7. Income Taxes
We are domiciled in the USVI and are obligated to pay taxes to the USVI on our income. We applied for tax benefits from the USVI Economic Development Commission and received our certificate of benefits (“the Certificate”), effective as of February 1, 2013. Pursuant to the Certificate, so long as we comply its provisions, we will receive a 90% tax reduction on our USVI-sourced income until 2043. For the year ended December 31, 2017, we generated a tax loss in the USVI.
For the years ended December 31, 2017, 2016 and 2015, AAMC had income from AAMC Cayman SEZC Ltd., a Cayman entity disregarded for USVI tax purposes, and from Front Yard dividends. This income was not eligible for the 90% tax reduction.
Beginning on January 1, 2017, AAMC US, Inc., a domestic U.S. corporation and wholly-owned subsidiary, began operations. This entity is based entirely in the mainland U.S. and is subject to U.S. federal and state corporate income tax.
Prior to January 1, 2016, our income tax expense and accruals included those of Front Yard. During the year ended December 31, 2015, Front Yard qualified as a REIT, distributed the necessary amount of taxable income and, therefore, incurred no federal income tax expense; accordingly, the only federal income taxes included in the accompanying consolidated financial statements are in connection with its taxable REIT subsidiary.
The following table sets forth the components of income (loss) before income taxes:
|
| | | | | | | | | | | | |
| | Year ended December 31, 2017 | | Year ended December 31, 2016 | | Year ended December 31, 2015 |
U.S. Virgin Islands | | $ | (7,259 | ) | | $ | (3,721 | ) | | $ | (1,249 | ) |
Other | | 998 |
| | 492 |
| | (1,687 | ) |
Loss before income taxes | | $ | (6,261 | ) | | $ | (3,229 | ) | | $ | (2,936 | ) |
The following table sets forth the components of our deferred tax assets:
|
| | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
Deferred tax assets: | | | | |
Stock compensation | | $ | 374 |
| | $ | 880 |
|
Accrued expenses | | 550 |
| | 475 |
|
Available-for-sale securities | | 307 |
| | 1,027 |
|
Net operating losses | | 114 |
| | — |
|
Other | | 29 |
| | 21 |
|
| | 1,374 |
| | 2,403 |
|
Deferred tax liability: | | | | |
Depreciation | | 14 |
| | 5 |
|
| | 1,360 |
| | 2,398 |
|
Valuation allowance | | (828 | ) | | (2,377 | ) |
Deferred tax asset, net | | $ | 532 |
| | $ | 21 |
|
The change in deferred tax assets is included in changes in other non-current assets in the consolidated statement of cash flows for the year ended December 31, 2017. Significant factors contributing to the decrease in our valuation allowance in 2017 are the reduction of the corporate income tax rate in the U.S. and U.S. Virgin Islands stemming from U.S. tax reform, reductions in the temporary differences attributable to AAMC’s investment in RESI common shares and vesting of share-based compensation awards.
The following table sets forth the reconciliation of the statutory USVI income tax rate to our effective income tax rate:
|
| | | | | | | | | |
| | Year ended December 31, 2017 | | Year ended December 31, 2016 | | Year ended December 31, 2015 |
U.S. Virgin Islands income tax rate | | 38.5 | % | | 38.5 | % | | 38.5 | % |
State and local income tax rates | | (0.1 | ) | | — |
| | 4.7 |
|
Excluded REIT income | | — |
| | — |
| | 2.6 |
|
EDC benefits in the USVI | | (45.1 | ) | | (50.7 | ) | | (0.7 | ) |
Foreign tax rate differential | | 0.3 |
| | (1.2 | ) | | (3.5 | ) |
Permanent and other | | (4.6 | ) | | 2.1 |
| | (1.7 | ) |
Valuation allowance | | — |
| | (41.5 | ) | | (40.6 | ) |
Effective income tax rate (1) | | (11.0 | )% | | (52.8 | )% | | (0.7 | )% |
________________
(1) Prior to our deconsolidation of Front Yard effective January 1, 2016, our effective tax rate included the activities of Front Yard.
During the tax years ended December 31, 2017 and 2016, we recognized no interest or penalties associated with unrecognized tax benefits. As of December 31, 2017 and 2016, we had accrued no unrecognized tax benefits or associated interest and penalties.
We remain subject to tax examination in the USVI for tax years 2014 to 2017 and in the United States for 2017.
Impact of Tax Reform
The Tax Cuts & Jobs Act (the “TCJA”) was enacted on December 22, 2017. The TCJA reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign-sourced earnings. At December 31, 2017, we have recorded, in accordance with ASC 740, the tax effects of enactment of the TCJA on existing deferred tax balances, and we estimate there is no one-time transition tax on foreign earnings. Further, we estimate that the new taxes on foreign-sourced earnings are not applicable to our foreign operations. We re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. As the majority of our deferred balances are offset by a full valuation allowance, the revaluation of our deferred balances from TCJA was immaterial. Therefore, although management is still evaluating the effects of the TCJA, we do not believe that the TCJA will significantly impact our consolidated financial statements.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under ASC 740, Income Taxes. Our financial results reflect the income tax effects of the TCJA for which the accounting under ASC Topic 740 is complete, and we have recorded provisional amounts for those specific income tax effects of the TCJA for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. We recorded an immaterial amount of tax expense for the impact of the re-measurement of our deferred tax inventory. We are still analyzing certain aspects of the TCJA and refining our calculations; therefore, these estimates may change as additional information becomes available.