Income Taxes
The Tax Cuts and Jobs Act, or the “Tax Act,” was signed into law on December 22, 2017. This legislation makes significant change in U.S. tax law, including a reduction in the corporate tax rate, changes to net operating loss carryforwards and carrybacks and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the current rate of 35% to 21%. As a result of the enacted Tax Act, we were required to revalue deferred tax assets and liabilities at the rate in effect when the deferred tax balances are scheduled to reverse. This revaluation resulted in an additional $8.8 million of income tax expense and a corresponding reduction in the deferred tax asset.
Additionally, on December 22, 2017, the Securities and Exchange Commission staff also issued Staff Accounting Bulletin No. 118, or "SAB 118," to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. Specifically, SAB 118 provides a measurement period for companies to evaluate the impacts of the Tax Act on their financial statements. We consider the $8.8 million of income tax expense recorded to be a provisional amount primarily because we continue to evaluate the tax effects of the Tax Act on taxes related to our international operations, the realizability of deferred tax assets, remeasurement of certain temporary differences at the new tax rates and the impact of other retroactive provisions.
The components of our income tax expense are as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current | | | | | |
Federal | $ | 584 |
| | $ | 7,227 |
| | $ | 7,730 |
|
State | (88 | ) | | 1,829 |
| | 1,519 |
|
Foreign | 6 |
| | — |
| | — |
|
Total Current | 502 |
| | 9,056 |
| | 9,249 |
|
Deferred | | | | | |
Federal | 3,837 |
| | (4,283 | ) | | (3,372 | ) |
State | (1,368 | ) | | (546 | ) | | (180 | ) |
Foreign | 19 |
| | — |
| | — |
|
Total Deferred | 2,488 |
| | (4,829 | ) | | (3,552 | ) |
Total | $ | 2,990 |
| | $ | 4,227 |
| | $ | 5,697 |
|
The difference between the income tax expense at the federal statutory rate and income tax expense in the consolidated statements of operations is as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income tax expense, net of federal benefits | 0.1 |
| | 4.9 |
| | 4.5 |
|
Nondeductible meals and entertainment | 0.6 |
| | 1.6 |
| | 1.2 |
|
Research and development tax credits | (16.1 | ) | | (10.8 | ) | | (8.9 | ) |
Tax windfall benefits | (36.5 | ) | | — |
| | — |
|
Change in tax rate due to tax reform | 27.2 |
| | — |
| | — |
|
Other | (1.0 | ) | | (1.3 | ) | | 0.8 |
|
Effective rate | 9.3 | % | | 29.4 | % | | 32.6 | % |
The components of our net deferred tax assets (liabilities) are as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets, non-current | | | |
Provision for doubtful accounts | $ | 714 |
| | $ | 1,046 |
|
Accrued expenses | 2,362 |
| | 2,622 |
|
Deferred revenue | 2,455 |
| | 3,627 |
|
Deferred rent | 3,384 |
| | 4,671 |
|
Stock-based compensation | 3,613 |
| | 3,468 |
|
Acquisition costs | 3,310 |
| | 4,482 |
|
Subsidiary unit compensation | 1,413 |
| | 1,566 |
|
Equity investments | 116 |
| | 182 |
|
Net operating losses | 1,357 |
| | 2,678 |
|
Tax credits | 2,546 |
| | — |
|
Intangible assets and prepaid patent licenses | 156 |
| | — |
|
Other | 160 |
| | 107 |
|
Total deferred tax assets, non-current | 21,586 |
| | 24,449 |
|
Deferred tax liabilities, non-current | | | |
Intangible assets and prepaid patent licenses | (74 | ) | | (2,780 | ) |
Depreciation | (2,917 | ) | | (4,649 | ) |
Contingent liability | (171 | ) | | (268 | ) |
Total deferred tax liabilities, non-current | $ | (3,162 | ) | | $ | (7,697 | ) |
Net deferred tax assets, non-current | $ | 18,424 |
| | $ | 16,752 |
|
A reconciliation of the beginning and ending amounts of unrecognized tax benefits (without related interest expense) is as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Beginning balance | $ | 681 |
| | $ | 506 |
| | $ | 208 |
|
Additions based on tax positions of the current year | 718 |
| | 197 |
| | 152 |
|
Additions based on tax positions of prior year | 373 |
| | 79 |
| | 146 |
|
Additions resulting from acquisitions | 277 |
| | — |
| | — |
|
Decreases due to lapse of applicable statute of limitations | (76 | ) | | — |
| | — |
|
