On
December 22, 2017,
the
2017
Tax Cuts and Jobs Act (the Act) was enacted into law and significantly changed how the U.S. imposes income tax on multinational corporations. Changes include, but are
not
limited to, a reduction of the corporate income tax rate from
35%
to
21%,
a transition tax on accumulated foreign earnings and a transition from a worldwide to a territorial tax system. We are required to recognize the effect of the Tax Act in the period of enactment, such as remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was
$3.2
million.
The Act also imposed a
one
-time transition tax, which is based on the Company
’s post-
1986
earnings and profits (E&P) that were previously deferred from U.S. income taxes. The Company estimated there is
no
impact related to the transition tax. The determination of the transition tax requires further analysis regarding the amount and composition of the Company’s historical foreign earnings, which is expected to be completed in the
second
half of
2018.
The Company doesn’t expect the adjustment to be significant.
The Company has
not
provided for any foreign withholding tax for any undistributed earnings for its foreign subsidiaries as of
December 31, 2017.
The Company intends to permanently reinvest the foreign earnings outside of the U.S.
In
December 2017,
the SEC staff issued Staff Accounting Bulletin
No.
118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB
118
), which allows companies to record provisional amounts during a measurement period
not
to extend more than
one
year beyond the
Act enactment date. Since the
2017
Act was passed late in the
fourth
quarter of
2017,
and ongoing guidance and accounting interpretation are expected over the next
12
months, we consider the accounting for deferred tax remeasurements, the impact of the transition of U.S. international taxation from a worldwide tax system to a territorial system and other provisions to be incomplete due to the forthcoming guidance and our ongoing analysis. We expect to complete our analysis within the measurement period in accordance with SAB
118.
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| | | | | | | | | | |
| | | | |
| U.S. | | | | | | | | | | | | |
| Current | | $ | (141 | ) | | $ | 410 | | | $ | 2,022 | |
| Deferred | | | (471 | ) | | | 208 | | | | 1,549 | |
| Foreign | | | | | | | | | | | | |
| Current | | | 254 | | | | 329 | | | | 341 | |
| Withholding | | | 1,654 | | | | 2,898 | | | | 3,089 | |
| Deferred | | | (33 | ) | | | 8 | | | | 14 | |
| Total provision | | $ | 1,263 | | | $ | 3,853 | | | $ | 7,015 | |
During the years ended
December 31,
201
7,
2016
and
2015,
income before taxes from U.S. operations was $(
1.2
) million,
$11.3
million and
$17.7
million, respectively, and income before taxes from foreign operations was
$1.1
million,
$1.6
million and
$1.7
million, respectively.
The income tax provision differs from the amount estimated by applying the statutory federal income tax rate (
35%
) for the following reasons (in thousands):
| | | | |
| | | | | | | | | | |
| Federal statutory tax provision | | $ | (26 | ) | | $ | 4,534 | | | $ | 6,798 | |
| State tax provision | | | (110 | ) | | | 283 | | | | 465 | |
| Stock compensation expense | | | (944 | ) | | | 45 | | | | 677 | |
| Tax credits | | | (2,769 | ) | | | (4,000 | ) | | | (4,166 | ) |
| Foreign tax, net | | | 1,641 | | | | 2,852 | | | | 3,111 | |
| Tax Law Changes | | | 3,247 | | | | — | | | | — | |
| Other | | | 224 | | | | 139 | | | | 130 | |
| Tax provision | | $ | 1,263 | | | $ | 3,853 | | | $ | 7,015 | |
As of
December 31,
201
7,
the Company had Federal and California net operating loss carry-forwards (“NOLs”) of approximately
$3.2
million and
$5.6
million. The Federal and California NOLs begin expiring after
2019
and
2028,
respectively.
As of
December 31,
201
7,
the Company had federal and state research and experimental and other tax credit (“R&D credits”) carry-forwards of approximately
$13
million and
$16.5
million, respectively. The federal credits begin to expire after
2027,
while the California credits have
no
expiration. The extent to which the federal and state credit carry forwards can be used to offset future tax liabilities, respectively,
may
be limited, depending on the extent of ownership changes within any
three
-year period as provided in the Tax Reform Act of
1986
and the California Conformity Act of
1987.
The Company assesses its deferred tax assets for recoverability on a regular basis, and where applicable, a valuation allowance is recorded to reduce the total deferred tax asset to an amount that will, more likely than
not,
be realized in the future. As of
December 31,
201
7
and
2016,
we believe that most of our deferred tax assets are “more-likely-than
not”
to be realized with the exception of California R&D tax credits that have
not
met the “more-likely-than
not”
realization threshold criteria because on an annual basis and pursuant to current law, we generate more California credits than California tax. As a result, at
December 31, 2017
and
2016,
the excess credits of
$9.0
million and
$6.7
million, respectively continued to be subject to a full valuation allowance. In addition, the Company had approximately
$0.1
million of California NOL carryforward from its acquisition of Syntricity. The Company evaluated positive and negative evidence and concluded that it was more likely than
not
that the California NOL would
not
be fully realizable. As a result of management’s evaluation, the Company recorded full valuation allowance against this deferred tax assets. The Company will continue to review its deferred tax assets in accordance with the applicable accounting standards. Net deferred tax assets balance as of
December 31, 2017
and
2016
was
$15.5
million and
$15.0
million, respectively.
