|
15. |
INCOME TAXES |
The sources of income before income taxes are as follows (shown in thousands):
|
|
|
For the year ended |
|
|||||||||
|
|
|
December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
United States |
|
$ |
64,631 |
|
|
$ |
81,226 |
|
|
$ |
81,049 |
|
|
Foreign |
|
|
5,950 |
|
|
|
12,185 |
|
|
|
7,104 |
|
|
Income before income tax expense (benefit) |
|
$ |
70,581 |
|
|
$ |
93,411 |
|
|
$ |
88,153 |
|
Income tax expense (benefit) consists of the following (shown in thousands):
|
|
|
For the year ended |
|
|||||||||
|
|
|
December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
7,278 |
|
|
$ |
28,359 |
|
|
$ |
10,357 |
|
|
Deferred |
|
|
(18,152 |
) |
|
|
(1,102 |
) |
|
|
11,163 |
|
|
Total |
|
|
(10,874 |
) |
|
|
27,257 |
|
|
|
21,520 |
|
|
State: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
2,891 |
|
|
|
6,649 |
|
|
|
1,915 |
|
|
Deferred |
|
|
1,688 |
|
|
|
(310 |
) |
|
|
2,900 |
|
|
Total |
|
|
4,579 |
|
|
|
6,339 |
|
|
|
4,815 |
|
|
Foreign: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
1,923 |
|
|
|
2,459 |
|
|
|
1,729 |
|
|
Deferred |
|
|
1 |
|
|
|
(742 |
) |
|
|
(256 |
) |
|
Total |
|
|
1,924 |
|
|
|
1,717 |
|
|
|
1,473 |
|
|
Total federal, state and foreign income tax expense (benefit) |
|
$ |
(4,371 |
) |
|
$ |
35,313 |
|
|
$ |
27,808 |
|
Income tax expense (benefit) differs from the amounts estimated by applying the statutory income tax rates to income before income taxes as follows:
|
|
|
For the year ended |
|
|||||||||
|
|
|
December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal tax expense at the statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
State tax expense at the statutory rate, net of federal tax benefits |
|
|
4.7 |
|
|
|
4.5 |
|
|
|
4.8 |
|
|
Foreign taxes |
|
|
(0.6 |
) |
|
|
(1.9 |
) |
|
|
(0.9 |
) |
|
Effect of change in accounting for stock compensation |
|
|
(2.4 |
) |
|
|
- |
|
|
|
- |
|
|
Effect of enacted tax rate changes |
|
|
(42.0 |
) |
|
|
- |
|
|
|
(0.6 |
) |
|
Effect of contingent earn-out adjustment |
|
|
- |
|
|
|
- |
|
|
|
(6.9 |
) |
|
Effect of valuation allowances |
|
|
0.4 |
|
|
|
(0.7 |
) |
|
|
0.8 |
|
|
Effect of permanent differences, net |
|
|
0.4 |
|
|
|
0.6 |
|
|
|
0.6 |
|
|
Effect of other transactions, net |
|
|
(1.7 |
) |
|
|
0.3 |
|
|
|
(1.3 |
) |
|
|
|
|
(6.2) |
% |
|
|
37.8 |
% |
|
|
31.5 |
% |
Deferred income taxes result from temporary differences between years in the recognition of certain expense items for income tax and financial reporting purposes. The source and income tax effects of these differences (shown in thousands) are as follows:
|
|
|
For the year ended |
|
|||||
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets (liabilities) attributable to: |
|
|
|
|
|
|
|
|
|
Allowance for uncollectible receivables |
|
$ |
4,600 |
|
|
$ |
5,231 |
|
|
Deferred revenue |
|
|
3,284 |
|
|
|
3,427 |
|
|
Accrued compensation |
|
|
1,884 |
|
|
|
1,601 |
|
|
Accrued office consolidation costs |
|
|
224 |
|
|
|
644 |
|
|
Interest rate derivatives |
|
|
- |
|
|
|
26 |
|
|
Share-based compensation |
|
|
8,072 |
|
|
|
10,403 |
|
|
Unsecured employee loans |
|
|
1,055 |
|
|
|
785 |
|
|
Deferred rent |
|
|
4,806 |
|
|
|
8,683 |
|
|
Foreign net operating losses |
|
|
1,723 |
|
|
|
1,417 |
|
|
Other |
|
|
854 |
|
|
|
2,171 |
|
|
Deferred tax assets before foreign valuation allowance |
|
|
26,502 |
|
|
|
34,388 |
|
|
Foreign valuation allowance |
|
|
(1,729 |
) |
|
|
(1,410 |
) |
|
Deferred tax assets |
|
|
24,773 |
|
|
|
32,978 |
|
|
Goodwill and intangible assets — domestic acquisition cost |
|
|
(72,918 |
) |
|
|
(95,708 |
) |
|
Goodwill and intangible assets — foreign acquisition cost |
|
|
(652 |
) |
|
|
(620 |
) |
|
Depreciation and amortization |
|
|
(10,370 |
) |
|
|
(10,965 |
) |
|
Prepaid expenses |
|
|
(1,964 |
) |
|
|
(3,422 |
) |
|
Deferred tax liabilities |
|
|
(85,904 |
) |
|
|
(110,715 |
) |
|
Net deferred tax liabilities |
|
$ |
(61,131 |
) |
|
$ |
(77,737 |
) |
When appropriate, we evaluate the need for a valuation allowance to reduce deferred tax assets. The evaluation of the need for a valuation allowance requires management judgment and could impact our financial results and effective tax rate. Management has determined that it is more likely than not, due to the uncertainty surrounding certain of our international business operations, that sufficient future taxable income will not be available to realize certain deferred tax assets, therefore management recognized a full valuation allowance for those deferred tax assets in the financial statements.
