Income Taxes
The components of income tax expense included in our consolidated statements of operations were as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Current: | | | | | |
Federal | $ | 15,545 |
| | $ | 16,540 |
| | $ | 18,988 |
|
State | (1,122 | ) | | 1,934 |
| | 1,104 |
|
Foreign | 368 |
| | 217 |
| | 21 |
|
Current income tax expense | 14,791 |
| | 18,691 |
| | 20,113 |
|
Deferred: |
| | | | |
Federal | 4,596 |
| | 2,362 |
| | (138 | ) |
State | (1,816 | ) | | (1,142 | ) | | (287 | ) |
Foreign | — |
| | 50 |
| | 19 |
|
Deferred income tax expense (benefit) | 2,780 |
| | 1,270 |
| | (406 | ) |
Income tax expense | $ | 17,571 |
| | $ | 19,961 |
| | $ | 19,707 |
|
Note 13—Income Taxes (continued)
Income tax expense differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. The sources and tax effects of the differences are as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. federal statutory tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal tax benefit | (2.3 | ) | | 0.4 |
| | 0.4 |
|
General business credits | (2.8 | ) | | (3.4 | ) | | (0.9 | ) |
Employee stock-based compensation | (12.4 | ) | | 0.3 |
| | 0.8 |
|
Tax Cuts and Jobs Act remeasurement | (5.0 | ) | | — |
| | — |
|
Transaction costs | — |
| | — |
| | (2.1 | ) |
Other | 4.5 |
| | 0.1 |
| | 0.7 |
|
Effective tax rate | 17.0 | % | | 32.4 | % | | 33.9 | % |
On December 22, 2017, H.R. 1, known as the Tax Cuts and Jobs Act (the "Tax Act") was signed into law and makes significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the US federal corporate tax rate from 35% to 21%, creates new taxes on certain foreign-sourced earnings and certain related-party payments, eliminates certain deductions and enhances and extends through 2026 the option to claim accelerated depreciation deductions on qualified property. In addition, in 2017 we were subject to a one-time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we have made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. We remeasured deferred tax assets and liabilities resulting from the permanent reduction in the U.S. statutory corporate tax rate from 35% to 21% and recorded a provisional tax benefit of $6.3 million. We also analyzed the transition tax on accumulated foreign subsidiary earnings and made a provisional determination that we have no additional tax obligation. As we collect and prepare necessary data, and interpret the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts including estimates for certain employment compensation. Those adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. The SEC has provided up to a one-year measurement period for companies to finalize the accounting for the impacts of this new legislation and we anticipate finalizing our accounting over the coming quarters.
The decrease in the effective tax rate for the year ended December 31, 2017 as compared to the year ended December 31, 2016 is primarily due to excess tax benefits related to stock compensation recognized as an income tax benefit instead of additional paid-in capital in accordance with ASU 2016-09. Additionally, our rate was favorably impacted by the remeasurement of our deferred tax assets and liabilities associated with the Tax Cuts and Jobs Act. Furthermore, our rate was favorably impacted by our release of reserves for uncertain tax positions upon the completion of tax examinations and the expiration of the statute of limitations with certain taxing jurisdictions. See Note 2 — Summary of Significant Accounting Policies for additional information about our adoption of ASU 2016-09.
The tax effects of temporary difference that give rise to significant portions of our deferred tax assets and liabilities were as follows:
Note 13—Income Taxes (continued)
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (In thousands) |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 7,746 |
| | $ | 12,619 |
|
Stock-based compensation | 9,137 |
| | 13,221 |
|
Reserve for overdrawn accounts | 3,516 |
| | 4,684 |
|
Accrued liabilities | 8,782 |
| | 6,910 |
|
Tax credit carryforwards | 5,873 |
| | 3,590 |
|
Other | 10 |
| | 2,293 |
|
Total deferred tax assets | $ | 35,064 |
| | $ | 43,317 |
|
Deferred tax liabilities: | | | |
Internal-use software costs | $ | 16,860 |
| | $ | 20,415 |
|
Property and equipment, net | 1,274 |
| | 692 |
|
Deferred expenses | 4,418 |
| | 5,881 |
|
Intangible assets | 11,901 |
| | 11,208 |
|
Gift card revenue | 1,884 |
| | 4,236 |
|
Total deferred tax liabilities | 36,337 |
| | 42,432 |
|
Net deferred tax (liabilities) assets | $ | (1,273 | ) | | $ | 885 |
|
We establish a valuation allowance when we consider it more-likely-than-not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2017, we do not have a valuation allowance on any of our deferred tax assets as we believe it is more-likely-than-not that we will realize the benefits of our deferred tax assets.
We are subject to examination by the Internal Revenue Service, or IRS, and various state tax authorities. We remain subject to examination of our federal income tax returns for the years ended December 31, 2014 through 2016. We generally remain subject to examination of our various state income tax returns for a period of four to five years from the respective dates the returns were filed.
As of December 31, 2017, we have net operating loss carryforwards of approximately $37.7 million and $33.7 million for federal and state tax purposes, respectively, which will be available to offset future income. If not used, these carryforwards will expire between 2020 and 2035. In addition, we have state business tax credits of approximately $9.8 million that can be carried forward indefinitely and other state business tax credits of approximately $1.2 million that will expire between 2023 and 2027.
As of December 31, 2017 and 2016, we had a liability of $5.6 million and $7.3 million, respectively, for unrecognized tax benefits related to various federal and state income tax matters excluding interest, penalties and related tax benefits. The reconciliation of the beginning unrecognized tax benefits balance to the ending balance is as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Beginning balance | $ | 7,314 |
| | $ | 7,371 |
| | $ | 6,189 |
|
Increases related to positions taken during prior years | 404 |
| | 134 |
| | 759 |
|
Increases related to positions taken during the current year | 1,099 |
| | 1,023 |
| | 423 |
|
Decreases related to positions settled with tax authorities | (1,865 | ) | | (1,105 | ) | | — |
|
Decreases due to a lapse of applicable statute of limitations | (1,392 | ) | | (109 | ) | | — |
|
Ending balance | $ | 5,560 |
| | $ | 7,314 |
| | $ | 7,371 |
|
| | | | | |
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate | $ | 5,560 |
| | $ | 7,314 |
| | $ | 7,371 |
|
We recognized accrued interest and penalties related to unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015, of approximately $0.2 million, $0.6 million and $0.2 million, respectively.