7. Income Taxes
On December 22, 2017, the 2017 Tax Act was enacted into law. Beginning January 1, 2018, the 2017 Tax Act 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, creates new taxes on certain foreign sourced earnings, repeals the Alternative Minimum Tax (“AMT”), and expands the number of individuals whose compensation is subject to a $1.0 million cap on deductibility, amongst other changes. In certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and refundable AMT credit. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740 Income Taxes and the provisions of the tax laws that were in effect immediately prior to enactment. We will continue to refine our calculations as additional analysis is completed.
For items which we have been able to determine a reasonable estimate, we recognized a provisional tax benefit of $5.0 million during the fourth quarter of 2017 as a result of the 2017 Tax Act’s enactment, which is included as a component of the provision for income tax. The components of the provisional tax benefit recognized include:
Deferred tax assets and liabilities. Certain deferred tax assets and liabilities have been re-measured based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the 2017 Tax Act and refining our calculations, which could affect the measurement of these balances or give rise to new deferred tax amounts. The related provisional income tax benefit recorded to the consolidated statement of operations for the year ended December 31, 2017, net of valuation allowance, was $2.4 million.
AMT credit. As part of the 2017 Tax Act, corporate AMT was repealed. AMT credits generated by the Company in previous years are refundable in tax years beginning after 2017 and before 2022 with any remaining credits being fully refundable in 2022. The related provisional income tax benefit recorded to the consolidated statement of operations for the year ended December 31, 2017 for the AMT credit refund was $2.6 million. The receivable for the refundable AMT credit was recorded to non-current other assets within the consolidated balance sheet as of December 31, 2017.
Officer compensation. For tax years beginning after December 31, 2017, the 2017 Tax Act expanded the number of individuals whose compensation is subject to a $1.0 million cap on deductibility and includes performance-based compensation (such as bonuses) in the calculation. As a result, the Company recorded a provisional amount to reduce the future tax benefit related to officers’ stock-based compensation. However, there was no net impact to the provision for income tax as the provisional amount was offset by an equal reduction in the Company's deferred tax asset valuation allowance.
One-time transitional tax. As part of the 2017 Tax Act, total foreign earnings and profits (“E&P”) after 1986, that were previously deferred from U.S. federal taxation, are subject to a one-time tax on the mandatory deemed repatriation of foreign earnings. The Company’s provisional analysis of the one-time transition tax resulted in no additional taxes being owed due to the overall accumulated E&P deficit.
With respect to global intangible low-taxed income (“GILTI”) provisions of the 2017 Tax Act, the Company is continuing to evaluate how the provisions will be accounted for. The GILTI provisions allow companies to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which the entity is subject to the rules or (ii) account for GILTI in the entity’s measurement of deferred taxes. As of December 31, 2017, the Company has not elected a method due to its continuing analysis of the GILTI provisions. The elected method will depend, in part, on analyzing global income to determine whether the Company expects to have future U.S. inclusions in its taxable income related to GILTI and, if so, the impact that is expected.
