Income Taxes
The Company’s geographical breakdown of its income before income taxes is as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Domestic | $ | 24,558 |
| | $ | 38,549 |
| | $ | 36,643 |
|
Foreign | 5,523 |
| | 5,948 |
| | (2,371 | ) |
Income before income taxes | $ | 30,081 |
| | $ | 44,497 |
| | $ | 34,272 |
|
The following table summarizes the consolidated provision for income taxes (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | |
| | |
| | |
|
Federal provision | $ | (4,813 | ) | | $ | 6,389 |
| | $ | 16,551 |
|
State and local provision | 112 |
| | 852 |
| | 1,683 |
|
Foreign provision | 5,564 |
| | 2,861 |
| | 1,326 |
|
Deferred: | |
| | |
| | |
|
Federal benefit | 14,578 |
| | 3,376 |
| | (3,311 | ) |
State and local provision | 523 |
| | (34 | ) | | 33 |
|
Foreign benefit | (2,610 | ) | | (1,575 | ) | | (1,562 | ) |
Provision for income taxes | $ | 13,354 |
| | $ | 11,869 |
| | $ | 14,720 |
|
The provision for income taxes differs from statutory income tax rate as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. income tax at federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Tax credits | (4.0 | ) | | (12.0 | ) | | — |
|
State and local taxes, net of federal benefit | 2.1 |
| | 2.9 |
| | 3.7 |
|
Equity-based compensation(1) | 1.9 |
| | 2.1 |
| | 2.7 |
|
Foreign rate differential | (2.3 | ) | | (1.8 | ) | | 1.2 |
|
Uncertain tax positions | 5.2 |
| | (0.4 | ) | | (1.0 | ) |
Transition tax related to TCJA | 2.6 |
| | — |
| | — |
|
U.S. Federal rate change related to TCJA | 12.4 |
| | — |
| | — |
|
Domestic production activities deduction | (9.8 | ) | | — |
| | — |
|
Non-deductible—other | 1.3 |
| | 0.9 |
| | 1.4 |
|
Total provision for income taxes | 44.4 | % | | 26.7 | % | | 43.0 | % |
| |
(1) | Included in this amount for the year ended December 31, 2017 is the impact of windfall/shortfall related to stock option exercises and RSU vestings that were reflected in additional paid-in capital, prior to the adoption of ASU 2016-09 on January 1, 2017. All periods presented include the impact of non-deductible stock-based compensation expenses. |
On December 22, 2017, the U.S. enacted the TCJA, which lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a one-time “transition tax” on undistributed earnings of foreign subsidiaries. The Company’s effective tax rate for the year ended December 31, 2017 includes an expense of $3.7 million related to the impact of remeasuring the Company’s deferred tax balances to reflect the new tax rate and an expense of $0.8 million for the transition tax. As permitted under the TCJA, the Company intends to pay the transition tax in eight annual interest-free installments beginning in 2018.
The tax effect of the Company’s temporary differences that give rise to deferred tax assets and liabilities are presented below (in thousands):
|
| | | | | | | |
| Year Ended
December 31, |
| 2017 | | 2016 |
Deferred tax assets: | |
| | |
|
Non-cash equity-based compensation | $ | 8,342 |
| | $ | 10,611 |
|
Intangible amortization | 4,555 |
| | 8,197 |
|
Non-income tax accruals | 2,887 |
| | 3,682 |
|
Deferred rent | 2,484 |
| | 3,123 |
|
Other liabilities | 2,895 |
| | 5,600 |
|
Deferred tax assets | 21,163 |
| | 31,213 |
|
Deferred tax liabilities: | |
| | |
|
Depreciation and amortization | (12,888 | ) | | (10,347 | ) |
Net deferred tax assets | $ | 8,275 |
| | $ | 20,866 |
|
The non-cash equity-based compensation for the Company includes a deferred tax asset of $3.8 million associated with the performance-based grant of stock options and restricted stock units to the Company’s Chief Executive Officer.
The following table summarizes changes to the Company’s unrecognized tax benefits as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Balance of unrecognized tax benefits at January 1 | $ | 1,455 |
| | $ | 1,479 |
| | $ | 1,500 |
|
Gross additions for tax positions for prior years | 1,412 |
| | 886 |
| | 280 |
|
Gross additions for tax positions for current year | 273 |
| | 360 |
| | 57 |
|
Gross expirations | (174 | ) | | (1,270 | ) | | (358 | ) |
Balance of unrecognized tax benefits at December 31 | $ | 2,966 |
| | $ | 1,455 |
| | $ | 1,479 |
|
The total amount of gross unrecognized tax benefits was $3.0 million, which, if recognized, would impact the Company’s effective tax rate in future periods. The liability for unrecognized tax benefits is included in other non-current liabilities.
The Company and its subsidiaries file income tax returns in the U.S. and various foreign jurisdictions. The Company is currently under examination by the German Tax Office for years 2013-2015 and by New York City for 2014. The Company is no longer subject to U.S. federal or state and local tax examinations by tax authorities for years before 2010.
The Company recognizes interest expense and tax penalties related to unrecognized tax benefits as a component of income tax expense in the consolidated statements of operations. Interest and penalties included in the company’s provision for income taxes were not material in all the periods presented.
As of December 31, 2017, the Company has $6.2 million and $2.6 million in tax net operating loss carryforwards in Canada and the U.K., respectively, which are available to reduce future income taxes, none of which are expected to expire unutilized.