12. INCOME TAXES
US Tax Reform
The “Tax Cuts and Jobs Act” (TCJA) was enacted on December 22, 2017 and it significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things, includes a reduction in the U.S. federal tax rate from 35% to 21%, allows for the expensing of capital expenditures, 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 and puts into effect the migration from a “worldwide” system of taxation to a territorial system.
The Company has not completed its accounting for the income tax effects of the TCJA. Where the Company has been able to make reasonable estimates of the effects for which its analysis is not yet complete, the Company has recorded provisional amounts in accordance with SEC Staff Accounting Bulletin No. 118. Where the Company has not yet been able to make reasonable estimates of the impact of certain elements, the Company has not recorded any amounts related to those elements and has continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect immediately prior to the enactment of the TCJA.
The Company's accounting for the following elements of the TCJA is incomplete. However, the Company was able to make reasonable estimates of certain effects and, therefore, has recorded provisional amounts as follows:
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Revaluation of the Deferred Credit, deferred tax assets and liabilities and other miscellaneous tax attributes: The TCJA reduces the U.S. federal corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. In addition, the TCJA makes certain changes to the depreciation rules and implements new limits on the deductibility of certain executive compensation. The Company has evaluated these changes and has recorded a provisional tax benefit of $3.4 million. The Company is still completing its calculation of the impact of these changes on its deferred tax balances. |
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Transition tax on unrepatriated foreign earnings: The Transition Tax on unrepatriated foreign earnings is a tax on previously untaxed accumulated and current earnings and profits ("E&P") of the Company's foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, among other factors, the amount of post-1986 E&P of its foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company was able to make a reasonable estimate of the Transition Tax and has recorded a provisional Transition Tax expense of $0.6 million. The Company is continuing to gather additional information to more precisely compute the amount of the Transition Tax to complete its calculation of E&P as well as the final determination of non-U.S. income taxes paid. |
The Company's accounting for the following elements of the TCJA is incomplete, and it has not yet been able to make reasonable estimates of the effects of these items. Therefore, no provisional amounts were recorded.
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Indefinite reinvestment assertion: Beginning in 2018, the TCJA provides a 100% deduction for dividends received from 10-percent owned foreign corporations by U.S. corporate shareholders, subject to a one-year holding period. Although dividend income is now exempt from U.S. federal tax in the hands of the U.S. corporate shareholders, companies must still apply the guidance of ASC 740-30-25-18 to account for the tax consequences of outside basis differences and other tax impacts of their investments in non-U.S. subsidiaries. The Company has accrued the Transition Tax on the deemed repatriated earnings that were previously indefinitely reinvested. The Company is still evaluating the impacts of the TCJA related to its remaining outside basis differences and how the TCJA will affect the Company's current accounting position to indefinitely reinvest unremitted foreign earnings. The Company expects to finalize its conclusion related to its indefinite reinvestment assertion during the measurement period. |
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Global intangible low taxed income (GILTI): The TCJA creates a new requirement that certain income (i.e., GILTI) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the TCJA and the application of ASC 740. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into the Company's measurement of its deferred taxes. The Company has not yet completed its analysis of the GILTI tax rules and is not yet able to reasonably estimate the effect of this provision of the TCJA or make an accounting policy election for the ASC 740 treatment of the GILTI tax. Therefore, the Company has not recorded any amounts related to potential GILTI tax in its financial statements and has not yet made a policy decision regarding whether to record deferred taxes on GILTI. |
The Company files income tax returns for U.S. federal and various U.S. states, as well as various foreign jurisdictions. The liabilities for unrecognized tax benefits are carried in Other long-term liabilities on the consolidated balance sheets because the payment of cash is not anticipated within one year of the balance sheet date.