On January 1, 2017, we adopted FASB ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. As required by the standard, excess tax benefits and deficiencies recognized in share-based compensation expense are recorded in the consolidated statement of comprehensive income as a component of income tax expense. Previously, these amounts were recorded as a component of additional paid-in capital on the consolidated balance sheet. During the year ended December 31, 2017, excess tax benefits of $1.7 million related to exercised and vested share-based compensation awards reduced income tax expense in the consolidated statement of comprehensive income. See Note 2 – Summary of Significant Accounting Policies and Recent Accounting Pronouncements for further information.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
Amount |
|
|
|
|
|
(in thousands) |
|
|
|
Balance at January 1, 2017 |
|
$ |
10,360 |
|
|
Additions based on tax positions related to the current year |
|
|
228 |
|
|
Additions based on tax positions of prior years |
|
|
- |
|
|
Reductions based on tax positions of prior years |
|
|
(8,879 |
) |
|
Settlements |
|
|
(47 |
) |
|
Balance at December 31, 2017 |
|
$ |
1,662 |
|
Of the $1.7 million of our accrual for uncertain tax positions at December 31, 2017, $0.4 million would impact our effective income tax rate if recognized. We believe that only a specific resolution of the matters with the taxing authorities or the expiration of the applicable statute of limitations would provide sufficient evidence for management to conclude that the deductibility is more likely than not sustainable.
We recognize interest and penalties accrued related to uncertain tax positions as income tax expense. The total amount of interest and penalties accrued as of December 31, 2017 and December 31, 2016 was $0.3 million and $0.6 million, respectively.
During the year ended December 31, 2016, we increased our accrual for uncertain tax positions by $8.7 million due to a tax accounting method change that was resolved during the year ended December 31, 2017.
During the year ended December 31, 2015, we acquired a liability for uncertain tax positions of $1.3 million in connection with our acquisition of the Indian subsidiary of RevenueMed. Based on the indemnification terms of the purchase agreement, which entitle us to indemnification if tax is due, an offsetting receivable from RevenueMed was recorded. As a result, we estimate that the settlement or other disposition of this matter will not have an impact on our effective income tax rate.
We are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. We have substantially concluded all U.S. federal and material state income tax matters for years through 2013. We are currently under audit with the Internal Revenue Service for the year 2014. Our Indian subsidiary which we acquired from RevenueMed is currently under either audit or tax appeals with its local taxing authority for all statutory tax years 2009 through 2014.
On December 22, 2017, the President of the United States signed into law Tax Reform. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. Tax Reform permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under Tax Reform, the Company revalued its ending net deferred tax liabilities at December 31, 2017 and recognized a provisional $29.8 million tax benefit in the Company’s consolidated statement of comprehensive income for the year ended December 31, 2017.
Tax Reform provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Company had an estimated $5.6 million of undistributed foreign E&P subject to the deemed mandatory repatriation and recognized a provisional $0.9 million of income tax expense in the Company’s consolidated statement of comprehensive income for the year ended December 31, 2017. After the utilization of deemed foreign tax credits, the Company expects to pay additional U.S. federal cash taxes of approximately $0.1 million on the deemed mandatory repatriation, payable over eight years.
While Tax Reform provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions.
The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017.
The BEAT provisions in Tax Reform eliminates the deduction of certain base-erosion payments made to related foreign corporations, and imposes a minimum tax if greater than regular tax. The Company believes it has not made a material amount of base-erosion payments and has not included any tax impacts of BEAT in its consolidated financial statements for the year ended December 31, 2017.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. 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 Tax Reform. The Company has recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. Included in the provisional amount is $0.1 million for the income tax on the deemed repatriation of unremitted foreign earnings. We have computed the amount based on information available to us; however, we have not yet completed our analysis of the components of the computation, including the amount of our foreign earnings and profits subject to U.S. income tax. In addition, we have included in the provisional amount a tax benefit of $29.8 million for the revaluation of deferred tax assets and liabilities. We have also computed this amount based on information available to us; however; there is still uncertainty as to the application of Tax Reform, in particular as it relates to executive compensation. We also anticipate that the completion of our 2017 income tax returns by the fourth quarter of 2018 will impact the provisional amounts we have recorded. As we complete our analysis of U.S. tax reform in 2018, the ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of Tax Reform. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.
As a result of the deemed mandatory repatriation provisions in Tax Reform, the Company included an estimated $5.6 million of undistributed earnings in income subject to U.S. tax at reduced tax rates. The Company does not intend to distribute earnings in a taxable manner, and therefore intends to limit distributions to earnings previously taxed in the U.S., or earnings that would qualify for the 100% dividends received deduction provided for in Tax Reform, and earnings that would not result in any significant foreign taxes. As a result, the Company has not recognized a deferred tax liability on its investment in foreign subsidiaries.