Entity information:
12. Income Taxes
The Company’s income tax (benefit) expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. The Company is subject to income taxes in both the United States and foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax (benefit) expense.
The Company is incorporated in the United States and operates in various countries with different tax laws and rates. A portion of the Company’s income or (loss) before taxes and the (benefit from) provision for income taxes are generated from international operations.
Income or (loss) before income taxes and equity in losses of unconsolidated investees for the years ended December 31, 2017, 2016 and 2015 is summarized as follows:
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
United States
 
$
543

 
$
(944
)
 
$
2,955

Foreign
 
1,933

 
75

 
1,069

Total income (loss) before income taxes and equity in losses of unconsolidated investees
 
$
2,476

 
$
(869
)
 
$
4,024


Income tax (benefit) or provision in 2017, 2016 and 2015 is comprised of federal, state, and foreign taxes.
The components of the (benefit from) provision for income taxes are summarized as follows:
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
 
Federal
 
$
(13
)
 
$
(3,872
)
 
$
3,815

State
 
259

 
304

 
603

Foreign
 
739

 
772

 
492

Total current
 
985

 
(2,796
)
 
4,910

Deferred:
 
 
 
 
 
 
Federal
 
(2,502
)
 
(11,909
)
 
(3,025
)
State
 
(1,742
)
 
(785
)
 
(251
)
Foreign
 
(352
)
 
(193
)
 
25

Total deferred
 
(4,596
)
 
(12,887
)
 
(3,251
)
(Benefit from) provision for income taxes
 
$
(3,611
)
 
$
(15,683
)
 
$
1,659


The Company’s actual (benefit from) or provision for tax differed from the amounts computed by applying the Company’s U.S. federal income tax rate of 34% to pretax income as a result of the following:
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Income tax at federal statutory rate
 
34.0
 %
 
34.0
 %
 
34.0
 %
State income taxes, net of federal benefit
 
(94.6
)
 
417.1

 
(0.7
)
Foreign taxes differential
 
(4.2
)
 
(63.0
)
 
4.8

Prepaid tax ASC 810-10
 
(39.8
)
 
59.0

 
2.1

IRC 199 deduction
 
—

 
—

 
(7.4
)
Stock-based compensation
 
(802.0
)
 
1,474.0

 
14.8

Non-deductible meals and entertainment
 
19.4

 
(92.6
)
 
5.6

Imputed interest
 
19.1

 
(30.7
)
 
4.7

Tax credits
 
(0.5
)
 
395.5

 
(11.6
)
Remeasurement of deferred tax assets and liabilities
 
622.5

 
—

 
—

Transfer pricing tax benefit
 
(35.3
)
 
—

 
(13.8
)
Other
 
8.0

 
(47.4
)
 
3.6

Change in valuation allowance
 
127.6

 
(340.8
)
 
5.1

Effective tax rate
 
(145.8
)%
 
1,805.1
 %
 
41.2
 %

Deferred income tax assets and liabilities consist of the following:
 
 
December 31,
 
 
2017
 
2016
Deferred tax assets:
 
 
 
 
Net operating loss carryforwards
 
$
20,622

 
$
5,983

Tax credits
 
7,095

 
6,260

Accruals and reserves
 
5,430

 
7,668

Stock-based compensation
 
3,083

 
3,703

Translation adjustment
 
486

 
690

UNICAP adjustments
 
3,813

 
4,721

Other
 
487

 
938

Gross deferred tax assets
 
41,016

 
29,963

Valuation allowance
 
(10,295
)
 
(6,062
)
Total deferred tax assets
 
30,721

 
23,901

Deferred tax liabilities:
 
 
 
 
Depreciation and amortization
 
(6,363
)
 
(1,425
)
Total deferred tax liabilities
 
(6,363
)
 