The components of income (loss) before income taxes consisted of the following (in thousands):
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Year Ended December 31, |
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2017 |
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2016 |
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2015 |
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Domestic |
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$ |
52,986 |
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$ |
18,016 |
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$ |
(12,294 |
) |
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Foreign jurisdictions |
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$ |
3,959 |
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$ |
3,941 |
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$ |
4,464 |
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Income (loss) before income taxes |
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$ |
56,945 |
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$ |
21,957 |
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$ |
(7,830 |
) |
Income tax provision (benefit) consisted of the following (in thousands):
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Current |
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Deferred |
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Total |
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Year ended December 31, 2017 |
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U.S. Federal |
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$ |
10,953 |
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$ |
3,466 |
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$ |
14,419 |
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U.S. state and local |
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2,032 |
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51 |
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2,083 |
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Foreign jurisdictions |
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1,576 |
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(255 |
) |
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1,321 |
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$ |
14,561 |
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$ |
3,262 |
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$ |
17,823 |
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Year ended December 31, 2016 |
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U.S. Federal |
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$ |
15,105 |
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$ |
(8,784 |
) |
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$ |
6,321 |
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U.S. state and local |
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1,636 |
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(524 |
) |
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1,112 |
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Foreign jurisdictions |
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710 |
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389 |
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1,099 |
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$ |
17,451 |
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$ |
(8,919 |
) |
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$ |
8,532 |
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Year ended December 31, 2015 |
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U.S. Federal |
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$ |
11,067 |
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$ |
(11,995 |
) |
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$ |
(928 |
) |
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U.S. state and local |
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1,119 |
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(761 |
) |
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358 |
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Foreign jurisdictions |
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1,372 |
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41 |
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1,413 |
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$ |
13,558 |
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$ |
(12,715 |
) |
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$ |
843 |
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The difference between the statutory rate for federal income tax and the effective income tax rate was as follows (in thousands):
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Year Ended December 31, |
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2017 |
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2016 |
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2015 |
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Income tax expense calculated at the federal statutory rate |
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$ |
19,931 |
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35.0 |
% |
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$ |
7,685 |
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35.0 |
% |
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$ |
(2,740 |
) |
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35.0 |
% |
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Effect of: |
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State and local taxes, net of federal benefit |
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1,606 |
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2.8 |
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912 |
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4.2 |
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487 |
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(6.2 |
) |
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Tax on foreign earnings, net of tax credits and deductions |
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(69 |
) |
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(0.1 |
) |
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(26 |
) |
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(0.1 |
) |
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(330 |
) |
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4.2 |
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Tax reform adjustment |
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(3,418 |
) |
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(6.0 |
) |
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Deferred credit |
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(1,053 |
) |
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(1.9 |
) |
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Change in valuation allowance |
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- |
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- |
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- |
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- |
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- |
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- |
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Permanent items: |
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Goodwill impairment |
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- |
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- |
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- |
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- |
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2,106 |
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(26.9 |
) |
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Stock-based awards |
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(179 |
) |
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(0.3 |
) |
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(534 |
) |
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(2.4 |
) |
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778 |
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(9.9 |
) |
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Tax reform adjustment |
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574 |
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1.0 |
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- |
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- |
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- |
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- |
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Other |
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483 |
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0.9 |
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174 |
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0.8 |
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185 |
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(2.4 |
) |
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State/Local tax credits |
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(1,187 |
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(2.1 |
) |
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(1,049 |
) |
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(4.8 |
) |
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(931 |
) |
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11.9 |
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Change in liability for uncertain tax positions |
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1,141 |
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2.0 |
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1,212 |
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5.5 |
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1,250 |
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(16.0 |
) |
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Other |
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(6 |
) |
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(0.0 |
) |
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158 |
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0.7 |
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38 |
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(0.5 |
) |
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$ |
17,823 |
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31.3 |
% |
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$ |
8,532 |
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38.9 |
% |
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$ |
843 |
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(10.8)% |
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Components of the Company’s net deferred tax asset (liability) included in the consolidated balance sheets consisted of the following at December 31 (in thousands):
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2017 |
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2016 |
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Deferred tax assets: |
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Accrued liabilities |
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$ |
17,563 |
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$ |
19,393 |
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Depreciation and amortization |
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980 |
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1,787 |
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Foreign operating loss carryforward |
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246 |
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246 |
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U.S. federal tax credits and carryforward |
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8,152 |
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- |
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U.S. state and local tax credits and carryforward |
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1,799 |
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385 |
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Other |
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|
667 |
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1,209 |
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Valuation allowance |
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(2,394 |
) |
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(987 |
) |
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Total deferred tax assets |
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27,013 |
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22,033 |
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Deferred tax liabilities: |
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Depreciation and amortization |
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(20,117 |
) |
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(33,436 |
) |
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Prepaid expenses |
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(572 |
) |
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(310 |
) |
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Other |
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(541 |
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(220 |
) |
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Total deferred tax liabilities |
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(21,230 |
) |
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(33,966 |
) |
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Net deferred tax asset (liability) |
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$ |
5,783 |
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$ |
(11,933 |
) |
The deferred tax asset attributable to U.S federal tax credits and carryforwards includes $8.0 million of U.S. federal operating loss carryforwards that will expire at various times from 2031 to 2037 if not utilized. U.S. state and local tax credits and carryforwards above includes $1.3 million for U.S. state and local operating loss carryforwards that will expire at various times from 2026 to 2032 if not utilized.
