Income Taxes
Loss from continuing operations before provision for income taxes for the Company’s domestic and international operations was as follows (in thousands):
|
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. | $ | (28,463 | ) | | $ | (32,499 | ) | | $ | (40,720 | ) |
International | (3,030 | ) | | 3,802 |
| | 1,711 |
|
Loss before provision for income taxes | $ | (31,493 | ) | | $ | (28,697 | ) | | $ | (39,009 | ) |
The income tax provision consisted of the following (in thousands):
|
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 94 |
| | $ | 279 |
| | $ | — |
|
Foreign | 46 |
| | 1,112 |
| | 632 |
|
State and local | 212 |
| | 89 |
| | (32 | ) |
Total current income tax provision | 352 |
| | 1,480 |
| | 600 |
|
Deferred: | | | | | |
Federal | (1,645 | ) | | 129 |
| | 160 |
|
Foreign | (5 | ) | | (54 | ) | | 52 |
|
State and local | (349 | ) | | 1,874 |
| | 772 |
|
Total deferred income tax provision (benefit) | (1,999 | ) | | 1,949 |
| | 984 |
|
Income tax provision (benefit) | $ | (1,647 | ) | | $ | 3,429 |
| | $ | 1,584 |
|
The following table provides a reconciliation of income taxes provided at the federal statutory rate of 35% to the income tax provision (in thousands):
|
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. income tax at federal statutory rate | $ | (11,012 | ) | | $ | (10,046 | ) | | $ | (13,388 | ) |
State income taxes, net of federal benefit | (650 | ) | | (170 | ) | | 342 |
|
Section 956 inclusion | — |
| | 2,976 |
| | — |
|
Foreign tax rate differential | (21 | ) | | (882 | ) | | (85 | ) |
Share-based compensation | 1,748 |
| | 5,038 |
| | — |
|
Permanent differences | 926 |
| | 383 |
| | 254 |
|
Tax cuts and jobs act | 37,042 |
| | — |
| | — |
|
Tax credits | (5 | ) | | (111 | ) | | (405 | ) |
Federal rate change | — |
| | (1,954 | ) | | — |
|
Return to provision | (407 | ) | | 1,068 |
| | — |
|
Adjustments to opening deferreds | — |
| | 2,009 |
| | — |
|
Valuation allowance | (29,334 | ) | | 4,458 |
| | 14,529 |
|
Other, net | 66 |
| | 660 |
| | 337 |
|
Income tax provision (benefit) | $ | (1,647 | ) | | $ | 3,429 |
| | $ | 1,584 |
|
In November 2015, the Philippine Economic Zone Authority granted a four year tax holiday to the Company's Philippine affiliate, commencing with its fiscal year beginning January 1, 2016. The earnings per share benefit in 2017, 2016, and 2015 was not material.
In December 2013, Malaysia granted a ten year tax holiday to the Company’s Malaysia affiliate, commencing with its fiscal year beginning January 1, 2014. This resulted in a tax benefit in fiscal 2013 of approximately $0.2 million from the elimination of the Malaysia subsidiary’s deferred tax liabilities. The earnings per share benefit in 2017, 2016 and 2015 was not material.
The following table provides the effect of temporary differences that created deferred income taxes as of December 31, 2017 and 2016. Deferred tax assets and liabilities represent the future effects on income taxes resulting from temporary differences and carryforwards at the end of the respective periods (in thousands):
|
| | | | | | | |
| For the Year Ended December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Accrued liabilities | $ | 3,847 |
| | $ | 3,540 |
|
Share-based compensation expense | 3,904 |
| | 4,961 |
|
Net operating loss carryforwards | 65,958 |
| | 92,087 |
|
Tax credits | 6,860 |
| | 5,676 |
|
Amortization of tax intangibles | 2,842 |
| | 5,957 |
|
Investments | — |
| | 1,774 |
|
Other, net | 355 |
| | 351 |
|
Total deferred tax assets | 83,766 |
| | 114,346 |
|
Deferred tax liabilities: | | | |
Property and equipment | (811 | ) | | (3,607 | ) |
Convertible debt costs | (263 | ) | | (1,041 | ) |
Total deferred tax liabilities | (1,074 | ) | | (4,648 | ) |
Net deferred tax assets | 82,692 |
| | 109,698 |
|
Less: Valuation allowance | (82,923 | ) | | (111,935 | ) |
Net deferred tax liabilities | $ | (231 | ) | | $ | (2,237 | ) |
As of December 31, 2017 and 2016, management assessed the realizability of deferred tax assets and evaluated the need for a valuation allowance for deferred tax assets on a jurisdictional basis. This evaluation utilizes the framework contained in ASC 740, Income Taxes, wherein management analyzes all positive and negative evidence available at the balance sheet date to determine whether all or some portion of the Company's deferred tax assets will not be realized. Under this guidance, a valuation allowance must be established for deferred tax assets when it is more-likely-than-not (a probability level of more than 50 percent) that the asset will not be realized. In assessing the realization of the Company's deferred tax assets, management considers all available evidence, both positive and negative.
