Income taxes consist of the following:
| | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | | $ | 3,809 | | | $ | 2,203 | | | $ | (520 | ) |
| | | | 255 | | | | 563 | | | | 253 | |
| Total current | | | 4,064 | | | | 2,766 | | | | (267 | ) |
| Deferred (credit): | | | | | | | | | | | | |
| | | | (1,743 | ) | | | (2,666 | ) | | | 3,994 | |
| | | | (2,231 | ) | | | - | | | | 1,153 | |
| Total deferred | | | (3,974 | ) | | | (2,666 | ) | | | 5,147 | |
| Total taxes on income | | $ | 90 | | | $ | 100 | | | $ | 4,880 | |
The current tax expense amounts
in
2016
and
2015
differ from the actual amounts payable to the taxing authorities due to the tax impact associated with stock incentive plan transactions under the plans described in Note
13,
Stock Based Compensation
. These adjustments were an addition of
$123
and
$44
in
2016
and
2015.
These adjustments to current taxes on income were recognized as adjustments of additional paid-in capital. Commencing
January 1, 2017,
all such adjustments are recognized as current taxes on income.
On
December 22, 2017,
the Tax Cuts and Jobs Act (the “
Tax Act”) was enacted. The Tax Act makes broad and complex changes to the U.S. tax code that impact the Company, most notably a reduction of the U.S. corporate income tax rate from
35
percent to
21
percent for tax years beginning after
December 31, 2017.
Other changes provided by the
2017
Tax Act include, but are
not
limited to the acceleration of depreciation for certain assets placed into service after
September 27, 2017.
Prospective changes beginning in
2018
from the Tax Act include: additional limitations on executive compensation, the repeal of the domestic manufacturing deduction and capitalization of research and development expenditures.
The SEC staff issued Staff Accounting Bulletin
No.
118
(“
SAB
118”
), which provides guidance on accounting for the tax effects of the Tax Act. We recognized the income tax effects of the Tax Act in our
2017
financial statements in accordance with SAB
118,
in the reporting period in which the Tax Act was signed into law. We did
not
identify items for which the income tax effects of the Tax Act have
not
been completed and a reasonable estimate could
not
be determined as of
December 31, 2017.
In accordance with SAB
118,
we have recorded a provisional amount of
$2,
963
of the deferred tax expense in connection with the re-measurement of certain deferred tax assets and liabilities and we will continue to refine the measurement of the net deferred tax balance during the preparation of the
2017
tax return as additional guidance and information become available.
Differences between the expected income tax expense derived from applying the federal statutory income tax rate to earnings from continuing operations before taxes on income and the actual tax expense are as follows:
| | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Federal income taxes at the statutory rate | | $ | 5,609 | | | | 35.00 | % | | $ | 2,959 | | | | 34.00 | % | | $ | (4,284 | ) | | | 34.00 | % |
Increase (decrease) in income taxes resulting from: | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred income tax re-measurement due to Tax Act | | | 2,963 | | | | 18.49 | | | | - | | | | - | | | | - | | | | - | |
Other deferred income tax adjustment | | | (241 | ) | | | (1.50 | ) | | | (51 | ) | | | (0.59 | ) | | | (156 | ) | | | 1.24 | |
Non-deductible compensation | | | - | | | | - | | | | 459 | | | | 5.27 | | | | - | | | | - | |
Non-deductible NHTSA penalty | | | - | | | | - | | | | - | | | | - | | | | 340 | | | | (2.70 | ) |
Other nondeductible expenses | | | 156 | | | | 0.97 | | | | 226 | | | | 2.60 | | | | 176 | | | | (1.39 | ) |
| Domestic manufacturing deduction | | | (504 | ) | | | (3.15 | ) | | | - | | | | - | | | | - | | | | - | |
| Stock based compensation | | | (394 | ) | | | (2.46 | ) | | | - | | | | - | | | | - | | | | - | |
| Worthless stock deduction of dissolved subsidiary | | | (966 | ) | | | (6.03 | ) | | | | | | | | | | | | | | | | |
State tax expense, net of federal income tax benefit | | | 547 | | | | 3.41 | | | | 68 | | | | 0.78 | | | | (79 | ) | | | 0.63 | |
| Forfeiture of state net operating loss and credit carry-forwards from dissolution of subsidiary | | | 3,039 | | | | 18.97 | | | | - | | | | - | | | | - | | | | - | |
| Valuation allowance adjustment | | | (9,544 | ) | | | (59.56 | ) | | | (2,932 | ) | | | (33.69 | ) | | | 9,472 | | | | (75.17 | ) |
| Unrecognized tax benefit adjustment | | | 314 | | | | 1.96 | | | | 129 | | | | 1.48 | | | | (162 | ) | | | 1.29 | |
Federal research and development tax credit | | | (753 | ) | | | (4.70 | ) | | | (801 | ) | | | (9.20 | ) | | | (364 | ) | | | 2.89 | |
| | | | (136 | ) | | | (0.84 | ) | | | 43 | | | | 0.50 | | | | (63 | ) | | | 0.48 | |
| Total | | $ | 90 | | | | 0.56 | % | | $ | 100 | | | | 1.15 | % | | $ | 4,880 | | | | (38.73 | )% |
Temporary differences which give rise to deferred income tax assets (liabilities)
are as follows:
| | | December 31, | |
| | | 2017 | | | 2016 | |
