9. Income Taxes

Income (loss) from operations before income taxes consisted of the following (in thousands):

 

Income tax benefit (expense) consisted of the following (in thousands):

 

The reconciliation of the federal statutory income tax rate of 35% to our effective income tax rate is as follows (in thousands):

 

On December 22, 2017, the President of the United States signed the Tax Cuts and Jobs Act (the “2017 Act”) into law. The 2017 Act will have pervasive financial reporting implications for all companies with U.S. operations. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21%, effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, additional limitations on executive compensation and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings. 

 

On December 22, 2017, Staff Accounting Bulletin No. 118, or SAB 118, was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Act. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed. Any subsequent adjustment to these amounts will be recorded to current tax expense in 2018 when the analysis is complete.

 

The enactment of the 2017 Act requires the remeasurement of deferred taxes at the new corporation tax rate of 21%, for which we have recorded a provisional amount that reduces the net deferred tax assets, before valuation allowance, by $38.4 million. Due to a full valuation allowance, the change in deferred taxes was fully offset by the change in valuation allowance. We do not expect the amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings to be material based on cumulative foreign deficits from our foreign subsidiaries. We expect to finalize our analysis in 2018.  

 

Other significant provisions that are not yet effective but may impact income taxes in future years include: an exemption from U.S. tax on dividends of future foreign earnings, limitations on the deductibility of certain executive compensation, deductions related to foreign derived intangible income, and a minimum tax on certain foreign earnings. 

 

During the year ended December 31, 2016, we elected to prospectively adopt ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, effective January 1, 2016.  No prior periods were retrospectively adjusted. During the year ended December 31, 2017, the Company adopted the new accounting guidance ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payments, including the recognition of the tax attributes related to the exercise of employee stock options, even if they haven’t resulted in a decrease to taxes payable.  Therefore, the Company recorded an increase to deferred tax assets related to net operating loss carryforwards of $7.2 million as of January 1, 2017, which is fully reduced by valuation allowance and no net impact to income tax expense.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands):

We had federal net operating loss (“NOL”) carryforwards of approximately $189.8 million and $155.5 million as of December 31, 2017 and 2016, respectively, which expire between 2021 and 2037. In addition, as of December 31, 2017 and 2016 we had state NOL carryforwards of approximately $65.4 million and $62.6 million which expire between 2019 and 2037.  

Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, provide for annual limitations on the utilization of net operating loss and credit carryforwards if we were to undergo an ownership change, as defined in Section 382. Changes in our equity structure and the acquisitions made by us in prior years resulted in such an ownership change. Currently, we do not expect the utilization of our net operating loss and tax credit carryforwards in the near term to be materially affected as no significant limitations are expected to be placed on these carryforwards as a result of our previous ownership changes.

We reduce the deferred tax asset resulting from future tax benefits by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some portion or all of these deferred taxes will not be realized. We have determined it is more likely than not that we will not realize the benefit of all our deferred tax assets and accordingly a valuation allowance of $67.6 million and $90.1 million against our deferred taxes was required at December 31, 2017 and 2016, respectively. The change in the valuation allowance for the years ended December 31, 2017, 2016 and 2015 was a decrease of $22.5 million, a decrease of $2.8 million and an increase of $4.4 million,  respectively, all of which was recorded in income tax benefit (expense). As we have no sustained history of generating book income, the ultimate future realization of these excess deferred tax assets is not more likely than not and thus subject to a valuation allowance.

We are subject to the accounting guidance for uncertain income tax positions. We believe that our income tax positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material adverse effect on our financial condition, results of operations, or cash flow.

Our policy for recording interest and penalties associated with audits and uncertain tax positions is to record such items as a component of income tax expense, and amounts recognized to date are not material. There are no material uncertain income tax positions during 2017, 2016 or 2015 and we do not expect our uncertain tax positions to have a material impact on our consolidated financial statements within the next twelve months. The total gross amount of unrecognized tax benefits was not material for the years ended December 31, 2017 and 2016.

We file a U.S. federal and various state tax returns. The tax years 2007 to 2017 remain subject to examination by the Internal Revenue Service and most tax years since our incorporation are subject to examination by various state authorities.