INCOME TAXES
On December 22, 2017, the Tax Cuts and Job Act (the Tax Act) was signed into United States tax law. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) elimination of the corporate alternative minimum tax (AMT); (3) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (4) current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) a new limitation on deductible interest expense; (6) limitations on the deductibility of certain executive compensation; (7) limitations on the use of FTCs to reduce the U.S. income tax liability; and (8) limitations on net operating losses (NOLs) generated after December 31, 2017, to 80 percent of taxable income.
The SEC staff issued SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, "Income Taxes." In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the laws that were in effect immediately before the enactment of the Tax Act.
The Tax Act reduces the US federal corporate tax rate from a graduated rate up to 35% to a flat rate of 21%, effective January 1, 2018. The Company has adjusted its deferred tax assets and liabilities at December 31, 2017 to reflect the Tax Act’s reduction of corporate income tax rates which are expected to be in effect in future years as the deferred tax assets and liabilities are realized. The effect of this provisional adjustment in the deferred provision for income taxes is a discrete net expense of $11,095, however this is offset with a reduction in the valuation allowance.
The Company considers these provisional recorded estimates as of December 31, 2017, and these amounts could be affected by additional information and other analysis related to the Tax Act. As a result, these amounts could be adjusted during the measurement period ending December 2018.
The components of income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Deferred: | | | | | |
Federal | $ | 8,494 |
| | $ | (3,184 | ) | | $ | (2,562 | ) |
State | (131 | ) | | (477 | ) | | (325 | ) |
| 8,363 |
| | (3,661 | ) | | (2,887 | ) |
(Decrease) Increase in valuation allowance | (8,363 | ) | | 3,661 |
| | 2,887 |
|
Total tax expense | $ | — |
| | $ | — |
| | $ | — |
|
The reconciliation between the effective tax rate and the statutory tax rate is as follows:
|
| | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
State statutory rate, net of federal benefit | 0.8 | % | | 4.1 | % | | 4.2 | % |
Effect of foreign rates different from statutory | (0.2 | )% | | — | % | | — | % |
Change in state rate (6.2% to 0.95%) | 3.8 | % | | — | % | | — | % |
Change in federal rate (34% to 21%) | (9.8 | )% | | — | % | | — | % |
Nondeductible/nontaxable items | (122.2 | )% | | (12.2 | )% | | (0.7 | )% |
Change in valuation allowance | 93.6 | % | | (25.9 | )% | | (37.5 | )% |
Income tax expense (benefit) | — | % | | — | % | | — | % |
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. The primary temporary differences that give rise to the deferred tax assets and liabilities are certain inventory adjustments, amortization, research and development fees, and net operating loss carryforwards.
The deferred tax assets and liabilities consisted of the following at December 31, 2017 and 2016: |
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Inventories, net | $ | 1,168 |
| | $ | 1,167 |
|
Stock based compensation | 1,035 |
| | 1,938 |
|
Loss carryforwards | 18,523 |
| | 26,091 |
|
Credit carryforwards | 336 |
| | 305 |
|
Intangibles | 117 |
| | 216 |
|
Other | 105 |
| | 113 |
|
Total deferred tax assets | 21,284 |
| | 29,830 |
|
Valuation allowance | (21,222 | ) | | (29,586 | ) |
Net deferred tax assets | 62 |
| | 244 |
|
Deferred tax liabilities: | | | |
Property, plant and equipment | (62 | ) | | (244 | ) |
Total deferred tax liabilities | (62 | ) | | (244 | ) |
Deferred tax assets, net | $ | — |
| | $ | — |
|
The deferred tax assets were fully offset by a valuation allowance at December 31, 2017 and 2016, and no income tax benefit has been recognized in our consolidated statements of operations for each of the three years in the period ended December 31, 2017. As of December 31, 2017, we had available federal and state tax loss carryforwards of $70,335 and tax credits for federal and state tax purposes of $335 which begin to expire in 2028. An ownership change under Section 382 of the Internal Revenue Code was deemed to occur on May 30, 2014. Given the limitation calculation, we anticipate approximately $16,200 in losses generated prior to the ownership change date will be subject to potential limitation. The estimated annual limitation is $1,062, which is increased by $2,302 over the first five years as a result of an unrealized built in gain.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2017. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.
We are subject to taxation in the United States, Indiana and various other state and international jurisdictions. As of December 31, 2017, all tax years from 2010 remain open to examination by the major taxing jurisdictions to which we are subject due to our net operating loss and credit carryforwards from those years. We believe that the income tax filing positions will be sustained on audit and do not anticipate any adjustments that will result in a material change. Therefore, no reserve for uncertain income tax positions has been recorded. Interest and penalties, if any, associated with income tax examinations will be to record such items as a component of income taxes.
At December 31, 2017, our foreign operations held cash totaling $0.5 million. Except for the nontaxable repayment of
intercompany loans, our intent is to permanently reinvest these funds outside of the United States and our current plans do not
demonstrate a need to repatriate these funds to our U.S. operations. However, if these funds were repatriated, the amount
remitted would be subject to U.S. income taxes and applicable non-U.S. income and withholding taxes.
