Entity information:
Income Taxes
The Company is domiciled in the United States and operates primarily in the United States and Canada. These countries have different tax regimes and tax rates, which affect the consolidated income tax provision of the Company and its effective tax rate. Moreover, losses from one country generally cannot be used to offset taxable income from another country, and some expenses incurred in certain tax jurisdictions receive no tax benefit, thereby affecting the effective tax rate.
Tax Cuts and Jobs Act of 2017
On December 22, 2017, the President of the United States signed into law what is informally referred to as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), a comprehensive U.S. tax reform package that, effective January 1, 2018, among other things, lowered the corporate income tax rate from 35 percent to 21 percent and moved the country towards a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of foreign subsidiaries. Under the accounting rules, companies are required to recognize the effects of changes in tax laws and tax rates on deferred tax assets and liabilities in the period in which the new legislation is enacted.
At December 31, 2017, the Company has recognized the tax effects of the Tax Act as written and recorded a $0.7 million tax benefit. Below is a brief description of the effects from U.S. tax reform and its impact on the Company.
Remeasurement of Deferred Taxes
Under the Tax Act, the U.S. corporate income tax rate was reduced from 35 percent to 21 percent. As a result, the Company remeasured its U.S. deferred taxes as of December 31, 2017. The remeasurement had no impact on tax expense or the Company’s effective tax rate due to the full valuation allowance. The valuation allowance decreased by $36.6 million. In addition, due to the remeasurement of the net operating loss (“NOL”), the ASC 740-10 reserve was remeasured at 21 percent, which resulted in a decrease to deferred taxes of $1.3 million with an offset to the valuation allowance.
Reassessment of the Realizability of Deferred Tax Assets
Under the Tax Act, the Alternative Minimum Tax Credit utilization rule was changed, which required the Company to reassess the realizability of the deferred tax asset. As a result, the Company has released the valuation allowance on the Refundable Alternative Minimum Tax Credit Carryforward and reclassified the asset from a deferred tax asset to a non-current receivable resulting in $0.7 million of tax benefit. The reclassification had a minimal impact on the Company’s effective tax rate.
Liability for Taxes Due on Mandatory Deemed Repatriation
Under the Tax Act, a company’s foreign earnings accumulated under the legacy tax laws are deemed to be repatriated into the United States. Since the Company discontinued its strategy of reinvesting foreign earnings in foreign operations in 2011, there is no impact to the tax provision as a result of the deemed repatriation.
Upon completion of our 2017 U.S. income tax return in 2018, we may identify additional remeasurement adjustments to our recorded deferred tax assets. We will continue to assess our provision for income taxes as future guidance on the accounting effects of the Tax Act is issued but do not anticipate significant revisions will be necessary. Any such revisions will be recorded in the period in which they are identified, in accordance with the measurement period guidance outlined in SEC Staff Accounting Bulletin No. 118.
Components of the Provision (Benefit) for Income Taxes
Income (loss) before income taxes on continuing operations consists of the following (in thousands):
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Foreign
 
$
(4,406
)
 
$
(556
)
 
$
334

United States
 
(103,217
)
 
(43,756
)
 
(118,914
)
 
 
$
(107,623
)
 
$
(44,312
)
 
$
(118,580
)

Provision (benefit) for income taxes on continuing operations by country consists of the following (in thousands):
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Current provision (benefit):
 
 
 
 
 
 
Foreign
 
$
(157
)
 
$
(550
)
 
$
1,822

United States:
 
 
 
 
 
 
Federal
 
(833
)
 
735

 
(51,475
)
State
 
(391
)
 
(159
)
 
(4,497
)
 
 
(1,381
)
 
26

 
(54,150
)
Deferred tax provision (benefit):
 
 
 
 
 
 
Foreign
 
417

 
(556
)
 
357

United States
 
—

 
—

 
(238
)
 
 
417

 
(556
)
 