Deferred income tax assets: | | | | | | | | |
| Warranty reserve | | $ | 3,595 | | | $ | 7,246 | |
| Credit carry-forwards, net of federal income tax benefit | | | 317 | | | | 3,199 | |
| Inventory costs and reserves | | | 1,792 | | | | 2,194 | |
| Compensation related accruals | | | 663 | | | | 1,512 | |
| Net operating loss carry-forwards, net of federal income tax benefit | | | 954 | | | | 1,029 | |
| Stock based compensation | | | 1,061 | | | | 615 | |
| Vendor compensation | | | 507 | | | | - | |
| Other | | | 409 | | | | 773 | |
Total deferred income tax assets | | $ | 9,298 | | | $ | 16,568 | |
| | | | | | | | | |
| | | | | | | | | |
Deferred income tax liabilities: | | | | | | | | |
| Depreciation | | $ | (1,230 | ) | | $ | (2,294 | ) |
| Intangible assets | | | (574 | ) | | | (840 | ) |
| Prepaid insurance | | | (152 | ) | | | (522 | ) |
| Total deferred income tax liabilities | | $ | (1,956 | ) | | $ | (3,656 | ) |
| | | | | | | | | |
| Net deferred income tax assets | | $ | 7,342 | | | $ | 12,912 | |
| Valuation allowance | | | (58 | ) | | | (9,602 | ) |
| | | $ | 7,284 | | | $ | 3,310 | |
Based upon an assessment of the available positive and negative evidence at
December 31, 2016,
we determined whether sufficient future taxable income would be generated to realize the benefit of the deferred tax assets as of
December 31, 2016
and recorded
a valuation allowance of
$9,602
against a portion of the deferred tax assets. A significant portion of negative evidence considered was the cumulative loss incurred over the
three
-year period ending
December 31, 2016.
During
2017,
the Company determined that based on recent operating results, as well as an assessment of expected future operating results, the realization of its remaining deferred tax assets is more likely than
not.
As a result, the Company reversed substantially the entire valuation allowance during
2017.
The release of the valuation allowance was determined in accordance with the provisions of ASC
740,
“Income Taxes,” which requires an assessment of both positive and negative evidence when determining whether it is more likely than
not
that deferred tax assets are realizable.
At
December
31,
2017
and
2016,
we had state deferred income tax assets related to state tax net operating loss carry-forwards, of
$1,207
and
$1,560,
which begin expiring in
2019.
Also, as of
December
31,
2017
and
2016,
we had deferred income tax assets related to state tax credit carry-forwards of
$402
and
$4,846,
which begin expiring in
2026.
Due to accumulated losses in several state jurisdictions, we had recorded valuation allowances against certain deferred income tax assets aggregating
$58
and
$4,228
at
December 31, 2017
and
2016.
During
2017
certain state NOL and credit carry-forwards were forfeited due to the dissolution of a dormant, wholly-owned subsidiary. As of
December 31, 2016,
we had recorded a
100%
valuation allowance against these carry-forwards. Therefore, the resultant adjustment to deferred tax assets of
$3,039
was fully offset by a reduction in the valuation allowance.
A reconciliation of the change in the unrecognized tax benefits (“UTB”) for the
three
years ended
December 31,
201
7,
2016
and
2015
is as follows:
| | | | | | | | | | |
| | | $ | 345 | | | $ | 349 | | | $ | 481 | |
| Increase (decrease) related to prior year tax positions | | | 168 | | | | (24 | ) | | | (73 | ) |
Increase related to current year tax positions | | | 118 | | | | 20 | | | | 91 | |
| Settlement | | | - | | | | - | | | | (110 | ) |
| Expiration of statute | | | (66 | ) | | | - | | | | (40 | ) |
| | | $ | 565 | | | $ | 345 | | | $ | 349 | |
As of
December
31,
2017,
we had an ending UTB balance of
$565
along with
$279
of interest and penalties, for a total liability of
$847,
with
$117
recorded as a current liability and
$730
recorded as a non-current liability based on the applicable statutes of limitations. The change in interest and penalties amounted to an increase of
$94
in
2017,
an increase of
$133
in
2016,
and a decrease of
$30
in
2015,
which were reflected in Income tax expense within our Consolidated Statements of Operations.
As of
December 31, 2017,
we are
no
longer subject to examination by federal taxing authorities for
2013
and earlier years.
We also file tax returns in a number of states and those jurisdictions remain subject to audit in accordance with relevant state statutes. These audits can involve complex issues that
may
require an extended period of time to resolve and
may
cover multiple years. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given fiscal period could be impacted. However, we do
not
expect such impacts to be material to our financial statements. An unfavorable tax settlement would require use of our cash and could result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement could result in a reduction in our effective income tax rate in the period of resolution. We do
not
expect the total amount of unrecognized tax benefits to significantly increase or decrease over the next
twelve
months.