Income Taxes
We recorded an income tax provision of approximately $1.8 million, $1.7 million and $1.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. The income tax provision for the years ended December 31, 2017, 2016 and 2015 was primarily due to state and foreign income tax expense and federal and state tax expense related to tax amortization of acquired indefinite lived intangible assets.
Our income tax provision consisted of the following (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current income taxes: | | | | | |
Federal | $ | (103 | ) | | $ | (18 | ) | | $ | — |
|
State | 100 |
| | 321 |
| | 263 |
|
Foreign | 1,523 |
| | 959 |
| | 778 |
|
Total current income taxes | 1,520 |
| | 1,262 |
| | 1,041 |
|
| | | | | |
Deferred income taxes: | | | | | |
Federal | (992 | ) | | 503 |
| | 484 |
|
State | 75 |
| | 48 |
| | 56 |
|
Foreign | 1,199 |
| | (106 | ) | | (102 | ) |
Total deferred income taxes | 282 |
| | 445 |
| | 438 |
|
Total income tax provision | $ | 1,802 |
| | $ | 1,707 |
| | $ | 1,479 |
|
Loss before provision for income taxes consisted of the following (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | (20,983 | ) | | $ | (42,687 | ) | | $ | (59,376 | ) |
Foreign | 2,502 |
| | 2,149 |
| | 1,645 |
|
Total | $ | (18,481 | ) | | $ | (40,538 | ) | | $ | (57,731 | ) |
The differences between our income tax provision as presented in the accompanying consolidated statements of operations and the income tax expense computed at the federal statutory rate consists of the items shown in the following table as a percentage of pretax loss (in percentages):
|
| | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income tax at U.S. statutory rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
State, net of federal benefit | 8.3 |
| | 1.7 |
| | 3.7 |
|
Foreign rate differential | (3.8 | ) | | (0.3 | ) | | (0.2 | ) |
Share-based compensation | 38.2 |
| | (9.1 | ) | | (7.0 | ) |
Non-deductible expenses | (1.1 | ) | | (0.2 | ) | | (0.2 | ) |
Tax credits | 7.8 |
| | (0.4 | ) | | 1.4 |
|
Tax Cuts and Jobs Act impact | (220.2 | ) | | — |
| | — |
|
Other | 0.4 |
| | (0.7 | ) | | (1.2 | ) |
Change in valuation allowance | 126.6 |
| | (29.2 | ) | | (33.1 | ) |
Total | (9.8 | )% | | (4.2 | )% | | (2.6 | )% |
On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act) was signed into law, enacting significant changes to the U.S. Internal Revenue Code. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; creating a global intangible low-taxed income inclusion (GILTI) and the base erosion anti-abuse tax (BEAT), a new minimum tax. The Tax Act, also imposes significant limitations on the deductibility of interest, executive compensation and future net operating losses. The Tax Act allows for the expensing of certain capital expenditures.
On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, as of December 31, 2017, we had not yet completed our accounting for the tax effects of the enactment of the Act. Our provision for income taxes for the year ended December 31, 2017 is based in part on our best estimate of the effects of the transition tax and existing deferred tax balances with our understanding of the Tax Act and guidance available as of the date of this filing. For the amounts which we were able to reasonably estimate, we recognized a provisional remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future of $42 million, which is offset by a valuation allowance. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was a benefit of $0.1 million. We also provided withholding tax on the deemed repatriation of foreign earnings of $1.2 million. We are still analyzing certain aspects of the Tax Act and refining the estimate of the expected reversal of our deferred tax balance. This can potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
The Act also includes provisions for the GILTI tax inclusion, wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations. This income will effectively be taxed at a 10.5% tax rate in general. As a result, our deferred tax assets and liabilities are being evaluated if the deferred tax assets and liabilities should be recognized for the basis differences expected to reverse as a result of GILTI provisions that are effective for us after the calendar year ending December 31, 2017, or should the tax on GILTI provisions be recognized in the period the Act was signed into law. Because of the complexity of the new provisions, we are continuing to evaluate on how the provisions will be accounted for under the U.S. generally accepted accounting principles wherein companies are allowed to make an accounting policy election of either (i) account for GILTI as a component of tax expense in the period in which we are subject to the rules (the “period cost method”), or (ii) account for GILTI in our measurement of deferred taxes (the “deferred method”). Currently, we have not elected a method and will only do so after our completion of the analysis of the GILTI provisions and our election method will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in our taxable income related to GILTI and, if so, the impact that is expected.