119

Total benefit for income taxes
 
$
(964
)
 
$
(530
)
 
$
(54,031
)

The provision (benefit) for income taxes has been determined based upon the tax laws and rates in the countries in which operations are conducted and income is earned. The Company and its subsidiaries operating in the United States are subject to federal income tax rates up to 35 percent and varying state income tax rates and methods of computing tax liabilities. The Company’s principal international continuing operations are in Canada. The Company’s subsidiaries in Canada are subject to a corporate income tax rate of 27 percent. The Company did not have any non-taxable foreign earnings from tax holidays for taxable years 2015 through 2017.
In April 2011, the Company discontinued its strategy of reinvesting foreign earnings in foreign operations. The Company’s current operating strategy is not to reinvest all earnings of its operations internationally. Instead, dividends are distributed to the U.S. parent or its U.S. affiliates. Due to the current deficit in foreign earnings and profits, the Company does not anticipate a significant tax expense to future repatriations of foreign earnings in the United States.
A reconciliation of the differences between the provision (benefit) for income taxes computed at the appropriate statutory rates and the reported provision (benefit) for income taxes is as follows (in thousands). For 2017, 2016 and 2015, the Company was domiciled in the United States, which has a 35 percent statutory tax rate.
 
 
2017
 
2016
 
2015
Taxes on earnings at statutory rate in domicile of parent company
 
$
(37,668
)
 
$
(15,509
)
 
$
(41,503
)
Earnings taxed at rates less or greater than parent company rates:
 
 
 
 
 
 
Foreign
 
443

 
246

 
(297
)
State income taxes, net of U.S. federal benefit
 
—

 
116

 
(3,050
)
Non deductibles
 
3,033

 
2,017

 
2,681

Changes in provision for unrecognized tax positions
 
574

 
204

 
91

Change in valuation allowance
 
33,656

 
12,951

 
(19,027
)
Stock-based compensation
 
597

 
1,522

 
1,990

Deferred tax adjustments
 
(276
)
 
(1,123
)
 
(595
)
Deemed dividend/previously taxed income
 
—

 
—

 
1,850

Prior year tax settlement
 
327

 
382

 
(246
)
Transfer pricing allocation
 
(874
)
 
6

 
2,011

Stock issuance costs
 
—

 
—

 
1,947

Alternative Minimum Tax credit carryforward
 
—

 
(1,031
)
 
—

Other
 
(124
)
 
(311
)
 
117

Tax Cuts and Jobs Act
 
(652
)
 
—

 
—

Total benefit for income taxes
 
$
(964
)
 
$
(530
)
 
$
(54,031
)

For the year ended December 31, 2017, the Company’s provision for income taxes for discontinued operations is $0.0 million, and the Company’s benefit for income taxes for continuing operations is $1.0 million for a net benefit for income taxes of $1.0 million on a consolidated basis.
For the year ended December 31, 2016, the Company’s provision for income taxes for discontinued operations was $0.1 million, and the Company’s benefit for income taxes for continuing operations was $0.5 million for a net benefit for income taxes of $0.4 million on a consolidated basis.
For the year ended December 31, 2015, the Company’s provision for income taxes for discontinued operations was $57.2 million, and the Company’s benefit for income taxes for continuing operations was $54.0 million for a net provision for income taxes of $3.2 million on a consolidated basis.
As a result of the Tax Act, the NOL was remeasured from 35 percent to 21 percent. Due to the remeasurement of the NOL, the U.S. portion of the ASC 740-10 reserve was also remeasured at 21 percent, which decreased the gross position by $0.9 million with a full offset to the valuation allowance. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
 
 
Year Ended December 31,
 
 
2017
 
2016
Beginning balance
 
$
2,406

 
$
2,406

Impact of Tax Cuts and Jobs Act
 
(870
)
 
—

Other
 
(49
)
 
