Apptio Inc

Note 9. Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act of 2017, or the Tax Act, was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The Company has estimated the provision for income taxes in accordance with the Tax Act and guidance available as of the date of this filing, and as a result recorded a reduction of $30.0 million in its deferred tax assets, which is entirely offset by its valuation allowance resulting in zero total tax expense in the period in which the legislation was enacted. The provisional amount related to the re-measurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was $30.0 million. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $0.7 million based on cumulative foreign earnings of $5.5 million.

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 Tax Act. Additional work is necessary for a more detailed analysis of the deferred tax assets and liabilities and the Company’s historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.

The components of loss before provision for income taxes were as follows (in thousands):

	Years Ended December 31,
		2017			2016			2015
United States	$	(33,268	)	$	(26,161	)	$	(40,805	)
Foreign		8,208			(4,940	)		(93	)
Total	$	(25,060	)	$	(31,101	)	$	(40,898	)

The components of the provision for income taxes were as follows (in thousands):

	Years Ended December 31,
		2017		2016		2015
Current:
Federal	$	—	$	—	$	—
State		2		7		21
Foreign		559		445		88
Total		561		452		109
Deferred:
Federal		—		—		—
State		—		—		—
Foreign		—		—		—
Total		—		—		—
Provision for income taxes	$	561	$	452	$	109

The items accounting for the difference between income taxes computed at the federal statutory income tax rate of 34% and the provision for income taxes consisted of the following (in thousands):

	Years Ended December 31,
		2017			2016			2015

Income tax benefit at statutory rate	$	(8,520	)	$	(10,574	)	$	(13,832	)
Statutory rate change		30,019			—			—
State taxes, net of federal benefit		(2,612	)		(213	)		14
Impact of foreign income taxes		(2,233	)		2,124			119
Stock-based compensation		(7,542	)		2,340			1,629
Foreign exchange loss (gain)		1,990			(1,920	)		—
Change in valuation allowance		(8,782	)		9,510			12,673
Impact of ASU 2016-09		(1,809	)		—			—
Transition tax		695			—			—
Research and development credits		(833	)		(764	)		(674	)
Other		188			(51	)		180
	$	561		$	452		$	109

The reconciliation of the statutory rate of 34% and the Company’s effective rate of -2.24% is driven primarily by effects of the Tax Act, increased tax deductions related to stock compensation, and change in the relative amounts of income earned in foreign jurisdictions.

At December 31, 2017, the Company has U.S. net operating loss carryforwards of $207.9 million, which may be used to offset future taxable income. The carryforwards expire in years ranging from 2028 through 2036. Carryforwards of net operating losses are subject to possible limitation should a change in ownership of the Company occur, as defined by Internal Revenue Code Section 382.

The Company’s net deferred tax assets consisted of the following at December 31, 2017 and 2016 (in thousands):

	December 31,
Deferred tax assets (liabilities)		2017			2016

Deferred tax assets:
Net operating loss carryforwards	$	49,996		$	58,457
Deferred revenue		604			372
Tax credits		3,662			2,829
Accrued payroll		646			935
Accrued expenses not currently deductible		1,239			2,121
Non-qualified stock options		2,689			3,164
Depreciation and amortization		350			128
Other		84			46
Gross deferred assets		59,270			68,052
Valuation allowance		(59,270	)		(68,052	)
Total deferred tax assets, net of valuation allowance		—			—
Deferred tax liabilities:
Depreciation and amortization		—			—
Unrealized foreign currency gain/loss		—			—
Total deferred tax liabilities		—			—
Net deferred assets	$	—		$	—

The Company has established a full valuation allowance equal to the net deferred tax asset balance due to the uncertainty of future realization of the net deferred tax assets.

The net change in the total valuation allowance was as follows (in thousands):

	December 31,
	2017			2016			2015

Balance at beginning of period	$	(68,052	)	$	(58,542	)	$	(45,011	)
Tax valuation increase		(1,324	)		(9,779	)		(14,375	)
Tax valuation decrease		10,106			269			844
Balance at end of period	$	(59,270	)	$	(68,052	)	$	(58,542	)

The calculation of the Company’s tax obligations involves dealing with uncertainties in the application of complex tax laws and regulations. ASC 740, Income Taxes, provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. The Company has assessed its income tax positions and recorded tax benefits for all years subject to examination, based upon its evaluation of the facts, circumstances and information available at each period end. For those tax positions where the Company has determined there is a greater than 50% likelihood that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is determined there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit has been recognized.

Although the Company believes that it has adequately reserved for its uncertain tax positions, it can provide no assurance that the final tax outcome of these matters will not be materially different. As the Company expands internationally, it will face increased complexity, and its unrecognized tax benefits may increase in the future. The Company makes adjustments to its reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made.

The total balance of unrecognized gross tax benefits was as follows (in thousands):

	Years Ended December 31,
		2017		2016		2015
Unrecognized tax benefits at beginning of year	$	2,829	$	2,065	$	1,391
Additions for tax positions in prior years		—		—		—
Additions for tax positions in the current year		833		764		674
Unrecognized tax benefits at end of year	$	3,662	$	2,829	$	2,065

The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and internationally in the United Kingdom, Germany, Denmark, Netherlands, France, Canada, Australia, Singapore and Italy. As of December 31, 2017, 2016 and 2015, there is no accrued interest or penalties associated with income taxes recorded in the consolidated financial statements. The 2011 through 2017 tax years are open to review by taxing authorities.