(1,425
)
Net deferred tax assets
 
$
24,358

 
$
22,476


At December 31, 2017, the Company had approximately $72.7 million, $67.9 million and $1.1 million of federal, state and foreign net operating loss carryforwards, respectively, available to offset future taxable income. The federal net operating loss may be carried forward for 20 years and will begin to expire in 2036. The state net operating loss carryforwards will begin to expire in 2020. At December 31, 2017, the Company had federal research credits of $4.2 million and California state tax credits of $5.9 million. The federal research credits are generally carried forward for 20 years. California state tax credits may be carried forward indefinitely.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017, (the Tax Reform Act) was enacted. The Tax Reform Act significantly revised the U.S. corporate income tax regime by, including but not limited to, lowering the U.S. corporate income tax rate to 21% effective January 1, 2018, implementing a territorial tax system, imposing a one-time transition tax on previously untaxed accumulated earnings and profits of foreign subsidiaries, and creating new taxes on foreign sourced earnings. Also on December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Reform Act. SAB 118 provides a measurement period, that should not extend beyond one year from the Tax Reform Act enactment date, for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Reform Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Reform Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. The provisional amounts incorporate assumptions made based on our current interpretation of the Tax Reform Act and may change as we receive additional clarification and implementation guidance.
Due to the broad complexities of the Tax Reform Act, the Company’s ASC 740 accounting for the tax law change is still under evaluation and is not complete.The Company has not made sufficient progress on the global intangible low-taxed income tax analysis to reasonably estimate the effects, and therefore, has not recorded provisional amounts in the financial statements nor selected an accounting policy with respect to deferred taxes for the new tax on foreign sourced earnings. To reasonably estimate future U.S. income inclusions attributable to the global intangible low-taxed income tax, the Company must analyze its current tax structure, international operations, projections of future foreign income, and its business presence worldwide. The Company recorded an adjustment for the reduction of the U.S. corporate income tax rate to 21% effective January 1, 2018, resulting with a decrease to its DTAs in the amount of $15.4 million with a corresponding charge to income tax expense. The Tax Reform Act also includes a requirement to pay a one-time transition tax on the cumulative value of earnings and profits that were previously not repatriated for U.S. income tax purposes. Based on the Company’s analysis to date, the one-time transition tax is not expected to be material.
The Company generated significant domestic DTAs in the years ended December 31, 2016 and 2017, primarily due to the excess tax benefits from stock option exercises and vesting of restricted stock upon application of ASU 2016-09. The Company assessed its ability to realize the benefits of its domestic DTAs by evaluating all available positive and negative evidence, objective and subjective in nature, including (1) cumulative results of operations in recent years, (2) sources of recent pre-tax income, (3) estimates of future taxable income, (4) the length of net operating loss (“NOL”) carryforward periods, and (5) the ability to carry back losses to prior years. The Company determined it would be in a three-year cumulative taxable income position, had it not been for the impact of excess tax deductions from stock-based compensation under ASU 2016-09. The Company also measured its current DTA balances against estimates of future income based on objectively verifiable operating results from the Company’s recent history.
The Company considered its projections of future taxable income in conjunction with relevant provisions of the Tax Reform Act, including but not limited to, the indefinite carryforward period for NOLs generated in years beginning on or after January 1, 2018. The Company also considered its three-year cumulative taxable income position, exclusive of the impact of excess tax deductions from stock-based compensation under ASU 2016-09. After an evaluation of all available qualitative and quantitative evidence, both positive and negative in nature, the Company concluded that sufficient future taxable income will be generated to realize the benefits of its federal DTAs prior to expiration other than its federal research and development tax credit DTAs. The tax attribute ordering rules provide that net operating losses must be used in full to offset taxable income prior to the utilization of tax credits. Accordingly, the Company’s federal research and development tax credit DTAs, which have a 20 year carryforward period, is expected to expire prior to utilization based on future projected taxable income. As a result, a valuation allowance was established against the Company’s federal research and development tax credit DTAs, resulting with a $2.4 million charge to income tax expense and impacted the effective tax rate.
For years ended December 31, 2017, 2016 and 2015, a full valuation allowance remains against the Company’s California DTA balances.
The change in the Company’s deferred tax valuation allowance against net DTAs changed from January 1, 2015 to December 31, 2017, is as follows:
 
 
Beginning Balance
 
Additions Charged To Expenses or Other Accounts(1)
 
Deductions Credited to Expenses or Other Accounts(2)
 
Ending Balance
For the year ended:
 
 
 
 
 
 
 
 
December 31, 2017
 
$
6,062

 
$
4,400

 
$
(167
)
 
$
10,295

December 31, 2016
 
$
2,702

 
$
3,360

 
$
—

 
$
6,062

December 31, 2015
 
$
2,945

 
$
—

 
$
(243
)
 
$
2,702

 
(1) Additions include current year additions charged to expenses and current year build due to increases in net DTAs, return to provision true-ups, and other adjustments.
(2) Deductions include current year releases credited to expenses and current year reductions due to decreases in net DTAs, return to provision true-ups, and other adjustments.
The Company will continue to closely monitor the need for an additional valuation allowance against its existing domestic and foreign DTAs and any additional DTAs that are generated in each subsequent reporting period. The need for a valuation allowance can be impacted by actual operating results, forecasted financial performance, and variances between the two, and the rate at which future DTAs are generated.
IRC Sections 382 and 383 limit the use of net operating losses and business credits if there is a change in ownership. In 2009, the Company determined there were changes in ownership in 2004 and 2008, which did not cause any impairment of tax attributes.
A reconciliation of the change in the gross unrecognized tax benefits from January 1, 2015 to December 31, 2017, is as follows:
 
 
December 31,
 
 
2017
 
2016
 
2015
Beginning Balance
 
$
3,827

 
$
3,619

 
$
1,726

Gross increase for tax positions of current year
 
871

 
1,213

 
1,023

Gross increase for tax positions of prior years
 
130

 
250

 
1,062

Gross decrease for tax positions of prior years
 
(659
)
 
(648
)
 
—

Settlement
 
—

 
(387
)
 
—

Lapse of statute of limitations
 
(17
)
 
(220
)
 
(192
)
Ending Balance
 
$
4,152

 
$
3,827

 
$
3,619


The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Income tax expense for the years ended December 31, 2017, 2016 and 2015 included interest and penalties that were not material. As of December 31, 2017 and 2016 the Company had approximately $0.1 million and $0.1 million respectively, of accrued interest and penalties attributable to uncertain tax positions. Included in the $4.2 million balance of unrecognized tax benefits as of December 31, 2017 is $0.8 million of tax benefits that, if recognized, would affect the effective tax rate.
The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. Due to net operating loss and credit carryovers, the tax years ending December 31, 2004 through December 31, 2017 remain subject to examination by federal and state tax authorities. In Australia and Canada, tax years ending December 31, 2009 through December 31, 2017 generally remain subject to examination by tax authorities. In Germany and Italy, tax years ending December 31, 2013 through December 31, 2017 remain subject to examination by tax authorities.
The Company does not anticipate any significant changes in the balance of gross unrecognized tax benefits over the next 12 months.