In concluding on the evaluation, management placed significant emphasis on guidance in ASC 740, which states that “a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome.” Based upon available evidence, it was concluded on a more-likely-than-not basis that all deferred tax assets were not realizable as of December 31, 2017. Accordingly, a valuation allowance of $82.9 million has been recorded to offset this deferred tax asset. The change in valuation allowance for the years ended December 31, 2017 and 2016 was a decrease of $29.0 million and an increase of $24.3 million, respectively.
Management also concluded on a more-likely-than-not basis that its Singapore deferred tax assets were not realizable, using the analysis prescribed in ASC 740. Other factors were considered but provided neither positive nor negative objectively-verifiable evidence as to the realization of our deferred tax assets. The remaining deferred tax assets as of December 31, 2017 relate to jurisdictions in which the Company has net adjusted historical pretax profits and sufficient forecast profitability to assure future realization of such deferred tax assets.
The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. In accordance with Staff Accounting Bulletin 118, we have not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. For the items for which we were able to determine a reasonable estimate, we recognized a provisional benefit of $2.1 million, which is included as a component of income tax expense from continuing operations. In all cases, we will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected as we gain a more thorough understanding of the tax law.
We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax balance was $37.0 million, which was offset by a decrease in our valuation allowance of $39.1 million. We recognized a $2.1 million tax benefit related to remeasurement of indefinite-lived deferred tax liabilities and the release of valuation allowance associated with tax reform changes in net operating loss carryforwards. Future net operating losses generated will have an indefinite carryover as opposed to a 20-year carryover. Therefore, we expect the reversal of our deferred tax assets to result in indefinite lived deferreds (future net operating losses) which can be used as an offset in our valuation allowance calculations.
The non-recurring transition tax is based on the total post-1986 earnings and profits ("E&P") previously deferred from U.S. income taxes. In aggregate, the Company has a deficit in post-1986 E&P from its foreign subsidiaries resulting in no transition tax liability. The Company considers its undistributed earnings of ServiceSource Europe, Ltd & ServiceSource International Singapore Pte. Ltd permanently reinvested in foreign operations and has not provided for U.S. income taxes on such earnings. As of December 31, 2017, the Company's had no unremitted earnings from its foreign subsidiaries.
As of December 31, 2017, the Company had net operating loss carryforwards of approximately $249.6 million for federal income tax purposes and approximately $416.5 million for state income tax purposes. These losses are available to reduce taxable income and expire at various dates beginning in 2024 for federal income tax purposes and 2021 for state income tax purposes. The Company also has foreign net operating loss carryforwards of approximately $10.4 million which are indefinitely available to reduce taxable income and do not expire.
As of December 31, 2017, the Company had $2.5 million of U.S. federal research and development credits which expire beginning in 2031, and $3.7 million of California research and development credits which do not expire. The Company also has $0.5 million of California Enterprise Zone Credits which expire beginning in 2023 if not utilized, and $1.6 million of other state tax credits which expire beginning in 2024 if not utilized.
Utilization of the Company’s net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration or elimination of the net operating loss and tax credit carryforwards before utilization. Management believes that the limitation will not limit utilization of the carryforwards prior to their expiration.
The Company acquired U.S. federal net operating loss carryforwards of Scout Analytics, Inc. upon the acquisition of that entity in January 2014, subject to the ownership change limitations. Acquired U.S. federal net operating losses from Scout total approximately $30.2 million net of amounts unavailable due to ownership change limitations, which is included in the total U.S. federal net operating loss above.
The Company files U.S. federal and state and foreign income tax returns in jurisdictions with varying statutes of limitations. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. These audits could include examining the timing and amount of deductions, the allocation of income among various tax jurisdictions and compliance with federal, state, local and foreign tax laws. Our 2005 through 2016 tax years generally remain subject to examination by federal, state and foreign tax authorities.
The Company has implemented the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Beginning balance | $ | 926 |
| | $ | 937 |
| | $ | 948 |
|
Additions based on tax positions related to the current year | 1 |
| | 24 |
| | 62 |
|
Reductions for tax positions of prior years | 5 |
| | (35 | ) | | (73 | ) |
Ending balance | $ | 932 |
| | $ | 926 |
| | $ | 937 |
|
As of December 31, 2017, the Company had a liability for unrecognized tax benefits of $0.9 million, none of which, if recognized, would affect the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the year ended December 31, 2017, the interest and penalties recognized were insignificant. During the years ended December 31, 2016 and 2015, the Company recognized and accrued an insignificant amount of interest or penalties related to unrecognized tax benefits.