The components of the net deferred tax assets are comprised of (in thousands):
| | | | |
| | | | | | | |
| Deferred tax assets | | | | | | | | |
| | | | | | | | | |
| Net operating loss carry forward | | $ | 1,318 | | | $ | 1,768 | |
| Research and development and other credit carry forward | | | 16,626 | | | | 12,345 | |
| Foreign tax credit carry forward | | | 1,754 | | | | — | |
| Accruals deductible in different periods | | | 3,285 | | | | 3,446 | |
| Intangible assets | | | 1,325 | | | | 2,573 | |
| Stock-based compensation | | | 1,166 | | | | 2,285 | |
| Valuation allowance | | | (9,126 | ) | | | (6,798 | ) |
| Subtotal | | $ | 16,348 | | | $ | 15,619 | |
| | | | | | | | | |
| Deferred tax liabilities | | | | | | | | |
| | | | | | | | | |
| Fixed assets | | | (835 | ) | | | (619 | ) |
| Net Deferred tax assets | | $ | 15,513 | | | $ | 15,000 | |
In accordance with the provisions of
the accounting standard relating to accounting for uncertain tax positions, the Company classifies its liabilities for income tax exposures as long-term. The Company includes interest and penalties related to unrecognized tax benefits within the Company’s income tax provision. As of
December 31, 2017
and
2016,
the Company had accrued interest and penalties related to unrecognized tax benefits of
$0.7
million and
$0.6
million, respectively. In the years ended
December 31, 2017,
2016,
and
2015,
the Company recognized charges for interest and penalties related to unrecognized tax benefits in the consolidated statements of operations of
$135,000,
$72,000,
and
$28,000,
respectively.
The Company
’s total amount of unrecognized tax benefits, excluding interest and penalties, as of
December 31, 2017
was
$12.9
million, of which
$7.7
million, if recognized, would impact the Company’s effective tax rate. As of
December 31, 2017,
the Company has recorded unrecognized tax benefits of
$3.1
million, including interest and penalties, as long-term income taxes payable in its consolidated balance sheet. The remaining
$9.8
million has been recorded net of our deferred tax assets, of which
$5.2
million is subject to a full valuation allowance. The Company does
not
expect the change in unrecognized tax benefits over the next
twelve
months to materially impact its results of operations and financial position.
The Company conducts business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S.
federal, various state and foreign jurisdictions. Because the Company used some of the tax attributes carried forward from previous years to tax years that are still open, statutes of limitation remain open for all tax years to the extent of the attributes carried forward into tax year
2002
for federal and California tax purposes. The Company is
not
subject to income tax examinations in any other of its major foreign subsidiaries’ jurisdictions.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| | | | |
Gross unrecognized tax benefits, January 1, 201 5 | | $ | 10,428 | |
| Increases in tax positions for current year | | | 720 | |
| Increase in tax positions for prior years | | | 162 | |
| Lapse in statute of limitations | | | (331 | ) |
Gross unrecognized tax benefits, December 31, 201 5 | | | 10,979 | |
| Increases in tax positions for current year | | | 1,118 | |
| Increases in tax positions for prior years | | | 112 | |
| Lapse in statute of limitations | | | (269 | ) |
Gross unrecognized tax benefits, December 31, 201 6 | | | 11,940 | |
| Increases in tax positions for current year | | | 1,166 | |
| Increases in tax positions for prior years | | | - | |
| Lapse in statute of limitations | | | (216 | ) |
| Gross unrecognized tax benefits, December 31, 2017 | | $ | 12,889 | |
We do
not
provide deferred taxes on undistributed earnings of our foreign subsidiaries as we intend to indefinitely reinvest those earnings
Valuation allowance for deferred tax assets is summarized:
| | | | | | | | | | | | | | | | |
| Valuation allowance for deferred tax assets | | | | | | | | | | | | | | | | | | | | |
| | | $ | 6,798 | | | $ | 2,328 | | | $ | 0 | | | $ | — | | | $ | 9,126 | |
| | | | 6,205 | | | $ | 593 | | | $ | 0 | | | $ | — | | | $ | 6,798 | |
| | | | 5,433 | | | $ | 557 | | | $ | 215 | | | $ | — | | | $ | 6,205 | |