Income Taxes
The Company’s income tax expense (benefit) consists of the following (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | (5,427 | ) | | $ | 3,835 |
| | $ | 1,393 |
|
State | 369 |
| | (1,293 | ) | | 1,164 |
|
| (5,058 | ) | | 2,542 |
| | 2,557 |
|
Deferred: | | | | | |
Federal | $ | 2,643 |
| | $ | (5,379 | ) | | $ | (2,578 | ) |
State | 1,090 |
| | (1,533 | ) | | (365 | ) |
| 3,733 |
| | (6,912 | ) | | (2,943 | ) |
Total benefit | $ | (1,325 | ) | | $ | (4,370 | ) | | $ | (386 | ) |
The reconciliation between the amount computed by applying the U.S. federal statutory rate of 34% to income before taxes and the Company's tax provision for 2017, 2016, and 2015 is as follows:
|
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
Federal income at the statutory rate | 34 | % | | 34 | % | | 35 | % |
State income tax, net of federal benefit | (8 | )% | | 11 | % | | (26 | )% |
Permanent differences | 1 | % | | (1 | )% | | (9 | )% |
Work Opportunity Credit | 2 | % | | 1 | % | | 9 | % |
Return to provision true-up | (1 | )% | | (1 | )% | | 4 | % |
Valuation Allowance | (13 | )% | | (18 | )% | | — | % |
Rate change on deferreds | (6 | )% | | — | % | | — | % |
Other | — | % | | 2 | % | | 4 | % |
| 9 | % | | 28 | % | | 17 | % |
The following table summarized the components of the Company's deferred tax assets and liabilities as of December 31, 2017 and 2016 (in thousands):
|
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets | | | |
Bad debt reserve | $ | 11 |
| | $ | 92 |
|
Vacation accrual | 510 |
| | 557 |
|
Workers Compensation | 241 |
| | 308 |
|
Nonqualified stock options | 3,917 |
| | 4,893 |
|
Debt issuance costs | 27 |
| | 279 |
|
Acquisition costs | 23 |
| | 66 |
|
State tax deferral | 384 |
| | 843 |
|
Deferred revenue | 15 |
| | 104 |
|
State tax credits | 452 |
| | 298 |
|
Net operating loss | 453 |
| | 217 |
|
Estimated liability for appeals | 3,956 |
| | 5,585 |
|
Other | 448 |
| | 146 |
|
Total deferred tax assets | 10,437 |
| | 13,388 |
|
Valuation allowance | (5,772 | ) | | (3,857 | ) |
Total deferred tax assets net of valuation allowance | 4,665 |
| | 9,531 |
|
Deferred tax liabilities: |
| |
|
Identifiable intangible assets | (733 | ) | | (1,299 | ) |
Fixed assets | (3,430 | ) | | (4,009 | ) |
Other | (34 | ) | | (22 | ) |
Total deferred tax liabilities | (4,197 | ) | | (5,330 | ) |
Net deferred tax assets (liabilities) | $ | 468 |
| | $ | 4,201 |
|
As of December 31, 2017, the Company recorded a valuation allowance against deferred tax assets that are not more likely than not realizable based upon the assessment of all positive and negative evidence. The total amount of the valuation allowance at December 31, 2017 is $5.8 million, which is an increase of $1.9 million from the amount recorded as of December 31, 2016.
On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” (TCJA) that significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. We do not expect tax reform to have a material impact to our financial statements. Our net deferred tax assets and liabilities have been revalued at the newly enacted U.S. corporate rate, and the provisional impact was recognized in our tax expense in 2017. We are continuing to evaluate the impact this tax reform legislation may have on our business.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income and tax-planning strategies in making this assessment. Based upon the Company’s cumulative three year loss position and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will be unable to realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could change in the near term if estimates of future taxable income during the carryforward period change.
The Company has state tax credits of $0.5 million, which will expire in 2024. The Company has state net operating loss carryforwards of $0.4 million which expire in 2020 and a federal net operating loss carryforward of $0.1 million which will expire in 2037. The Company has $0.3 million of federal tax credit carryforwards which will expire in 2037.
The following table reconciles the Company’s unrecognized tax benefits as of December 31, 2017 from its unrecognized tax benefits as of December 31, 2015 (in thousands):
|
| | | |
Unrecognized tax benefits balance at December 31, 2015 | $ | 895 |
|
Increase related to prior year tax positions | 311 |
|
Decrease related to prior year tax positions | (43 | ) |
Increase related to current year tax positions | — |
|
Settlements | — |
|
Lapse of statute of limitations | (176 | ) |
Unrecognized tax benefits balance at December 31, 2016 | 987 |
|
Increase related to prior year tax positions | 362 |
|
Decrease related to prior year tax positions | — |
|
Increase related to current year tax positions | — |
|
Settlements | — |
|
Lapse of statute of limitations | (267 | ) |
Unrecognized tax benefits balance at December 31, 2017 | $ | 1,082 |
|
At December 31, 2017 and 2016, we had approximately $1.1 million and $1.0 million of unrecognized tax benefits, respectively. We do not expect any significant change in unrecognized tax benefits during the next twelve months. The Company records interest expense and penalties related to unrecognized tax benefits in income tax expense. The amount of accrued interest was not material at December 31, 2017 and 2016, respectively. No penalties were recognized in 2016 or accrued at December 31, 2017, and 2016 respectively. Unrecognized tax benefits of approximately $1.1 million which, if recognized, would favorably affect the Company’s effective income tax rate.
We file income tax returns with the U.S. federal government and various state jurisdictions. We operate in a number of state and local jurisdictions, most of which have never audited our records. Accordingly, we are subject to state and local income tax examinations based upon the various statutes of limitations in each jurisdiction. For tax years before 2014, the Company is no longer subject to Federal and certain other state tax examinations. We are currently being examined by the Franchise Tax Board of California for tax years 2011 through 2014.