Income taxes
The income tax provision (benefit) consisted of the following for the years ended December 31, 2017, 2016 and 2015 (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | — |
| | $ | 19 |
| | $ | (51 | ) |
State and Foreign | 669 |
| | 402 |
| | 621 |
|
| 669 |
| | 421 |
| | 570 |
|
Deferred: | | | | | |
Federal | (488 | ) | | 51 |
| | 159 |
|
State | (32 | ) | | (2 | ) | | 10 |
|
Income tax provision | $ | 149 |
| | $ | 470 |
| | $ | 739 |
|
The differences between the effective tax rates reflected in the total provision for income taxes and the U.S. federal statutory rate of 34% for the years ended December 31, 2017, 2016 and 2015, respectively, were as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Provision at the U.S. federal statutory rate | $ | (26,443 | ) | | $ | (25,338 | ) | | $ | (22,124 | ) |
Increase (decrease) resulting from: | | | | | |
State income taxes, net of federal taxes | 18 |
| | 3 |
| | 74 |
|
Nondeductible expenses | 373 |
| | 457 |
| | 1,195 |
|
Acquisition-related expense | 245 |
| | (4 | ) | | (4 | ) |
Statutory to GAAP income adjustment | (77 | ) | | (274 | ) | | 119 |
|
Foreign Tax Expense | — |
| | 2 |
| | 350 |
|
Noncash share-based compensation | (3,405 | ) | | 604 |
| | 2,201 |
|
Incremental benefits for tax credits | (1,711 | ) | | (1,663 | ) | | (1,947 | ) |
Change in tax rate/income subject to lower tax rates and other | 2,625 |
| | 49 |
| | (15 | ) |
Change related to US tax reform | 31,359 |
| | — |
| | — |
|
Change in valuation allowance | (2,835 | ) | | 26,634 |
| | 20,890 |
|
Income tax provision | $ | 149 |
| | $ | 470 |
| | $ | 739 |
|
The Company’s effective tax rate was a provision of 0%, 1% and 1% for the years ended December 31, 2017, 2016 and 2015, respectively. During the year ended December 31, 2017, the Company's effective tax rate was impacted primarily by a valuation allowance, foreign taxes and other nondeductible expenses, partially offset by the R&E credit and the tax law changes under the Tax Cuts and Jobs Act.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law by the President of the United States and included a broad range of tax reform proposals affecting businesses, including corporate tax rates, business deductions, and international tax provisions. The Tax Cuts and Jobs Act reduced the United States corporate income tax rate to 21% effective January 1, 2018. The Company has remeasured the deferred tax assets as of December 31, 2017 to reflect the tax rate reduction and this resulted in a deferred tax expense of $31.4 million. The tax expense is offset by a release of valuation allowance of $31.4 million resulting in no expense for the year ended December 31, 2017.
The Tax Cuts and Jobs Act imposes a repatriation tax on any accumulated offshore earnings and profit. As of December 31, 2017, the Company has reviewed the offshore earnings and profits and has no additional earnings to repatriate and has provided for no tax. The Company continues to review the changes surrounding the deductibility of business expenses and stock compensation for executives as more guidance is issued.
Although PROS has included what it believes to be a reasonable estimate of the impact of the income tax effects of the Act on the Company’s consolidated financial statements as of December 31, 2017, it should be considered provisional. As the Company finalizes certain tax positions and reviews additional guidance available on tax reform, it will be able to conclude whether any further adjustments to current and deferred tax, current tax payable and receivable, and deferred income tax balances are required to the net deferred tax assets as well as to a liability related to the one-time repatriation tax. Any adjustments to these provisional amounts will be reported as a component of income tax expense in the reporting period in which the adjustments are determined, which will occur no later than the fourth quarter of 2018.
