Entity information:
Income Taxes
For the years ended December 31, 2017, 2016 and 2015, our net loss before income taxes was comprised of the following (in thousands):
 
2017
 
2016
 
2015
Domestic
$
(23,093
)
 
$
(4,524
)
 
$
1,079

Foreign
(7,153
)
 
(9,620
)
 
(7,688
)
Total
$
(30,246
)
 
$
(14,144
)
 
$
(6,609
)

For the years ended December 31, 2017, 2016 and 2015, our income tax expense (benefit) was comprised of the following (in thousands):
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
Federal
$
(65
)
 
$
(627
)
 
$
390

State
68

 
(200
)
 
62

Foreign
1,009

 
266

 
217

Total current expense (benefit)
1,012

 
(561
)
 
669

Deferred:
 
 
 
 
 
Federal
(42
)
 
(922
)
 
(334
)
State
—

 
(230
)
 
43

Foreign
(209
)
 
30

 
—

Total deferred expense (benefit)
(251
)
 
(1,122
)
 
(291
)
Total income tax expense (benefit)
$
761

 
$
(1,683
)
 
$
378


On December 22, 2017, U.S. federal tax reform was enacted with the signing of the TCJA. Notable provisions of the TCJA include the following:
•
Establishment of a flat corporate income tax rate of 21% on U.S. earnings;
•
Imposition of a one-time tax on unremitted cumulative non-U.S. earnings of foreign subsidiaries, or the Transition Tax;
•
The imposition of a new minimum tax on certain non-U.S. earnings, irrespective of the territorial system of taxation, and generally allows for the repatriation of future earnings of foreign subsidiaries without incurring additional U.S. taxes by transitioning to a territorial system of taxation;
•
Imposition of minimum taxes on certain payments made by a U.S. company to a related foreign company, or the Base Erosion Anti-Abuse Tax;
•
Elimination of the alternative minimum tax and allowance of a refund for previous alternative minimum tax credits;
•
Allowance for immediate expensing of the cost of investments in certain depreciable assets acquired and placed in service after September 27, 2017; and
•
Reduction in tax deductions with respect to certain compensation paid to certain executive officers.
While the changes from the TCJA are generally effective beginning in 2018, U.S. GAAP accounting for income taxes requires the effect of a change in tax laws or rates to be recognized in income from continuing operations for the period that includes the enactment date. Due to the complexities involved in accounting for the enactment of the TCJA, the Securities and Exchange Commission Staff Accounting Bulletin No. 118 (“SAB 118”) allows us to record provisional amounts in earnings for the year ending December 31, 2017. Where reasonable estimates can be made, the provisional accounting should be based on such estimates. When no reasonable estimate can be made, the provisional accounting may be based on the tax law in effect before the TCJA. We are required to complete our tax accounting for the TCJA in the period when we have obtained, prepared, and analyzed the information to complete the income tax accounting.
We have not completed our accounting for the tax effects of enactment of the TCJA; however, as described below, we have made reasonable estimates of the effects of the TCJA on our consolidated financial statements which are included as a component of income tax expense:
•
Deferred tax assets and liabilities: U.S. deferred tax assets and liabilities were remeasured based on the rates at which they are expected to reverse in the future, which is generally 21.0%, resulting in an income tax expense of approximately $2.1 million. This expense is fully offset by the tax benefit from the reduction in our U.S. valuation allowance. We will continue to analyze certain aspects of the TCJA which could potentially affect the tax basis of the reported amounts. Additionally, our U.S. tax returns for 2017 will be filed during the fourth quarter of 2018 and any changes to the tax positions for temporary differences compared to the estimates used will result in an adjustment of the estimated tax expense recorded as of December 31, 2017.
•
Transition Tax effects: The Transition Tax is based on our total post-1986 earnings and profits that was previously deferred from U.S. income taxes. Our provisional estimate for the Transition Tax is zero because we have post-1986 accumulated deficits. We will continue to evaluate the TCJA and any future guidance from the U.S. Treasury Department and Internal Revenue Service (“IRS”) in the determination of the Transition Tax which could result in adjustment of the estimate recorded as of December 31, 2017.
•
Indefinite reinvestment: Following enactment of the TCJA and the associated Transition Tax, in general, repatriation of cash to the United States can be completed with no incremental U.S. tax; however, repatriation of cash could subject the Company to non-U.S. jurisdictional taxes on distributions. The cash that our non-U.S. subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including acquisitions. The income taxes applicable to such earnings are not readily determinable given the various tax planning strategies we could employ if we repatriated these earnings. We will continue to evaluate the impact of the TCJA on our election to indefinitely reinvest our non-U.S. earnings, if any.
We will continue to analyze the effects of the TCJA on our consolidated financial statements and operations. Additional impacts from the enactment of the TCJA will be recorded as they are identified during the measurement period as provided for in SAB 118, which allows measurement period adjustments up to one year from the enactment date.
For the years ended December 31, 2017, 2016 and 2015, the provision for income taxes differs from the amount computed by applying the federal statutory income tax rates to our loss before the provision (benefit) for income taxes, as follows:
 
2017
 
2016
 
2015
U.S. federal statutory tax rate
34.0
 %
 
34.0
 %
 
34.0
 %
State tax expense
4.9

 
1.4

 
(0.9
)
Foreign rate differential
(6.7
)
 
(17.8
)
 
(29.4
)
Nondeductible expenses
(0.9
)
 
(2.3
)
 
(4.1
)
Tax credits
5.8

 
6.5

 
10.0

Unrecognized tax benefits
(0.7
)
 
(0.2
)
 
