NOTE J – Income Taxes
Our provisions for income taxes included current federal, foreign and state income tax expense, as well as deferred tax expense as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(184 |
) |
|
$ |
3,684 |
|
|
$ |
2,066 |
|
|
State |
|
|
258 |
|
|
|
555 |
|
|
|
289 |
|
|
Foreign |
|
|
652 |
|
|
|
599 |
|
|
|
119 |
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
11,551 |
|
|
|
(988 |
) |
|
|
103 |
|
|
State |
|
|
(342 |
) |
|
|
(133 |
) |
|
|
(141 |
) |
|
Foreign |
|
|
(355 |
) |
|
|
(577 |
) |
|
|
— |
|
|
|
|
$ |
11,580 |
|
|
$ |
3,140 |
|
|
$ |
2,436 |
|
The current federal provision in the table above includes a $0.4 million reclass of alternative minimum tax (“AMT”) credit carryforwards from the deferred federal provision. These unutilized AMT credit carryforwards become partially refundable in 2019, 2020 and 2021 and fully refundable in 2022.
A reconciliation of the expected federal income tax at the statutory rate to the provision for income taxes was as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Expected federal income tax at statutory rate |
|
$ |
3,107 |
|
|
$ |
3,011 |
|
|
$ |
2,404 |
|
|
State income taxes, net of federal tax effect |
|
|
366 |
|
|
|
320 |
|
|
|
246 |
|
|
Tax impact of foreign activity |
|
|
(105 |
) |
|
|
(115 |
) |
|
|
39 |
|
|
Permanent book/tax differences |
|
|
460 |
|
|
|
372 |
|
|
|
67 |
|
|
Change in valuation allowance |
|
|
16 |
|
|
|
(35 |
) |
|
|
(27 |
) |
|
Change in state deferred rate |
|
|
(134 |
) |
|
|
(67 |
) |
|
|
(118 |
) |
|
Research and development credit |
|
|
(227 |
) |
|
|
(261 |
) |
|
|
(200 |
) |
|
Tax impact of Tax Cuts and Jobs Act |
|
|
8,613 |
|
|
|
— |
|
|
|
— |
|
|
Tax impact of stock activity |
|
|
(925 |
) |
|
|
— |
|
|
|
— |
|
|
Other |
|
|
409 |
|
|
|
(85 |
) |
|
|
25 |
|
|
Total provision for income taxes |
|
$ |
11,580 |
|
|
$ |
3,140 |
|
|
$ |
2,436 |
|
The tax provision for the year ended December 31, 2017 includes tax benefits of $0.9 million for the excess tax deduction from stock activity. It also includes tax expense of $8.6 million related to The Job Cuts and Tax Act (“Tax Act”), primarily due to the reduction in corporate tax rate to 21.0% resulting in a decrease in our U.S. net deferred tax assets.
Differences between our effective tax rate and statutory tax rates are primarily due to the impact of the Tax Act, as well as permanently non-deductible expenses partially offset by the federal research and development credit. Additionally, under ASU 2016-09, excess tax benefits generated upon settlement or exercise of stock awards are now recognized as a reduction to income tax expense as a discrete tax item in the period that the event occurs creating potentially significant fluctuation in tax expense by year.
