INCOME TAXES
Deferred tax assets (liabilities) included in the balance sheet as of December 31, 2017 and 2016 are as follows (in thousands):
|
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating loss carryforward | $ | 168 |
| | $ | 155 |
|
Allowance for doubtful accounts | 272 |
| | 519 |
|
Provision for accrued expenses and other, net | 1,300 |
| | 2,947 |
|
Stock based compensation | 3,770 |
| | 5,410 |
|
Deferred revenue | 920 |
| | 283 |
|
Tax credit carryforward | — |
| | 3,257 |
|
| 6,430 |
| | 12,571 |
|
Less valuation allowance | 224 |
| | 1,033 |
|
Deferred tax asset, net of valuation allowance | 6,206 |
| | 11,538 |
|
Deferred tax liabilities: | | | |
Acquired intangibles | (10,933 | ) | | (14,602 | ) |
Depreciation of fixed assets | (3,049 | ) | | (4,531 | ) |
Deferred tax liabilities | (13,982 | ) | | (19,133 | ) |
Net deferred tax liability | $ | (7,776 | ) | | $ | (7,595 | ) |
Recognized in Consolidated Balance Sheets: | | | |
Deferred tax asset | 469 |
| | 306 |
|
Deferred tax liability | (8,245 | ) | | (7,901 | ) |
Net deferred tax liability | $ | (7,776 | ) | | $ | (7,595 | ) |
The Company had deferred tax assets of $0.2 million at December 31, 2017 and 2016 related to net operating loss carryforwards and $3.3 million at December 31, 2016 related to tax credit carryforwards. The Company had no tax credit carryforwards at December 31, 2017. The net operating losses expire in various years through 2025. The Company has recorded valuation allowances of $0.2 million and $1.0 million, respectively, at December 31, 2017 and 2016 in order to measure only the portion of the deferred tax assets which are more likely than not to be realized.
Tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current income tax expense (benefit): | | | | | |
Federal | $ | 1,984 |
| | $ | 5,048 |
| | $ | 10,201 |
|
State | (285 | ) | | 931 |
| | 1,491 |
|
Foreign | 1,504 |
| | 2,259 |
| | 3,500 |
|
Current income tax expense | 3,203 |
| | 8,238 |
| | 15,192 |
|
Deferred income tax expense (benefit): | | | | | |
Federal | (207 | ) | | (891 | ) | | 998 |
|
State | 329 |
| | 192 |
| | 405 |
|
Foreign | 94 |
| | (2,260 | ) | | (2,586 | ) |
Deferred income tax expense (benefit) | 216 |
| | (2,959 | ) | | (1,183 | ) |
Income tax expense | $ | 3,419 |
| | $ | 5,279 |
| | $ | 14,009 |
|
A reconciliation between the tax expense at the federal statutory rate and the reported income tax expense is summarized as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | $ | 6,789 |
| | $ | (42 | ) | | $ | 1,064 |
|
Gain on sale of subsidiary | (1,571 | ) | | — |
| | — |
|
Stock-based compensation | 1,414 |
| | — |
| | — |
|
Nondeductible impairment | — |
| | 5,287 |
| | 9,199 |
|
State taxes, net of federal effect | 35 |
| | 756 |
| | 1,435 |
|
Difference between foreign and U.S. rates | (1,054 | ) | | 297 |
| | 2,366 |
|
Change in unrecognized tax benefits | 1,003 |
| | (923 | ) | | 46 |
|
Gross tax on foreign dividend | 275 |
| | 5,084 |
| | — |
|
Tax credits related to foreign dividend | (275 | ) | | (4,244 | ) | | — |
|
US transition tax on foreign earnings | 2,962 |
| | — |
| | — |
|
Federal rate change impact on deferred tax liabilities | (3,281 | ) | | — |
| | — |
|
Research and development tax credits | (1,764 | ) | | (173 | ) | | (165 | ) |
Change in valuation allowances | (780 | ) | | (713 | ) | | — |
|
Other | (334 | ) | | (50 | ) | | 64 |
|
Income tax expense | $ | 3,419 |
| | $ | 5,279 |
| | $ | 14,009 |
|
Effective tax rate | 17.6 | % | | (4,436.1 | )% | | 460.7 | % |
In December 2017, President Trump signed into law H.R.1, commonly known as the Tax Cuts and Jobs Act (“TCJA”), which makes significant changes to the Internal Revenue Code. Subsequent to enactment of the TCJA in December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to provide guidance regarding accounting for the TCJA’s impact. SAB 118 requires companies to recognize those tax items for which accounting can be completed. For items whose accounting has not been completed, companies must recognize provisional amounts to the extent they are reasonably estimable, with subsequent adjustments over a measurement period as more information is available and calculations are finalized.
Enactment of the TCJA resulted in a one-time transition tax on the deemed repatriation of the Company’s undistributed earnings of its foreign subsidiaries. The Company has estimated that it will have a gross transition tax liability of $9.5 million which will be reduced by foreign tax credits of $6.5 million. Thus the Company has recorded tax expense of $3.0 million in the year ended December 31, 2017 as a provisional estimate of its US federal and state transition tax liability.
The TCJA lowered the Company’s US statutory federal tax rate from 35% to 21% effective January 1, 2018. The Company recorded a tax benefit of $3.3 million in the year ended December 31, 2017 as a provisional estimate of the reduction in its US deferred tax liabilities resulting from the rate change.