INCOME TAXES
On December 22, 2017, the Tax Cuts and Job Act (the Tax Act) was signed into United States tax law. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) elimination of the corporate alternative minimum tax (AMT); (3) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (4) current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) a new limitation on deductible interest expense; (6) limitations on the deductibility of certain executive compensation; (7) limitations on the use of FTCs to reduce the U.S. income tax liability; and (8) limitations on net operating losses (NOLs) generated after December 31, 2017, to 80 percent of taxable income.
The SEC staff issued SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, "Income Taxes." In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the laws that were in effect immediately before the enactment of the Tax Act.
The Tax Act reduces the US federal corporate tax rate from a graduated rate up to 35% to a flat rate of 21%, effective January 1, 2018. The Company has adjusted its deferred tax assets and liabilities at December 31, 2017 to reflect the Tax Act’s reduction of corporate income tax rates which are expected to be in effect in future years as the deferred tax assets and liabilities are realized. The effect of this provisional adjustment in the deferred provision for income taxes is a discrete net expense of $11,095, however this is offset with a reduction in the valuation allowance.
The Company considers these provisional recorded estimates as of December 31, 2017, and these amounts could be affected by additional information and other analysis related to the Tax Act. As a result, these amounts could be adjusted during the measurement period ending December 2018.
The components of income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Deferred: | | | | | |
Federal | $ | 8,494 |
| | $ | (3,184 | ) | | $ | (2,562 | ) |
State | (131 | ) | | (477 | ) | | (325 | ) |
| 8,363 |
| | (3,661 | ) | | (2,887 | ) |
(Decrease) Increase in valuation allowance | (8,363 | ) | | 3,661 |
| | 2,887 |
|
Total tax expense | $ | — |
| | $ | — |
| | $ | — |
|
The reconciliation between the effective tax rate and the statutory tax rate is as follows:
|
| | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
State statutory rate, net of federal benefit | 0.8 | % | | 4.1 | % | | 4.2 | % |
Effect of foreign rates different from statutory | (0.2 | )% | | — | % | | — | % |
Change in state rate (6.2% to 0.95%) | 3.8 | % | | — | % | | — | % |
Change in federal rate (34% to 21%) | (9.8 | )% | | — | % | | — | % |
Nondeductible/nontaxable items | (122.2 | )% | | (12.2 | )% | | (0.7 | )% |
Change in valuation allowance | 93.6 | % | | (25.9 | )% | | (37.5 | )% |
Income tax expense (benefit) | — | % | | — | % | | — | % |
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. The primary temporary differences that give rise to the deferred tax assets and liabilities are certain inventory adjustments, amortization, research and development fees, and net operating loss carryforwards.
The deferred tax assets and liabilities consisted of the following at December 31, 2017 and 2016: |
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Inventories, net | $ | 1,168 |
| | $ | 1,167 |
|
Stock based compensation | 1,035 |
| | 1,938 |
|
Loss carryforwards | 18,523 |
| | 26,091 |
|
Credit carryforwards | 336 |
| | 305 |
|
Intangibles | 117 |
| | 216 |
|
Other | 105 |
| | 113 |
|
Total deferred tax assets | 21,284 |
| | 29,830 |
|
Valuation allowance | (21,222 | ) | | (29,586 | ) |
Net deferred tax assets | 62 |
| | 244 |
|
Deferred tax liabilities: | | | |
Property, plant and equipment | (62 | ) | | (244 | ) |
Total deferred tax liabilities | (62 | ) | | (244 | ) |
Deferred tax assets, net | $ | — |
| | $ | — |
|
The deferred tax assets were fully offset by a valuation allowance at December 31, 2017 and 2016, and no income tax benefit has been recognized in our consolidated statements of operations for each of the three years in the period ended December 31, 2017. As of December 31, 2017, we had available federal and state tax loss carryforwards of $70,335 and tax credits for federal and state tax purposes of $335 which begin to expire in 2028. An ownership change under Section 382 of the Internal Revenue Code was deemed to occur on May 30, 2014. Given the limitation calculation, we anticipate approximately $16,200 in losses generated prior to the ownership change date will be subject to potential limitation. The estimated annual limitation is $1,062, which is increased by $2,302 over the first five years as a result of an unrealized built in gain.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2017. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.
We are subject to taxation in the United States, Indiana and various other state and international jurisdictions. As of December 31, 2017, all tax years from 2010 remain open to examination by the major taxing jurisdictions to which we are subject due to our net operating loss and credit carryforwards from those years. We believe that the income tax filing positions will be sustained on audit and do not anticipate any adjustments that will result in a material change. Therefore, no reserve for uncertain income tax positions has been recorded. Interest and penalties, if any, associated with income tax examinations will be to record such items as a component of income taxes.
At December 31, 2017, our foreign operations held cash totaling $0.5 million. Except for the nontaxable repayment of
intercompany loans, our intent is to permanently reinvest these funds outside of the United States and our current plans do not
demonstrate a need to repatriate these funds to our U.S. operations. However, if these funds were repatriated, the amount
remitted would be subject to U.S. income taxes and applicable non-U.S. income and withholding taxes.