Income Taxes
Income or loss before income taxes for the years ended December 31, 2017 and 2016 were primarily attributable to the United States.
Income tax expense attributable to income included the following:
|
| | | | | | | |
| Year Ended December 31, |
(in thousands) | 2017 | | 2016 |
Current income tax expense: | | | |
United States federal | $ | 326 |
| | $ | 126 |
|
Foreign | 87 |
| | 34 |
|
State and local | 903 |
| | 105 |
|
Total current income tax expense | 1,316 |
| | 265 |
|
Deferred income tax (benefit) expense: | | | |
United States federal | (27,719 | ) | | — |
|
State and local | (2,895 | ) | | 28 |
|
Total deferred income tax (benefit) expense | (30,614 | ) | | 28 |
|
Income tax (benefit) expense | $ | (29,298 | ) | | $ | 293 |
|
Reconciliation of income tax (benefit) expense and the domestic federal statutory income tax expense is as follows:
|
| | | | | | | |
| Year Ended December 31, |
(in thousands) | 2017 | | 2016 |
Income tax expense at U.S. federal statutory rate | $ | 5,515 |
| | $ | 3,753 |
|
Increase (reduction) from: | | | |
State taxes (net of federal benefit) | (2,269 | ) | | 133 |
|
Change in valuation allowance | (52,501 | ) | | (3,779 | ) |
Change in federal statutory tax rate | 14,497 |
| | — |
|
Amortization of goodwill | (621 | ) | | (621 | ) |
Goodwill impairment | 1,514 |
| | — |
|
Stock compensation | (1,000 | ) | | — |
|
Adjustments to federal deferred tax assets | 5,290 |
| | — |
|
Non-deductible expenses | 163 |
| | 148 |
|
Other | 114 |
| | 659 |
|
Income tax (benefit) expense | $ | (29,298 | ) | | $ | 293 |
|
Deferred income taxes include temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities.
At December 31, 2017, the Company determined that a full valuation allowance was no longer required against its deferred tax assets. The Company recorded a benefit to income tax expense of $43.2 million for the release of substantially all of the valuation allowance on those deferred tax assets.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“the Tax Act”) which significantly changed U.S. tax law. The Tax Act lowered the Company’s statutory federal income tax rate from 35% to 21% effective January 1, 2018. At December 31, 2017, the Company remeasured its deferred tax balances to reflect the new tax rate and recorded a charge to income tax expense of $14.5 million.
The tax effects of each type of temporary difference and carryforward that gave rise to a significant portion of deferred tax assets (liabilities) at December 31, 2017 and 2016 were as follows:
|
| | | | | | | |
| December 31, |
(in thousands) | 2017 | | 2016 |
Deferred tax assets attributable to: | | | |
Net operating loss carryforwards | $ | 14,473 |
| | $ | 29,660 |
|
Tax credit carryforwards | 7,858 |
| | 7,622 |
|
Reserves | 2,550 |
| | 3,810 |
|
Inventory | 4,126 |
| | 2,931 |
|
Deferred revenue | 3,571 |
| | 4,388 |
|
Intangibles | — |
| | 5,848 |
|
Other | 2,378 |
| | 2,073 |
|
Total gross deferred tax assets | 34,956 |
| | 56,332 |
|
Valuation allowance | (1,297 | ) | | (53,798 | ) |
Net deferred tax assets | 33,659 |
| | 2,534 |
|
| | | |
Deferred tax liabilities attributable to: | | | |
Intangibles | (1,332 | ) | | (2,370 | ) |
Fixed assets | (1,649 | ) | | (164 | ) |
Other | (64 | ) | | — |
|
Net deferred tax asset | $ | 30,614 |
| | $ | — |
|
The valuation allowance decreased in 2017 by $52.5 million primarily because of the release of substantially all of the valuation allowance previously recorded against the Company’s deferred tax assets. The valuation allowance decreased in 2016 by $3.8 million because it offset the decrease in the deferred tax asset derived from pre-tax gains. As of December 31, 2017, there is no amount of the valuation allowance for which subsequently recognized benefits will be allocated to reduce goodwill.
At December 31, 2017, the amounts and expiration dates of loss and tax credit carryforwards were as follows:
|
| | | | | |
(in thousands) | Amount as of December 31, 2017 | | Expire or start expiring at the end of: |
U.S. net operating loss (1) | $ | 63,629 |
| | 2028 |
U.S. federal capital losses | 3,785 |
| | 2019 |
| | | |
State tax net operating losses | 22,560 |
| | 2017 – 2035 |
| | | |
Tax credits: | | | |
Minimum tax credit | 7,771 |
| | Carry forward indefinitely |
Other tax credits | 2,467 |
| | 2017 – 2021 |
Total tax credits | $ | 10,238 |
| | |
| |
(1) | $20.5 million of the U.S. net operating loss (NOL) above is related to the VLCY acquisition. |
Income taxes paid, net of tax refunds, was $1.1 million and $0.8 million for the years ended December 31, 2017 and 2016, respectively.
Uncertain Tax Positions
The Company recognizes the financial statement impacts of a tax return position when it is more likely than not, based on technical merits, that the position will ultimately be sustained. For tax positions that meet this recognition threshold, the Company applies judgment, taking into account applicable tax laws, experience managing tax audits, and relevant GAAP to determine the amount of tax benefits to recognize in the financial statements. For each position, the difference between the benefit realized on the Company’s tax return and the benefit reflected in the financial statements is recorded to Other Liabilities in the Consolidated Balance Sheets as an unrecognized tax benefit (“UTB”). The Company updates its UTBs at each financial statement date to reflect the impacts of audit settlements and other resolution of audit issues, expiration of statutes of limitation, developments in tax law, and ongoing discussions with tax authorities.
A reconciliation of the change in the UTB balance for the years ended December 31, 2017 and 2016 is as follows:
|
| | | | | | | |
| Year Ended December 31, |
(in thousands) | 2017 | | 2016 |
Unrecognized tax benefit, beginning of period | $ | 5,936 |
| | $ | 6,236 |
|
Increases for tax positions in prior periods | 46 |
| | — |
|
Decreases for effectively settled tax positions | — |
| | (300 | ) |
Decreases for expiration of the statute of limitations | (3,351 | ) | | — |
|
Unrecognized tax benefit, end of period | $ | 2,631 |
| | $ | 5,936 |
|
Included in the balance of unrecognized tax benefits at December 31, 2017 are approximately $0.3 million of tax benefits that, if recognized, would affect the effective tax rate. The recognition of the remaining uncertain tax positions would not affect the effective tax rate, but would instead increase or would have increased available tax attributes. However, the recognition of the tax attribute would be offset by an increase in the deferred tax asset valuation allowance resulting in no net impact in the effective tax rate.
The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. Related to the unrecognized tax benefits noted above, the Company recognized no penalties (gross) and an immaterial amount of interest (gross) during the year ended December 31, 2017. At December 31, 2017, the Company had liabilities of $0.1 million for penalties (gross) and $0.1 million for interest (gross).
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. All U.S. tax years prior to 2008 related to the VLCY-acquired entities have been audited by the Internal Revenue Service. Cambium and its subsidiaries have been examined by the Internal Revenue Service through the end of 2006. The Company has been audited by various state tax authorities through 2007.