While the Company has recognized the provisional tax effect of the transition tax on deemed repatriation and the revaluation of deferred tax assets and liabilities in its financial statements for the year ended December 31, 2017, the ultimate tax impact could differ from these provisional amounts. The Company will continue to analyze the impact of the TCJA, including any additional regulatory guidance issued by the U.S. tax authorities, and expects to complete its accounting in 2018.
The Company recorded impairment charges of $2.2 million, $24.6 million, and $34.8 million for the years ended December 31, 2017, 2016, and 2015, respectively. Of the total impairment, the amounts relating to non-deductible goodwill were zero in 2017, $15.4 million in 2016, and $33.6 million in 2015. Based on the jurisdictions where the impairment charges were recorded, the non-deductible amounts caused tax expense to exceed the expected expense at statutory tax rates by zero in 2017, $5.3 million in 2016, and $9.2 million in 2015.
Prior to December 2016, the Company had asserted under ASC 740-30 that all of the unremitted earnings of its foreign subsidiaries were indefinitely invested. The Company evaluates this assertion each period based on a number of factors, including the operating plans, budgets, and forecasts for both the Company and its foreign subsidiaries; the long-term and short-term financial requirements in the U.S. and in each foreign jurisdiction; and the tax consequences of any decision to repatriate earnings of foreign subsidiaries to the U.S. In the fourth quarter of 2016, the Company evaluated a tax planning strategy related to the utilization of foreign tax credits on its U.S. federal tax return. Absent the strategy, the Company believed that it would not realize any of the credits during the allowable carryforward period under U.S. law. The Company concluded in December 2016 that it would implement the strategy, thus impacting the tax consequences of repatriation by enabling greater utilization of foreign tax credits. As a result, the Company changed its assertion regarding the indefinite reinvestment of its Canada subsidiary’s foreign earnings, but did not change its assertion with regard to the undistributed earnings of all other foreign subsidiaries. The Company recorded a tax liability of $0.8 million at December 31, 2016 reflecting the repatriation of $16.4 million from Canada to the U.S. All cumulative earnings of the Canada subsidiary through December 31, 2016 were distributed, so no additional accrual for deferred taxes related to earnings of the Canada subsidiary was required. The Company also recorded a tax benefit of $0.7 million in the year ended December 31, 2016 to record the partial release of a valuation allowance related to its foreign tax credit carryforwards.
Because of the transition tax on deemed repatriation required by the TCJA, the Company has been subject to tax in 2017 on the entire amount of its previously undistributed earnings from foreign subsidiaries. Beginning in 2018, the TCJA will generally provide a 100% deduction for U.S. federal tax purposes of dividends received by the Company from its foreign subsidiaries. However, the Company is currently evaluating the potential foreign and U.S. state tax liabilities that would result from future repatriations, if any, and how the TCJA will affect the Company's existing accounting position with regard to the indefinite reinvestment of undistributed foreign earnings. The Company expects to complete this evaluation and determine the impact which the legislation may have on its indefinite reinvestment assertion within the measurement period provided by SAB 118.
The TCJA establishes new tax rules designed to tax U.S. companies on global intangible low-taxed income (GILTI) earned by foreign subsidiaries. Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the TCJA and the application of ASC 740. Therefore, the Company has not made any adjustments related to potential GILTI tax in its 2017 financial statements.
An uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a tax return not yet filed, that has not been reflected in measuring income tax expense for financial reporting purposes. At December 31, 2017 and 2016, the Company has recorded a liability of $2.9 million and $2.5 million, respectively, which consists of unrecognized tax benefits of $2.5 million and $2.2 million, respectively, and estimated accrued interest and penalties of $0.3 million and $0.4 million, respectively. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. During the years ended December 31, 2017, 2016 and 2015, interest expense (income) and penalties recorded in the Consolidated Statements of Operations were $(41,000), $(86,000) and $177,000, respectively. Following is a reconciliation of the amounts of unrecognized tax benefits, net of tax and excluding interest and penalties, for the years ended December 31, 2017, 2016 and 2015 (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Unrecognized tax benefits—beginning of period | $ | 2,153 |
| | $ | 2,989 |
| | $ | 3,122 |
|
Increases in tax positions related to current year | 278 |
| | 117 |
| | 169 |
|
Increases in tax positions related to prior year | 646 |
| | — |
| | 76 |
|
Decreases in tax positions related to prior year | — |
| | (43 | ) | | — |
|
Lapse of statute of limitations | (538 | ) | | (910 | ) | | (378 | ) |
Unrecognized tax benefits—end of period | $ | 2,539 |
| | $ | 2,153 |
| | $ | 2,989 |
|
The foregoing table indicates unrecognized tax benefits, net of tax and excluding interest and penalties. The balance of gross unrecognized benefits was $2.7 million, $2.9 million, and $4.2 million at December 31, 2017, 2016 and 2015, respectively. If the unrecognized tax benefits at December 31, 2017, 2016 and 2015 were recognized in full, tax benefits of $2.9 million, $2.5 million and $3.4 million, respectively, would affect the effective tax rate.
The Company files income tax returns in the U.S. and various foreign jurisdictions. The Company is generally no longer subject to examinations by tax authorities for its tax returns for years prior to 2013. The Company believes it is reasonably possible that as much as $0.7 million of its unrecognized tax benefits may be recognized by the end of 2018 as a result of a lapse of the statute of limitations.