—

Ending balance
 
$
1,487

 
$
2,406


At December 31, 2017, there are no unrecognized tax benefits that will impact the Company’s effective tax rate if ultimately recognized. Due to the Tax Act, the Company remeasured interest and penalties on its U.S. positions from 35 percent to 21 percent, which resulted in a $0.4 million decrease to the reserve with a full offset to the valuation allowance. The Company has determined that, during the next twelve months, it is reasonably possible there will be no change in unrecognized tax benefits to be recognized due to the lapse of statutes of limitation in certain jurisdictions or settlement of audits.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2017, 2016 and 2015, the Company has recognized $0.2 million, $0.2 million and $0.2 million, respectively, in interest and penalties expense. The cumulative accrual for interest and penalties carried on the Consolidated Balance Sheets as of December 31, 2017 and 2016 is $1.0 million and $1.2 million, respectively.
The Company files income tax returns in the United States federal jurisdiction, in various states and in various foreign jurisdictions. The Company is subject to examination for 2008 forward for the United States and the majority of the state jurisdictions and for 2010 forward in Canada.
The principal components of the Company’s net deferred tax assets (liabilities) are as follows (in thousands):
 
 
December 31,
 
 
2017
 
2016
Deferred tax assets:
 
 
 
 
Non-current:
 
 
 
 
Accrued vacation
 
293

 
144

Allowance for doubtful accounts
 
319

 
249

Estimated losses
 
2,021

 
143

Deferred compensation
 
311

 
696

Accrued insurance
 
4,620

 
7,581

Deferred rent
 
790

 
1,815

Various accrued liabilities
 
163

 
274

Goodwill
 
12,885

 
25,739

U.S. tax net operating loss carry forwards
 
53,617

 
59,258

State tax net operating loss carry forwards
 
8,201

 
6,148

Foreign tax net operating loss carry forwards
 
2,817

 
2,817

Alternative Minimum Tax credit carryforward
 
—

 
846

Other
 
211

 
117

Gross deferred tax assets
 
86,248

 
105,827

Valuation allowance
 
(68,003
)
 
(69,304
)
Deferred tax assets, net of valuation allowance
 
18,245

 
36,523

 
 
 
 
 
Deferred tax liabilities:
 
 
 
 
Non-current:
 
 
 
 
Term Loan amortization
 
(394
)
 
(1,203
)
Depreciation
 
(3,150
)
 
(7,409
)
Intangible amortization
 
(14,701
)
 
(27,596
)
Deferred tax liabilities
 
(18,245
)
 
(36,208
)
Net deferred tax assets
 
$
—

 
$
315

 
 
 
 
 
United States
 
$
—

 
$
—

Foreign
 
—

 
315

Net deferred tax assets
 
$
—

 
$
315


The valuation allowance for deferred income tax assets at December 31, 2017 and 2016 was $68.0 million and $69.3 million, respectively. Due to the Tax Act, $36.6 million of the valuation allowance was released which resulted in no impact to the Consolidated Statements of Operations. Valuation allowances exist in the U.S., Canada and Australia. The valuation allowances at December 31, 2017 are $64.7 million, $0.5 million and $2.8 million, respectively. The valuation allowances at December 31, 2016 are $66.5 million, $0.0 million and $2.8 million, respectively.
At December 31, 2017, the Company has remaining U.S. federal net operating loss carry forwards of $53.6 million and state net operating loss carry forwards of $8.2 million. The Company has a net operating loss carry forward for Australia of $2.8 million.
The Company’s U.S. federal net operating losses expire beginning in 2031. The Company’s state net operating losses generally expire 20 years after the period in which the net operating loss was incurred. After the effect of tax planning strategies, carrybacks of certain federal net operating losses, reversals of existing temporary differences, and projections for future taxable income over the periods in which the deferred tax assets can be utilized to offset taxable income, the Company does not believe that the remaining net federal deferred tax asset is more likely than not realizable in the foreseeable future.