ) | | (56,750 | ) |
State | | (751 | ) | | (1,519 | ) | | (13,705 | ) |
Foreign | | (81 | ) | | 95 |
| | (41 | ) |
| | 14,837 |
| | (4,660 | ) | | (70,496 | ) |
Income tax provision (benefit) | | $ | 15,244 |
| | $ | (4,364 | ) | | $ | (69,432 | ) |
The Company's foreign earnings before taxes were $1.0 million, $0.7 million and $1.1 million for 2017, 2016 and 2015, respectively.
The consolidated deferred tax assets and liabilities consist of the following:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Financial statement accruals not currently deductible | $ | 2,339 |
| | $ | 2,692 |
|
Accrued vacation | 848 |
| | 1,185 |
|
Deferred revenue | 185 |
| | 280 |
|
State taxes | 29 |
| | 48 |
|
Fixed assets | 4,113 |
| | 6,555 |
|
Goodwill and other identifiable intangibles | 12,848 |
| | 22,291 |
|
Stock-based compensation | 4,545 |
| | 6,072 |
|
Federal tax net operating loss carryforward | 17,258 |
| | 27,759 |
|
State tax net operating loss carryforward, net | 5,951 |
| | 4,996 |
|
State tax credits, net | 1,164 |
| | 958 |
|
Foreign tax credit carryforward | 517 |
| | 517 |
|
Foreign tax net operating loss carryforward | 616 |
| | 499 |
|
Federal alternative minimum tax | 104 |
| | 284 |
|
Interest rate hedge | — |
| | 131 |
|
Gross deferred tax assets | 50,517 |
| | 74,267 |
|
Less: valuation allowance | (2,366 | ) | | (1,304 | ) |
Net deferred tax assets | $ | 48,151 |
| | $ | 72,963 |
|
| | | |
Deferred tax liabilities: | | | |
Goodwill and other identifiable intangibles | $ | (19,972 | ) | | $ | (30,296 | ) |
Outside basis in foreign entities
| (150 | ) | | — |
|
Net deferred tax assets | $ | 28,029 |
| | $ | 42,667 |
|
A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Statutory federal income tax rate | 35 | % | | 35 | % | | 35 | % |
State taxes, net of federal benefit | — |
| | 2 |
| | 5 |
|
Foreign taxes | (4 | ) | | — |
| | — |
|
Valuation allowance | (17 | ) | | — |
| | (289 | ) |
Non-deductible expenses and other | (5 | ) | | 1 |
| | 1 |
|
Section 162(m) limitation | (1 | ) | | (1 | ) | | 1 |
|
Tax Cuts and Jobs Act enacted on December 22, 2017 | (195 | ) | | — |
| | — |
|
Discrete items for state taxes | (4 | ) | | (1 | ) | | (1 | ) |
Non-deductible portion of goodwill impairment | (58 | ) | | (28 | ) | | — |
|
Effective income tax rate | (249 | )% | | 8 | % | | (248 | )% |
In accordance with ASC 740-10, Income Taxes, the Company evaluates the need for deferred tax asset valuation allowances based on a more likely than not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company considers the following possible sources of taxable income when assessing the realization of deferred tax assets:
•Future reversals of existing taxable temporary differences;
•Future taxable income exclusive of reversing temporary differences and carryforwards;
•Taxable income in prior carryback years; and
•Tax-planning strategies.
The assessment regarding whether a valuation allowance is required or should be adjusted also considers all available positive and negative evidence factors, including but not limited to:
•Nature, frequency, and severity of recent losses;
•Duration of statutory carryforward periods;
•Historical experience with tax attributes expiring unused; and
•Near- and medium-term financial outlook.
The Company utilizes a rolling three years of actual and current year anticipated results as the primary measure of cumulative income/losses in recent years, as adjusted for permanent differences. The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the Company's financial statements or tax returns and future profitability. The Company's accounting for deferred tax consequences represents its best estimate of those future events. Changes in the Company's current estimates, due to unanticipated events or otherwise, could have a material effect on its financial condition and results of operations. At September 30, 2015, as a result of sustained profitability in the U.S. evidenced by three years of earnings and forecasted continuing profitability, the Company determined it was more likely than not that future earnings would be sufficient to realize certain of its deferred tax assets in the U.S. Accordingly the Company reversed most of its U.S. valuation allowance, resulting in non-cash income tax benefit of $80.7 million for the year ended December 31, 2015. The Company has a $2.4 million valuation allowance against certain deferred tax assets as of December 31, 2017, which increased by $1.1 million in 2017 primarily due to the provisions in the TCJA.
Based on the Company’s current assessment, the remaining net deferred tax assets as of December 31, 2017 are considered more likely than not to be realized. The valuation allowance of $2.4 million may be increased or reduced as conditions change or if the Company is unable to implement certain available tax planning strategies. The realization of the Company’s net deferred tax assets ultimately depends on future taxable income, reversals of existing taxable temporary differences or through a loss carry back. The Company has income tax receivables of $25 thousand as of December 31, 2017 included in other current assets in its consolidated balance sheet primarily related to income tax refunds for prior years.
As of December 31, 2017, the Company had approximately $82.2 million of consolidated federal, $96.6 million of state and $3.3 million of foreign net operating loss and charitable contribution carryforwards available to offset future taxable income, respectively. The federal net operating loss carryforward began in 2011 and will begin to expire in varying amounts between 2031 and 2037. The charitable contribution carryforward began in 2015 and will begin to expire in varying amounts between 2020 and 2022. The state net operating loss carryforwards expire in varying amounts between 2018 and 2037. The foreign net operating loss carryforwards begin to expire in varying amounts beginning in 2022.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2011.
There were no unrecognized tax benefits as of and for the years ended December 31, 2017 or 2016, or 2015.