A summary of our deferred tax assets is as follows (in thousands):
|
| | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Accrued expenses and reserves | $ | 1,665 |
| | $ | 5,069 |
|
Share-based compensation | 14,430 |
| | 23,864 |
|
Deferred revenue | — |
| | 1,085 |
|
Net operating loss carryforwards | 71,653 |
| | 73,708 |
|
Property and equipment, textbooks and intangibles assets | 3,905 |
| | 5,168 |
|
Other items | 960 |
| | 1,407 |
|
Gross deferred tax assets | 92,613 |
| | 110,301 |
|
Valuation allowance | (91,183 | ) | | (110,045 | ) |
Total deferred tax assets | 1,430 |
| | 256 |
|
| | | |
Deferred tax liabilities: | | | |
Other | (2,869 | ) | | (1,413 | ) |
Total deferred tax liabilities | (2,869 | ) | | (1,413 | ) |
| | | |
Net deferred tax liability | $ | (1,439 | ) | | $ | (1,157 | ) |
At December 31, 2017 and 2016 the deferred tax liability is created by the tax amortization of acquired indefinite lived intangible assets. Under the accounting guidance this deferred tax liability can be used as a source of income for recognition of deferred tax assets when determining the amount of valuation allowance to be recorded. The 2017 Tax Cuts and Job Acts changed the expiration of post 2017 net operating losses. Under the Act, post 2017 net operating losses can only be used to offset 80% of future taxable income; however, they do not expire. The indefinite-lived deferred tax liabilities are therefore a source of income for the indefinite-lived net operating loss carryforward and no valuation allowance is necessary on 80% of the deferred tax liabilities.
Realization of the deferred tax assets is dependent upon future taxable income, the amount and timing of which are uncertain. Accordingly, the federal and state gross deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by approximately $18.9 million during the year ended December 31, 2017 and increased by $11.8 million during the year ended December 31, 2016.
As of December 31, 2017, we had net operating loss carryforwards for federal and state income tax purposes of approximately $257 million and $195 million, respectively, which will begin to expire in years beginning 2028 and 2018, respectively.
As of December 31, 2017, we had tax credit carryforwards for federal and state income tax purposes of approximately $5.6 million and $6.4 million, respectively. The federal credits expire in various years beginning in 2030. The state credits do not expire.
Utilization of our net operating losses and tax credit carryforwards may be subject to substantial annual limitations due to ownership change limitations provided by the Internal Revenue Code of 1986, as amended (IRC), and similar state provisions. Such annual limitations could result in the expiration of the net operating losses and tax credit carryforwards before utilization.
As describe above, the Tax Act includes a transition tax in 2017 that taxes any previously deferred foreign earnings and profits in 2017 at a reduced tax rate. As a result of this tax and the accrual of associated withholding tax, we have no unrecorded tax liabilities associated with unremitted foreign retained earnings as of December 31, 2017. As of December 31, 2016, we permanently reinvested approximately $6.0 million of earnings from our international subsidiaries.
We recognize interest and penalties related to uncertain tax positions as a component of income tax expense. During the years ended December 31, 2017, 2016 and 2015, we recognized an increase of $0.2 million, a decrease of $18 thousand and an increase of $0.1 million of interest and penalties, respectively. Accrued interest and penalties as of December 31, 2017 and 2016 were approximately $0.8 million and $0.6 million, respectively.
During the year ended December 31, 2017, we settled an audit relating to an examination by the tax authorities in India for the fiscal filing period ending March 31, 2015. During the year ended December 31, 2017, we also settled two years, 2012 and 2013, of a four-year tax audit in Israel. The remaining years under audit, 2014 and 2015 are waiting on the settlement of similar court decisions prior to assessments by the Israel Tax Authority.
We file tax returns in U.S. federal, state, and certain foreign jurisdictions with varying statutes of limitations. Due to net operating loss and credit carryforwards, all of the tax years since inception through the 2017 tax year remain subject to examination by the U.S. federal and some state authorities. Foreign jurisdictions remain subject to examination up to approximately seven years from the filing date, depending on the jurisdiction.
A reconciliation of the beginning and ending balances of the total amount of unrecognized tax benefits, excluding accrued interest and penalties, is as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Beginning balance | $ | 4,882 |
| | $ | 4,849 |
| | $ | 4,272 |
|
Increase in tax positions for prior years | 280 |
| | 478 |
| | 82 |
|
Decrease in tax positions for prior years | (101 | ) | | (855 | ) | | (416 | ) |
Decrease in tax positions for prior year settlement | (172 | ) | | (32 | ) | | (61 | ) |
Decrease in tax positions for prior years due to statutes lapsing | (169 | ) | | (76 | ) | | — |
|
Increase in tax positions for current year | 978 |
| | 595 |
| | 948 |
|
Change due to translation of foreign currencies | 74 |
| | (77 | ) | | 24 |
|
Ending balance | $ | 5,772 |
| | $ | 4,882 |
| | $ | 4,849 |
|
The actual amount of any taxes due could vary significantly depending on the ultimate timing and nature of any settlement. We believe that the amount by which the unrecognized tax benefits may increase or decrease within the next 12 months is not estimable. The amount of unrecognized tax benefits, if recognized, that would affect the effective tax rate is $1.2 million for the year ended December 31, 2017. One or more of these unrecognized tax benefits could be subject to a valuation allowance if, and when recognized in a future period, which could impact the timing of any related effective tax rate benefit.