NOTE 7 — Income Taxes
The Company is subject to income taxes only in the United States. Provision for income tax expense consists of the following:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2015 |
|
|
2016 |
|
|
2017 |
|
|||
|
|
|
(In thousands) |
|
|||||||||
|
Current expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
24,995 |
|
|
$ |
19,580 |
|
|
$ |
1,534 |
|
|
State |
|
|
598 |
|
|
|
2,244 |
|
|
|
1,777 |
|
|
Total current |
|
|
25,593 |
|
|
|
21,824 |
|
|
|
3,311 |
|
|
Deferred expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(7,968 |
) |
|
|
(1,403 |
) |
|
|
34,532 |
|
|
State |
|
|
239 |
|
|
|
291 |
|
|
|
2,108 |
|
|
Total deferred |
|
|
(7,729 |
) |
|
|
(1,112 |
) |
|
|
36,640 |
|
|
Total provision for income taxes |
|
$ |
17,864 |
|
|
$ |
20,712 |
|
|
$ |
39,951 |
|
For the years ended December 31, 2015 and 2016, the Company's current income tax expense does not reflect the excess tax benefits of employee stock-based awards. For stock options, the Company receives an income tax benefit calculated as the tax effect of the difference between the fair market value of the stock issued at the time of the exercise and the exercise price. For RSUs, the Company receives an income tax benefit upon the award's vesting equal to the tax effect of the underlying stock's fair market value. For tax years ended December 31, 2015 and 2016, where an incremental excess tax benefit was realized as a reduction of income taxes payable, such excess tax benefit was recognized as an increase to additional paid-in capital. The realized excess tax benefits from employee stock-based awards transactions in the years ended December 31, 2015 and 2016 were $25.1 million and $18.4 million, respectively.
Beginning January 1, 2017, with the adoption of ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting, all tax effects of employee stock-based awards are recorded within current and deferred tax expense.
The difference between income tax expense and the amount resulting from applying the federal statutory rate of 35% to net income is attributable to the following:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2015 |
|
|
2016 |
|
|
2017 |
|
|||
|
Federal tax at statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
State taxes, net of federal benefit |
|
|
1.4 |
% |
|
|
3.6 |
% |
|
|
4.1 |
% |
|
2017 Tax Act impacts |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
8.8 |
% |
|
Nondeductible expenses |
|
|
0.2 |
% |
|
|
0.4 |
% |
|
|
0.2 |
% |
|
Stock-based compensation |
|
|
-0.2 |
% |
|
|
0.2 |
% |
|
|
0.0 |
% |
|
Research and development credit |
|
|
-0.3 |
% |
|
|
-0.3 |
% |
|
|
-1.4 |
% |
|
Change in valuation allowance |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
-0.2 |
% |
|
Other |
|
|
0.0 |
% |
|
|
3.1 |
% |
|
|
-0.4 |
% |
|
Income tax expense |
|
|
36.1 |
% |
|
|
42.0 |
% |
|
|
46.1 |
% |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the 2017 Tax Act). The Company has not completed its determination of the accounting implications of the 2017 Tax Act. However, it has reasonably estimated the effects of the 2017 Tax Act and recorded provisional amounts in the financial statements as of December 31, 2017. The Company recorded a provisional tax expense for the impact of the 2017 Tax Act of approximately $7.6 million. This amount is primarily comprised of the remeasurement of federal deferred tax assets resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35%. As the Company completes its analysis of the 2017 Tax Act, collects and prepares necessary data, interprets any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, it may make adjustments to the provisional amounts.
For the year ended December 31, 2016, there was $1.5 million of income tax expense due to non-deductible transaction expenses related to acquisition activity included in the 3.1% in the table above. On January 1, 2017, the Company adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which requires excess tax benefits and deficiencies to be a component of income tax expense, and which increased volatility within the Company's provision for income taxes as the amount of excess tax benefits or deficiencies from stock-based compensation awards are dependent on the stock price at the date the awards vest. As a result, the Company's income tax expense and associated effective tax rate will be impacted by fluctuations in stock price between the grant dates and vesting dates of equity awards. For the year ended December 31, 2017, the net excess tax benefits from stock options decreased the effective tax rate by 2.3%.
The components of the Company’s deferred tax assets and liabilities are as follows:
|
|
|
December 31, |
|
|||||
|
|
|
2016 |
|
|
2017 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
14,046 |
|
|
$ |
11,321 |
|
|
Tax credits |
|
|
2,091 |
|
|
|
10,474 |
|
|
Deferred revenue |
|
|
98 |
|
|
|
73 |
|
|
Stock-based compensation |
|
|
23,763 |
|
|
|
17,942 |
|
|
Accrued expenses and reserves |
|
|
15,017 |
|
|
|
3,945 |
|
|
Total gross deferred tax assets |
|
|
55,015 |
|
|
|
43,755 |
|
|
Valuation allowance |
|
|
(162 |
) |
|
|
- |
|
|
Net deferred tax assets |
|
|
54,853 |
|
|
|
43,755 |
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
|
Fixed assets and intangible amortization |
|
|
(14,349 |
) |
|
|
(14,954 |
) |
|
Total deferred tax liabilities |
|
|
(14,349 |
) |
|
|
(14,954 |
) |
|
Net deferred tax assets |
|
$ |
40,504 |
|
|
$ |
28,801 |
|
The Company continuously evaluates additional facts representing positive and negative evidence in the determination of the realizability of the deferred tax assets. Upon evaluating the positive and negative evidence present at December 31, 2017, management concluded it was more likely than not that the benefit of its deferred tax assets will be realized.
As of December 31, 2017, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $39.3 million and $68.9 million, respectively, available to reduce future income subject to income taxes. The federal and state net operating loss carryforwards expire through 2036.
As of December 31, 2017, the Company has research credit carryforwards for federal and California income tax purposes of approximately $6.8 million and $8.6 million, respectively, available to reduce future income taxes. The federal research credit carryforwards expire through 2037. The California research credit carries forward indefinitely.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
|
|
|
Year Ended December 31, |
|
|||||
|
|
|
2016 |
|
|
2017 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Balance, beginning of year |
|
$ |
6,657 |
|
|
$ |
6,672 |
|
|
Reductions for tax positions taken in the prior year |
|
|
- |
|
|
|
- |
|
|
Additions for tax positions taken in the prior year |
|
|
- |
|
|
|
- |
|
|
Additions for tax positions taken in the current year |
|
|
15 |
|
|
|
281 |
|
|
Balance, end of year |
|
$ |
6,672 |
|
|
$ |
6,953 |
|
As of December 31, 2017, unrecognized tax benefits approximating $5.5 million would affect the effective tax rate if recognized. The Company does not anticipate adjustments to unrecognized tax benefits which would result in a material change to its financial position within the next twelve months.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. During the years ended December 31, 2015, 2016 and 2017, the accrued interest and penalties were immaterial.
The Company is subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. All tax years since inception in the Company’s major jurisdictions are open due to loss carryforwards and may be subject to examination in one or more jurisdictions.