The Company has foreign operating loss carryforwards for which a deferred tax asset of $0.2 million has been established. The Company has a valuation allowance of $0.2 million against this deferred tax asset based upon its assessment that it is more likely than not that this amount will not be realized. The ultimate realization of this tax benefit is dependent upon the generation of sufficient operating income in the respective tax jurisdictions. Approximately 74% of the foreign net operating loss carryforwards can be utilized over an indefinite period whereas the remainder will expire at various times from 2020 to 2025 if not utilized.
In May 2017, the Company acquired Nephrogenex which included deferred tax assets of $22.2 million, consisting of tax effected net operating losses in the amount of $13.5 million, tax effected capitalized research and development expenses of $8.5 million and tax effected federal tax credits of $0.2 million, and deferred tax liabilities of $0.1 million. See Note 2 for further description of the asset acquisition that occurred in the second quarter of 2017.
Annual activity related to the Company’s valuation allowance is as follows (in thousands):
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Year Ended December 31, |
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2017 |
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2016 |
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2015 |
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Beginning Balance |
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$ |
987 |
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$ |
1,021 |
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$ |
1,086 |
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Additions charged to expense |
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- |
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- |
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- |
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Additions due to asset acquisition |
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2,033 |
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- |
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- |
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Reductions from utilization, reassessments and expirations |
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3 |
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(34 |
) |
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(65 |
) |
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Remeasurement due to effect of tax reform |
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(629 |
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- |
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- |
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Ending Balance |
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$ |
2,394 |
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$ |
987 |
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$ |
1,021 |
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A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in thousands):
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Year Ended December 31, |
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2017 |
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2016 |
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2015 |
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Beginning Balance |
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$ |
5,698 |
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$ |
2,604 |
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$ |
1,353 |
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Increases in tax positions for prior years |
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5 |
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- |
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- |
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Decreases in tax positions for prior years |
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- |
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(196 |
) |
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(14 |
) |
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Increases in tax positions for current year |
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1,187 |
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3,365 |
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|
1,265 |
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Lapse in statute of limitations |
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- |
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(75 |
) |
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- |
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Ending Balance |
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$ |
6,890 |
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$ |
5,698 |
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$ |
2,604 |
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Interest and penalties associated with uncertain tax positions are recognized as components of Income tax provision in the consolidated statements of operations. There was no material change to tax-related interest and penalties during the years ended December 31, 2017, 2016 and 2015. As of December 31, 2017 and 2016, respectively, the Company has a liability for interest and penalties of $1.4 million and $1.0 million that is associated with related tax liabilities of $5.9 million and $4.3 million for uncertain tax positions.
The Company operates in various foreign, state and local jurisdictions. The number of tax years for which the statute of limitations remains open for foreign, state and local jurisdictions varies by jurisdiction and is approximately four years (2013 through 2017). For federal tax purposes, the Company’s open tax years are 2014 through 2017.