The tax effects of temporary differences and other tax attributes that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows (in thousands):
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
Noncurrent deferred taxes: | | | |
Property and equipment | $ | (847 | ) | | $ | (2,114 | ) |
Noncash share based compensation | 6,373 |
| | 8,053 |
|
State deferred | — |
| | 242 |
|
Capitalized software | (1,397 | ) | | (1,591 | ) |
Amortization | (5,096 | ) | | (2,187 | ) |
R&E tax credit carryforwards | 9,340 |
| | 6,852 |
|
Deferred revenue | 2,996 |
| 2,673 |
| 2,265 |
|
Federal Net Operating Losses ("NOLs") | 46,907 |
| | 40,671 |
|
State NOLs | 1,050 |
| | 1,517 |
|
State Credits | 1,613 |
| | 1,348 |
|
Foreign NOLs | 9,057 |
| | 10,663 |
|
Foreign tax credit carryforward | 2,521 |
| | 1,795 |
|
Other | 1,425 |
| | 1,317 |
|
Total noncurrent deferred tax assets | 73,942 |
| | 68,831 |
|
Less: valuation allowance | (74,153 | ) | | (69,049 | ) |
Total noncurrent deferred tax liability | (211 | ) | | (218 | ) |
Total net deferred tax liability | $ | (211 | ) | | $ | (218 | ) |
The net deferred tax liability is classified as other noncurrent liabilities in the accompanying Consolidated Balance Sheets.
The Company has federal and state net operating loss carryforwards related to past acquisitions and current year losses. Internal Revenue Code Section 382 ("Section 382") places certain limitations on the annual amount of U.S. net operating loss carryforwards that can be utilized when a change of ownership occurs. The Company believes the past acquisitions were changes in ownership pursuant to Section 382, subjecting federal acquired net operating losses to limitations. According to French law the net operating loss carryforwards are not subject to ownership change limitations.
The federal and foreign net operating loss and R&E tax credit carryforward amount available to be used in future periods, taking into account the 382 annual limitation and current year losses, is approximately $260.1 million and $11.0 million, respectively. The Company’s net operating losses will begin to expire in 2024, R&E credits will begin to expire in 2031, and foreign tax credits will begin to expire in 2022. Also included in net operating losses are $36.2 million of French carryforwards which have no expiration.
As of December 31, 2014, the Company determined it was more likely than not that it would be unable to fully utilize the majority of its U.S. and state deferred tax assets. As a result, the Company had recorded a valuation allowance against those assets to the extent that they cannot be realized through net operating loss carrybacks to prior years. This valuation allowance is evaluated periodically and will be reversed partially or in whole if business results and the economic environment have sufficiently improved to support realization of some or all of the Company's deferred tax assets. In performing the analysis throughout 2017, the Company determined that there was no sufficient positive evidence to outweigh the current and historic negative evidence to determine that it was more likely than not that the deferred assets would not be realized. Therefore, the Company continues to have a valuation allowance against net deferred tax assets as of December 31, 2017 and 2016.
Undistributed earnings of the Company’s foreign subsidiaries are considered permanently reinvested and, accordingly, no provision for U.S. federal or state income taxes has been provided thereon. The cumulative amount of undistributed earnings of the Company’s non-U.S. subsidiaries was immaterial for the years ended December 31, 2017 and 2016. The determination of the related deferred tax liability, which requires complex analysis of international tax situations related to repatriation, is not practical at this time. The Company is presently investing in international operations located in Europe, North America, and Australia. The Company is funding the working capital needs of its foreign operations through its U.S. operations. In the future, the Company plans to utilize its foreign undistributed earnings, as well as continued funding from its U.S. operations, to support its continued foreign investment.
For the years ended December 31, 2017, 2016 and 2015, the Company had $0.2 million, $0.2 million and $0.2 million, respectively, of net unrecognized tax benefits which, if recognized, would impact the Company's effective tax rate. The Company recorded immaterial amounts for interest and penalties as of December 31, 2017, 2016 and 2015, respectively. The Company believes that it is reasonably possible that there will be no change in the unrecognized tax benefits within the next twelve months.
The Company is not aware of any significant income tax examinations in progress at this time. The Company files tax returns in the United States and various state and foreign jurisdictions. The Company is subject to U.S. federal income tax examination for the calendar tax years 2016, 2015 and 2014 and state and foreign income tax examination for various years depending on the statutes of limitation of those jurisdictions.
The following table sets forth the changes to the Company's unrecognized tax benefit for the year ended December 31, 2017, 2016 and 2015 (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Beginning balance | | $ | 192 |
| | $ | 192 |
| | $ | 395 |
|
Changes based on tax positions related to prior year | | — |
| | — |
| | 21 |
|
Changes due to settlement | | (9 | ) | | — |
| | (224 | ) |
Ending balance | | $ | 183 |
| | $ | 192 |
| | $ | 192 |
|
The table above has been updated to reflect gross tax liability, exclusive of interest and penalties and other offsetting amounts.