Income Taxes
On December 22, 2017, the Act was signed into legislation. The Act reduces the federal corporate tax rate from 35% to 21%, and imposes a one-time transition tax on certain foreign earnings, effective January 1, 2018.
On December 22, 2017, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one year from the Act's enactment date for companies to complete the accounting under ASC 740, Income Taxes. Since the Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, the Company considers the deferred tax re-measurements, and other items to be reasonable estimates, but provisional, due to the forthcoming guidance and its ongoing analysis of final year-end data and tax positions. The Company expects to complete its analysis within the measurement period in accordance with SAB 118. As of December 31, 2017, the Company has recorded a decrease in its net deferred tax liability of $8.9 million, with a corresponding net adjustment to deferred income tax benefit. No transition tax was recorded as the Company does not have any foreign subsidiaries.
The Company accounts for income taxes and related uncertain tax positions in accordance with ASC Topic 740. For the years ended December 31, 2017, 2016 and 2015, the Company recognized net increase of $359,114 and net decreases of $160,672 and $112,599, respectively, in unrecognized tax benefits that impact the tax rate. The Company's policy is to recognize interest and penalties on unrecognized tax benefits as a component of income tax expense. The Company has recorded interest on its unrecognized tax benefits in 2017 and 2016. The following is a reconciliation of the total amounts of unrecognized tax benefits excluding interest and penalties for the years ended December 31, 2017 and 2016:
|
| | | | | | | |
| 2017 | | 2016 |
Balance at January 1 | $ | 364,324 |
| | $ | 420,909 |
|
Increases related to prior year tax positions | 98,177 |
| | 410,170 |
|
Increases related to current year tax positions | 213,152 |
| | 82,500 |
|
Decreases based on settlements with taxing authorities | (200,700 | ) | | (549,255 | ) |
Balance at December 31 | $ | 474,953 |
| | $ | 364,324 |
|
Of the total unrecognized tax benefits disclosed above, $257,119 and $54,649 are classified as other noncurrent liabilities for the years ended December 31, 2017 and 2016, respectively, and $26,475 and $227,175 are offsets to income taxes receivable as of December 31, 2017 and 2016, respectively, in the consolidated balance sheets. The remainder is included in deferred income taxes in the consolidated balance sheets. The Company does not believe it will have any significant changes in the amount of unrecognized tax benefits in the next 12 months. The total amount of the unrecognized tax benefits, if recognized, for the years ended December 31, 2017 and 2016, respectively, would affect the effective tax rate. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal examinations by tax authorities before 2014, and state and local income tax examinations, by tax authorities for years before 2013.
The provision for income taxes consists of the following components for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | (4,281,810 | ) | | $ | (5,027,290 | ) | | $ | 3,889,649 |
|
State | 174,805 |
| | 672,243 |
| | (202,270 | ) |
Total current | (4,107,005 | ) | | (4,355,047 | ) | | 3,687,379 |
|
Deferred: | | | | | |
Federal | (4,294,656 | ) | | 5,406,027 |
| | (23,265 | ) |
State | 128,166 |
| | (1,256,938 | ) | | 18,143 |
|
Total deferred | (4,166,490 | ) | | 4,149,089 |
| | (5,122 | ) |
Income tax (benefit) expense | $ | (8,273,495 | ) | | $ | (205,958 | ) | | $ | 3,682,257 |
|
The provision for income taxes for the years ended December 31, 2017, 2016 and 2015 differs from the amount computed by applying the U.S. federal income tax rate of 35% to pretax income because of the effect of the following items:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Tax expense at U.S. federal income tax rate | $ | 1,522,407 |
| | $ | 484,302 |
| | $ | 4,034,776 |
|
State income taxes, net of federal income tax effect | 268,933 |
| | 52,823 |
| | 36,308 |
|
Nondeductible expenses and other | 317,264 |
| | 188,813 |
| | 119,705 |
|
Effect of state rate change on deferred items | 148,101 |
| | (88,468 | ) | | (25,338 | ) |
Research and development credit | (527,642 | ) | | (467,500 | ) | | (364,050 | ) |
Changes in unrecognized tax benefits | 359,114 |
| | (160,672 | ) | | (112,599 | ) |
Provision to return adjustments | (297,579 | ) | | (71,588 | ) | | (6,545 | ) |
Remeasurement of net deferred tax liability resulting from the TCJA | (8,944,734 | ) | | — |
| | — |
|
State tax credits | (3,258,650 | ) | | (1,232,381 | ) | | — |
|
Valuation allowance | 2,950,575 |
| | 556,888 |
| | — |
|
Audit settlements | — |
| | 531,825 |
| | — |
|
Amended return refund | (811,284 | ) | | — |
| | — |
|
Income tax (benefit) expense | $ | (8,273,495 | ) | | $ | (205,958 | ) | | $ | 3,682,257 |
|
For the years ended December 31, 2017 and 2016, the Company's noncurrent deferred tax assets and liabilities consisted of the following: |
| | | | | | | |
| 2017 | | 2016 |
Noncurrent deferred tax assets: | | | |
Reserves and allowances | $ | 6,848,510 |
| | $ | 9,487,067 |
|
Stock options | 2,873,788 |
| | 3,899,180 |
|
Research and development credit | 1,320,334 |
| | 467,500 |
|
Net operating loss carryforward | 958,271 |
| | 456,639 |
|
Credit carryforwards | 4,756,466 |
| | 1,232,381 |
|
AMT credit | 271,825 |
| | — |
|
Subtotal | 17,029,194 |
| | 15,542,767 |
|
Valuation allowance | (3,627,408 | ) | | (556,888 | ) |
Total noncurrent deferred tax assets | 13,401,786 |
| | 14,985,879 |
|
Noncurrent deferred tax liabilities: | | | |
Prepaid and other expenses | 302,918 |
| | 494,744 |
|
Intangible assets | 9,381,475 |
| | 7,607,703 |
|
Property and equipment | 12,428,241 |
| | 15,508,307 |
|
Convertible debt | 3,791,800 |
| | 8,044,263 |
|
Total noncurrent deferred tax liabilities | 25,904,434 |
| | 31,655,017 |
|
Net deferred tax liability | $ | (12,502,648 | ) | | $ | (16,669,138 | ) |
For the years ended December 31, 2017 and 2016, the Company recorded deferred tax assets of $4,756,466 and $1,232,381, respectively, for certain state tax credits with a 5 year credit carryforward period. The Company believes that it is more likely than not that a portion of the benefit from these state tax credit carryforwards will not be realized. In recognition of this risk, the Company recorded valuation allowances of $3,627,408 and $556,888 on the deferred tax asset relating to these state tax credit carryforwards as of December 31, 2017 and 2016, respectively.
As of December 31, 2017 and 2016, the Company recorded deferred tax assets for federal and state income tax net operating loss carryforwards of $958,271 and $456,639, respectively, which will expire at various dates from tax years 2026 through 2036.