(1.8
)
Other
(0.3
)
 
(0.2
)
 
(1.9
)
Remeasurement of deferred taxes
(7.0
)
 
—

 
—

Change in valuation allowance
(31.6
)
 
(9.6
)
 
(11.5
)
Total
(2.5
)%
 
11.8
 %
 
(5.6
)%

Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amount of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
As of December 31, 2017 and 2016, significant components of our deferred tax assets and liabilities were as follows (in thousands):
 
2017
 
2016
Deferred tax assets:
 
 
 
Accrued vacation
$
967

 
$
529

Bad debt
109

 
159

Deferred revenue
1,248

 
2,176

Deferred rent
473

 
834

Tax credits
4,169

 
2,401

Net operating losses
10,413

 
2,939

Equity compensation
1,207

 
—

Other
287

 
929

Gross deferred tax assets
18,873

 
9,967

Less: Valuation allowance
(12,328
)
 
(2,642
)
Total deferred tax assets
6,545

 
7,325

Deferred tax liabilities:
 
 
 
Depreciation
(174
)
 
(349
)
Unbilled receivables
(555
)
 
(491
)
Prepaid expenses
(5,614
)
 
(6,505
)
Other
(8
)
 
—

Total deferred tax liabilities
(6,351
)
 
(7,345
)
Net deferred tax asset (liability)
$
194

 
$
(20
)

As of December 31, 2017 and 2016, we had $25.3 million and $1.8 million of gross net operating loss (“NOL”) carryforwards for U.S. federal tax purposes, respectively. Federal NOL carryforwards will expire, if unused, in 2037. As of December 31, 2017 and 2016, we had U.S. gross state NOL carryforwards of $25.3 million and $1.7 million, respectively. We had tax effected state NOL carryforwards of $1.6 million and $0.1 million as of December 31, 2017 and 2016, respectively. U.S. state NOL carryforwards will substantially expire, if unused, in 2037. As of December 31, 2017 and 2016, we had foreign NOL carryforwards of $35.7 million and $23.7 million, respectively, primarily attributable to our subsidiary in Switzerland. Those NOL carryforwards will substantially expire, if unused, in 2024.
Section 382 of the Internal Revenue Code limits the utilization of the NOLs when ownership changes occur, as defined by that section. A number of states have similar state laws that limit utilization of the state NOLs when ownership changes occur. We have performed an analysis of our Section 382 ownership changes and have determined that all federal and U.S state NOLs are available for use as of December 31, 2017.
As of December 31, 2017 and 2016, we had $4.5 million and $2.8 million, respectively, of federal tax credit carryforwards which will expire, if unused, in 2037.
The net change during the year in the total valuation allowance was $9.7 million, primarily driven by the valuation allowance recorded against the U.S. deferred tax assets and the change in the Switzerland deferred tax assets.
We continue to maintain a full valuation allowance against U.S. deferred tax assets based on our cumulative operating results as of December 31, 2017, three-year cumulative loss, and assessment of our expected future results of operations. We have evaluated all evidence, both positive and negative, in assessing the likelihood of realizability and the negative evidence outweighed the positive evidence.
As of December 31, 2017, we have a valuation allowance of $3.5 million against foreign deferred tax assets, primarily for deferred tax assets at our subsidiary in Switzerland. We continue to maintain a full valuation allowance on the deferred tax assets of our subsidiary in Switzerland as we determined that it was not more likely than not that we would be able to realize a benefit from the NOL at that subsidiary. Based on our cumulative operating results as of December 31, 2017, and assessment of our expected future results of operations, we determined that it was not more likely than not that we would be able to realize the deferred tax assets prior to expiration.
We are subject to income taxes in the United States, Australia, Canada, France, Germany, Italy, Netherlands, Switzerland, and United Kingdom.
Undistributed earnings of our foreign subsidiaries are considered to be indefinitely reinvested; accordingly, no U.S. income taxes have been provided thereon. Upon repatriation of those earnings, if any, we would be subject to U.S. income taxes, net of any applicable foreign tax credits, and foreign withholding taxes. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable.
As of December 31, 2017 and 2016, we had unrecognized tax benefits of $0.7 million and $0.4 million, respectively, of which the entire portion would affect our effective tax rate if recognized. The following table summarizes the activity related to our unrecognized tax benefit from December 31, 2014 to December 31, 2017 (in thousands):
Balance as of December 31, 2014
$
286

Additions for tax positions in current years
98

Additions for tax positions in prior years
—

Reductions due to lapse in statutes of limitations
—

Settlements
—

Balance as of December 31, 2015
384

Additions for tax positions in current years
171

Additions for tax positions in prior years
—

Reductions due to lapse in statutes of limitations
(136
)
Settlements
—

Balance as of December 31, 2016
419

Additions for tax positions in current years
232

Additions for tax positions in prior years
—

Reductions due to lapse in statutes of limitations
—

Settlements
—

Balance as of December 31, 2017
$
651


We recognize interest and penalties related to uncertain tax positions in income tax expense. During the year ended December 31, 2017, we reduced our liability for potential interest and penalties by $2,000. During the years ended December 31, 2016 and 2015, we recognized potential interest and penalties of $2,000 and $19,000, respectively, and the cumulative balance of interest and penalties as of December 31, 2017 and 2016 and was $33,000 and $35,000, respectively.
We anticipate that total unrecognized tax benefits will not decrease over the next year.
We file income tax returns in the United States federal jurisdiction and in many state and foreign jurisdictions. The tax years 2014 through 2017 remain open to examination by the major taxing jurisdictions to which we are subject. No material examinations are currently open.