Income (loss) before income taxes consists of the following for the periods shown below (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
United States |
|
$ |
(6,081 |
) |
|
$ |
(62,037 |
) |
|
$ |
(83,432 |
) |
|
International |
|
|
43,664 |
|
|
|
(42,694 |
) |
|
|
(46,750 |
) |
|
Total |
|
$ |
37,583 |
|
|
$ |
(104,731 |
) |
|
$ |
(130,182 |
) |
The provision for (benefit from) income taxes consists of the following for the periods shown below (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(2,132 |
) |
|
$ |
(30 |
) |
|
$ |
(30 |
) |
|
State |
|
|
142 |
|
|
|
2 |
|
|
|
(2,863 |
) |
|
Foreign |
|
|
13,562 |
|
|
|
7,178 |
|
|
|
3,817 |
|
|
Total current tax expense |
|
$ |
11,572 |
|
|
$ |
7,150 |
|
|
$ |
924 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(1,231 |
) |
|
$ |
(2,809 |
) |
|
$ |
(8,818 |
) |
|
State |
|
|
300 |
|
|
|
(20 |
) |
|
|
(504 |
) |
|
Foreign |
|
|
303 |
|
|
|
(879 |
) |
|
|
(274 |
) |
|
Total deferred tax expense (benefit) |
|
$ |
(628 |
) |
|
$ |
(3,708 |
) |
|
$ |
(9,596 |
) |
|
Provision for (benefit from) income taxes |
|
$ |
10,944 |
|
|
$ |
3,442 |
|
|
$ |
(8,672 |
) |
The reconciliation of federal statutory income tax provision (benefit) to our effective income tax provision is as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Expected provision (benefit) at U.S. federal statutory rate of 35% |
|
$ |
13,154 |
|
|
$ |
(36,656 |
) |
|
$ |
(45,564 |
) |
|
State income taxes - net of federal benefit |
|
|
142 |
|
|
|
2 |
|
|
|
(2,863 |
) |
|
Income taxed at foreign rates |
|
|
(3,643 |
) |
|
|
20,112 |
|
|
|
18,406 |
|
|
Equity-based compensation |
|
|
(2,898 |
) |
|
|
4,295 |
|
|
|
1,125 |
|
|
Tax reserve for uncertain tax positions |
|
|
3,101 |
|
|
|
2,382 |
|
|
|
1,827 |
|
|
Change in valuation allowance |
|
|
(51,976 |
) |
|
|
14,786 |
|
|
|
17,526 |
|
|
Impact of change in enacted tax rates |
|
|
48,296 |
|
|
|
69 |
|
|
|
(18 |
) |
|
Acquisition costs |
|
|
— |
|
|
|
110 |
|
|
|
650 |
|
|
Contingent consideration |
|
|
(252 |
) |
|
|
(2,781 |
) |
|
|
— |
|
|
Officer's compensation limitation |
|
|
2,582 |
|
|
|
— |
|
|
|
— |
|
|
Investment in subsidiaries |
|
|
1,676 |
|
|
|
— |
|
|
|
— |
|
|
Other |
|
|
762 |
|
|
|
1,123 |
|
|
|
239 |
|
|
|
|
$ |
10,944 |
|
|
$ |
3,442 |
|
|
$ |
(8,672 |
) |
Our provisional analysis of the one-time transition tax liability for our foreign subsidiaries enacted by the 2017 Tax Act did not result in additional taxes being owed, considering our accumulated deficit position at December 31, 2017. Additionally, no other income taxes (state or foreign) have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. As of December 31, 2017, the cumulative amount of earnings upon which income taxes have not been provided is approximately $48.8 million.
Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to be reversed. Our deferred tax assets and liabilities are as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
66,680 |
|
|
$ |
53,474 |
|
|
Tax credit carryforwards |
|
|
98,718 |
|
|
|
52,564 |
|
|
Acquired intangible assets |
|
|
25,692 |
|
|
|
26,110 |
|
|
Stock-based compensation |
|
|
7,467 |
|
|
|
16,087 |
|
|
Accrued expenses |
|
|
5,505 |
|
|
|
8,605 |
|
|
Other accrued compensation |
|
|
4,747 |
|
|
|
5,059 |
|
|
Charitable contributions |
|
|
2,886 |
|
|
|
4,495 |
|
|
State taxes |
|
|
248 |
|
|
|
3,168 |
|
|
Deferred revenue |
|
|
312 |
|
|
|
481 |
|
|
Other |
|
|
423 |
|
|
|
— |
|
|
Total deferred tax assets |
|
$ |
212,678 |
|
|
$ |
170,043 |
|
|
Less: Valuation allowance |
|
|
(209,652 |
) |
|
|
(164,907 |
) |
|
Deferred tax assets, net of valuation allowance |
|
$ |
3,026 |
|
|
$ |
5,136 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
(3,210 |
) |
|
$ |
(3,396 |
) |
|
Deferred rent |
|
|
(1,073 |
) |
|
|
(69 |
) |
|
Depreciation |
|
|
(3,839 |
) |
|
|
(7,215 |
) |
|
Other |
|
|
— |
|
|
|
(247 |
) |
|
Total deferred tax liabilities |
|
$ |
(8,122 |
) |
|
$ |
(10,927 |
) |
|
Net deferred taxes |
|
$ |
(5,096 |
) |
|
$ |
(5,791 |
) |
As a result of the adoption of ASU 2016-09 in the first quarter of 2017, the Company recognized the previously unrecognized excess tax benefits from stock-based compensation which increased the net operating loss and tax credit carryforward deferred tax assets and equally offsetting valuation allowance by $97.3 million. Additionally, as a result of the 2017 Tax Act, the Company’s deferred tax assets and liabilities have been re-measured with the enacted tax rate of 21% as of December 31, 2017, while the deferred tax assets and liabilities as of December 31, 2016 were measured with the then enacted tax rate of 35%.
