Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2016 | | 2015 |
Deferred tax assets and liabilities: | | | |
Accruals and prepaids | $ | 4,992 |
| | $ | 4,606 |
|
Intangible assets | (5,130 | ) | | 146 |
|
Property and equipment | (1,338 | ) | | (1,396 | ) |
R&D and other tax credits | 1,219 |
| | 3,293 |
|
Stock Compensation | 7,417 |
| | 7,063 |
|
Net operating loss | 2,395 |
| | 1,763 |
|
Other | 113 |
| | 145 |
|
Net deferred tax assets | $ | 9,668 |
| | $ | 15,620 |
|
| | | |
Valuation allowance | (554 | ) | | (782 | ) |
| $ | 9,114 |
| | $ | 14,838 |
|
The reconciliation of the Federal statutory income tax rate of 35% to the effective rate is as follows:
|
| | | | | |
| December 31, |
| 2016 | | 2015 |
Federal statutory rate | 35.00 | % | | 34.00 | % |
State taxes, net of federal benefit | 4.78 | % | | 3.33 | % |
Non deductible compensation | 0.04 | % | | 0.63 | % |
Meals & entertainment | 3.82 | % | | 2.27 | % |
Equity Compensation | 5.51 | % | | 6.39 | % |
Domestic Production Activities Deduction | (4.71 | )% | | — | % |
Tax Credits | (8.79 | )% | | (2.84 | )% |
Prior Period Adjustments | (3.79 | )% | | — | % |
Other | 3.27 | % | | (1.74 | )% |
Valuation allowance | (1.26 | )% | | (63.33 | )% |
| 33.87 | % | | (21.29 | )% |
Current and deferred income tax expense (benefit) is as follows (in thousands):
|
| | | | | | |
| December 31, 2016 |
| December 31, 2015 |
|
Current: | | |
Federal | $ | 4,700 |
| $ | 8,452 |
|
State | 1,423 |
| 1,218 |
|
Total current | 6,123 |
| 9,670 |
|
| | |
Deferred: | | |
Federal | 26 |
| (13,070 | ) |
State | (16 | ) | (1,768 | ) |
Total deferred | 10 |
| (14,838 | ) |
| | |
Total expense | $ | 6,133 |
| $ | (5,168 | ) |
Income taxes are based on estimates of the annual effective tax rate and evaluations of possible future events and transactions and may be subject to subsequent refinement or revision.
Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefit that, based on available evidence, is not expected to be realized. The Company establishes a valuation allowance for deferred tax assets for which realization is not likely. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.
As of December 31, 2016, our deferred tax assets were primarily the result of accrued liabilities, equity compensation, tax credits and net operating loss carryforwards. A valuation allowance of $554,000 and $782,000 was recorded against our gross deferred tax asset balance as of December 31, 2016, and December 31, 2015, respectively.
At December 31, 2016, the Company had income tax net operating loss ("NOL") carryforwards for federal and state purposes of $2,327,000 and $27,912,000 respectively. At December 31, 2015, the Company has income tax net operating loss ("NOL") carryforwards for federal and state purposes of $579,000 and $27,552,000 respectively. As of December 31, 2016, the Company has recorded a deferred tax asset for both federal and state NOL carryforwards of approximately $815,000 and approximately $1,580,000, respectively. As of December 31, 2015, the Company has recorded a deferred tax asset for both federal and state NOL carryforwards of approximately $197,000 and approximately $1,566,000, respectively. The Company's net operating losses and tax credits are subject to annual limitations due to ownership change limitations provided by Internal Revenue Code Section 382. If not utilized, the federal and state tax loss carryforwards will expire between 2027 and 2035. A valuation allowance remains recorded against the deferred tax asset for certain state net operating loss carryovers in the amount of $554,000 that are not expected to be utilized prior to expiration.
As a result of certain realization requirements of ASC 718, Compensation - Stock Compensation, the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation that were greater than the compensation recognized for financial reporting. During 2016, deferred tax assets in the amount of $1,170,000 were realized resulting in an increase to equity in the same amount. As of December 31, 2016, the Company does not have any remaining deferred tax assets that will result in an increase to equity upon realization. The Company uses ASC 740 ordering when determining when excess tax benefits have been realized.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands):
|
| | | | | | | |
| December 31, 2016 | | December 31, 2015 |
Unrecognized tax benefits - January 1 | $ | 170 |
| | $ | — |
|
| | | |
Gross increases - tax positions in current period | 111 |
| | 170 |
|
| | | |
Unrecognized tax benefits - December 31 | $ | 281 |
| | $ | 170 |
|
Included in the balance of unrecognized tax benefits as of December 31, 2016 and December 31, 2015, are $281,000 and $170,000, respectively, of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of unrecognized tax benefits as of December 31, 2016 and December 31, 2015, are $281,000 and $170,000, respectively, of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes. This amount is recorded in Other Liabilities in the accompanying consolidated balance sheets.
The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. Related to the unrecognized tax benefits noted above, the Company accrued no penalties or interest during 2016, and, in total, as of December 31, 2016 has not recognized any liabilities for penalties or interest. During 2015, we also did not accrue any penalties or interest and, in total, as of December 31, 2015, had not recognized any liability for penalties or interest.
The Company is subject to taxation in the US and various state jurisdictions. As of December 31, 2016 the Company’s tax returns for 2013, 2014 and 2015 are subject to examination by the tax authorities. As of December 31, 2016, the Company is generally no longer subject to US federal, state, or local examinations by tax authorities for years before 2013.