The significant components of our deferred tax assets (liabilities) were as follows (in thousands):
|
|
|
December 31, |
|
|||||||||||||
|
|
|
2017 |
|
|
2016 |
|
||||||||||
|
Deferred tax assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss and credit carryforwards |
|
$ |
11,067 |
|
|
|
|
|
|
$ |
4,614 |
|
|
|
|
|
|
Deferred operations |
|
|
— |
|
|
|
|
|
|
|
799 |
|
|
|
|
|
|
Stock-based compensation expense |
|
|
4,273 |
|
|
|
|
|
|
|
4,085 |
|
|
|
|
|
|
Accounts receivable allowances |
|
|
307 |
|
|
|
|
|
|
|
363 |
|
|
|
|
|
|
Accrued expenses |
|
|
2,293 |
|
|
|
|
|
|
|
2,704 |
|
|
|
|
|
|
Other |
|
|
182 |
|
|
|
|
|
|
|
297 |
|
|
|
|
|
|
Gross deferred tax asset |
|
|
|
|
|
|
18,122 |
|
|
|
|
|
|
|
12,862 |
|
|
Less: valuation allowance |
|
|
(602 |
) |
|
|
|
|
|
|
(649 |
) |
|
|
|
|
|
Total net deferred tax asset |
|
|
|
|
|
|
17,520 |
|
|
|
|
|
|
|
12,213 |
|
|
Deferred tax liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred operations |
|
|
(163 |
) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
Foreign operations |
|
|
(133 |
) |
|
|
|
|
|
|
(350 |
) |
|
|
|
|
|
Depreciation and amortization |
|
|
(1,536 |
) |
|
|
|
|
|
|
(1,328 |
) |
|
|
|
|
|
Other |
|
|
(24 |
) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
Total deferred tax liability |
|
|
|
|
|
|
(1,856 |
) |
|
|
|
|
|
|
(1,678 |
) |
|
Net deferred tax assets |
|
|
|
|
|
$ |
15,664 |
|
|
|
|
|
|
$ |
10,535 |
|
As of December 31, 2017, we had net operating loss carryforwards of $58.5 million for U.S. federal tax purposes. We also had $10.6 million of various state net operating loss carryforwards. The loss carryforwards for federal tax purposes will expire between 2020 and 2036 if not utilized. The loss carryforwards for state tax purposes will expire between 2018 and 2036 if not utilized.
Section 382 of the U.S. Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that might be used to offset taxable income when a corporation has undergone significant changes in stock ownership. We have performed a Section 382 analysis for the time period from our inception through December 8, 2010. During this time period it was determined that we had six separate ownership changes under Section 382. We have not updated the Section 382 analysis subsequent to December 8, 2010, however, we believe there have not been any events subsequent to that date that would materially impact the analysis. We believe that approximately $17.6 million of federal losses will expire unused due to Section 382 limitations. The maximum annual limitation of federal net operating losses under Section 382 is approximately $1.0 million. This limitation could be further restricted if any ownership changes occur in future years. Accordingly, our deferred tax assets are reported net of the excess tax deductions for stock compensation and Section 382 limitations.
As of December 31, 2017 we had federal research and development credit carryforwards, net of Section 383 limitations, of $1.2 million, which, if not utilized, will begin to expire in 2030. We had state research and development credit carryforwards of $0.6 million which, if not utilized, will begin to expire in 2025.
As of December 31, 2017, we had a valuation allowance against our deferred tax assets of $0.6 million. The valuation allowance is established for state net operating loss and credit carryforwards that we do not expect to utilize based on our current expectations of future state taxable income.
We are subject to income taxes in the U.S. federal, various state and international jurisdictions. We are generally subject to U.S. federal and state tax examinations for all prior tax years due to our net operating loss carryforwards and the utilization of the carryforwards in years still open under statute.
As of December 31, 2017, we do not have any unrecognized tax benefits. It is our practice to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We do not expect any material changes in our unrecognized tax positions over the next 12 months.
Tax Act
The Tax Act, which was enacted on December 22, 2017, includes broad and complex changes to the U.S tax code. The Tax Act reduces the corporate federal income tax rate to 21.0% effective January 1, 2018 and establishes a mandatory tax on previously untaxed foreign earnings and profits (“E&P”). The Tax Act expands the limitations for executive compensation under Section 162(m) and includes transition rules for previously awarded compensation.
Accounting Standard Codification 740 requires a company to record the effects of a tax law change in the period of enactment, however, the SEC staff issued SAB 118, which allows a company to record a provisional amount when it does not have the necessary information available, prepared or analyzed in reasonable detail to complete its accounting for the change in the tax law. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.
We have finalized our accounting for the corporate rate reduction and have recorded a decrease to our net deferred tax assets of $8.6 million with a corresponding adjustment to deferred tax expense for the year ended December 31, 2017. We have estimated that there is no tax on mandatory deemed repatriation due to a net foreign E&P deficit. We are continuing to evaluate the impact of the Tax Act on the taxation of previously untaxed foreign E&P and the deferred tax liability for withholding taxes on dividends. We are also continuing to evaluate the impact the expanded Section 162(m) limitations and related transition rules have on our deferred tax assets related to stock compensation.