Decreases related to settlements of prior year tax positions | — |
| | (101 | ) | | — |
|
Ending balance | $ | 1,973 |
| | $ | 681 |
| | $ | 506 |
|
Our effective income tax rates were 9.3%, 29.4% and 32.6% for the years ended December 31, 2017, 2016 and 2015, respectively. Our effective tax rates were below the statutory rate primarily due to recognizing the tax windfall benefits from employee stock-based payment transactions through the income statement provision for income taxes in the period incurred, as well as the research and development tax credits claimed, partially offset by the impact of state taxes and non-deductible meal and entertainment expenses. We adopted the accounting provision that simplified the tax accounting for employee share-based payment transactions in the first quarter of 2017. Prior to adoption of the new accounting provision, tax windfall benefits were required to be recorded in additional paid-in capital. These decreases in the effective tax rate were partially offset by the effects of the Tax Act, which required us to revalue deferred tax assets and liabilities at the rate in effect when the deferred tax balances are scheduled to reverse.
We recognize a valuation allowance if, based on the weight of available evidence, both positive and negative, it is more likely than not that some portion, or all, of net deferred tax assets will not be realized. Based on our historical and expected future taxable earnings, we believe it is more likely than not that we will realize all of the benefit of the existing deferred tax assets as of December 31, 2017 and 2016. Accordingly, we have not recorded a valuation allowance as of December 31, 2017 and 2016.
We apply guidance for uncertainty in income taxes that requires the application of a more likely than not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, this guidance permits us to recognize a tax benefit measured at the largest amount of the tax benefit that, in our judgment, is more likely than not to be realized upon settlement. We recorded unrecognized tax benefits of $1.0 million, $0.2 million and $0.3 million for research and development tax credits claimed during the years ended December 31, 2017, 2016 and 2015, respectively. We also recorded an unrecognized tax benefit of $0.3 million within our Canadian subsidiary related to an existing net operating loss acquired as part of the Acquisition.
As of December 31, 2017 and 2016, we accrued less than $0.1 million of total interest related to unrecognized tax benefits. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.
We are not aware of any events that make it reasonably possible that there would be a significant change in our unrecognized tax benefits over the next twelve months. Our cumulative liability for uncertain tax positions was $2.0 million and $0.7 million as of December 31, 2017 and 2016, respectively, and if recognized, would reduce our income tax expense and the effective tax rate.
We file income tax returns in the United States and Canada. We are no longer subject to U.S. income tax examinations for years prior to 2014, with the exception that operating loss carryforwards generated prior to 2014 may be subject to tax audit adjustment. We are generally no longer subject to state and local income tax examinations by tax authorities for years prior to 2014.
As of December 31, 2017, we had federal net operating loss carryforwards of approximately $6.0 million as well as state net operating loss carryforwards of approximately $1.9 million, which are scheduled to begin to expire in 2030. As of December 31, 2017, we had federal research and development tax credit carryforwards of approximately $2.2 million, which are scheduled to begin to expire in 2037. As of December 31, 2017, we had state research and development tax credit carryforwards of approximately $1.4 million, which are scheduled to begin to expire in 2021.The federal net operating loss carryforward arose in connection with the 2013 acquisition of EnergyHub. Utilization of net operating loss carryforwards may be subject to annual limitations due to ownership change limitations as provided by the Internal Revenue Code of 1986, as amended.