Due to our history of net operating losses, we believe it is more likely than not that certain federal, state, and foreign deferred tax assets will not be realized in future periods as of December 31, 2017.
Net operating loss and tax credit carryforwards as of December 31, 2017 are as follows (in thousands):
|
|
|
Amount |
|
|
Expiration years |
|
|
Net operating losses, federal |
|
$ |
409,273 |
|
|
2029 – 2036 |
|
Net operating losses, state |
|
|
299,631 |
|
|
2021 – 2036 |
|
Tax credits, federal |
|
|
89,218 |
|
|
2030 – 2037 |
|
Tax credits, state |
|
|
82,617 |
|
|
2019 – indefinite |
The federal and state net operating loss carryforwards are subject to various annual limitations under Section 382 of the Internal Revenue Code and similar state provisions.
The following table reflects changes in the gross unrecognized tax benefits (in thousands):
|
December 31, 2014 |
|
$ |
140,889 |
|
|
Additions based on tax positions related to 2015 |
|
|
8,876 |
|
|
Additions for tax positions of prior years |
|
|
82 |
|
|
Reductions for tax positions of prior years |
|
|
(2,817 |
) |
|
Decreases related to settlements of prior year tax positions |
|
|
(4,185 |
) |
|
December 31, 2015 |
|
$ |
142,845 |
|
|
Additions based on tax positions related to 2016 |
|
|
9,043 |
|
|
Additions for tax positions of prior years |
|
|
68 |
|
|
Reductions for tax positions of prior years |
|
|
(856 |
) |
|
December 31, 2016 |
|
$ |
151,100 |
|
|
Additions based on tax positions related to 2017 |
|
|
8,598 |
|
|
Additions for tax positions of prior years |
|
|
427 |
|
|
Decreases related to expiration of prior year tax positions |
|
|
(31 |
) |
|
Decreases related to settlements of prior year tax positions |
|
|
(54 |
) |
|
December 31, 2017 |
|
$ |
160,040 |
|
We classify uncertain tax positions as non-current unrecognized tax liabilities unless expected to be paid within one year or otherwise directly related to an existing deferred tax asset, in which case the uncertain tax position is recorded as an offset to the asset on the consolidated balance sheet. As of December 31, 2017, $151.0 million of our gross unrecognized tax benefits were recorded as a reduction of the related deferred tax assets and the remaining $9.0 million of our gross unrecognized tax benefits were recorded as non-current liabilities in our consolidated balance sheets.
If the balance of gross unrecognized tax benefits of $160.0 million as of December 31, 2017 was realized, this would have resulted in a tax benefit of $9.0 million within our provision for income taxes at such time. If the balance of gross unrecognized tax benefits of $151.1 million as of December 31, 2016 was realized, this would have resulted in a tax benefit of $10.3 million within our provision of income taxes at such time.
During all years presented, we recognized interest and penalties related to unrecognized tax benefits within the provision for income taxes on the consolidated statements of operations. The amount of interest and penalties recorded to the consolidated statements of operations during 2017 and 2016, were $0.3 million and $0.1 million, respectively, and the amount of interest and penalties accrued as of December 31, 2017 and 2016 was $1.0 million and $0.7 million, respectively. There were no interest and penalties recorded to the consolidated statements of operations during 2015.
We file income tax returns in the U.S. federal jurisdiction as well as many U.S. states and certain foreign jurisdictions. The material jurisdictions in which we are subject to potential examination include the U.S., United Kingdom and Ireland. We are subject to examination in these jurisdictions for all years since our inception in 2007. Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years which have been carried forward and may be audited in subsequent years when utilized. We do not expect any material changes to our unrecognized tax benefits within the next twelve months.