10. Income Taxes
The Company files income tax returns in the U.S. federal, the United Kingdom (“U.K.”) and various state jurisdictions.
For the years ended December 31, 2017, 2016 and 2015, the income tax provision was comprised of the following:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
16,852 |
|
|
$ |
24,509 |
|
|
$ |
20,947 |
|
|
State |
|
|
4,721 |
|
|
|
8,132 |
|
|
|
6,260 |
|
|
Foreign |
|
|
271 |
|
|
|
338 |
|
|
|
480 |
|
|
Total current |
|
|
21,844 |
|
|
|
32,979 |
|
|
|
27,687 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(30,794 |
) |
|
|
800 |
|
|
|
(1,534 |
) |
|
State |
|
|
(385 |
) |
|
|
516 |
|
|
|
(2,301 |
) |
|
Total deferred |
|
|
(31,179 |
) |
|
|
1,316 |
|
|
|
(3,835 |
) |
|
Total income tax (benefit) expense |
|
$ |
(9,335 |
) |
|
$ |
34,295 |
|
|
$ |
23,852 |
|
Income before provision for income taxes for the years ended December 31, 2017, 2016 and 2015, was as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Domestic source |
|
$ |
88,357 |
|
|
$ |
82,033 |
|
|
$ |
59,705 |
|
|
Foreign source |
|
|
1,291 |
|
|
|
1,819 |
|
|
|
2,224 |
|
|
Income before provision for income taxes |
|
$ |
89,648 |
|
|
$ |
83,852 |
|
|
$ |
61,929 |
|
The following is a reconciliation of income taxes computed at the U.S. federal statutory rate to the income taxes reported in the consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Income tax expense at statutory rate |
|
$ |
31,377 |
|
|
$ |
29,348 |
|
|
$ |
21,675 |
|
|
State income taxes |
|
|
5,011 |
|
|
|
5,621 |
|
|
|
2,577 |
|
|
Effect of rate change |
|
|
(36,768 |
) |
|
|
— |
|
|
|
— |
|
|
Stock-based compensation |
|
|
(7,072 |
) |
|
|
— |
|
|
|
— |
|
|
Research and development tax credit |
|
|
(800 |
) |
|
|
(638 |
) |
|
|
(345 |
) |
|
Foreign rate differential |
|
|
(203 |
) |
|
|
(273 |
) |
|
|
(328 |
) |
|
Unremitted earnings tax |
|
|
363 |
|
|
|
— |
|
|
|
— |
|
|
Uncertain tax position |
|
|
(55 |
) |
|
|
— |
|
|
|
— |
|
|
Deferred tax true-up |
|
|
— |
|
|
|
— |
|
|
|
69 |
|
|
All other |
|
|
(1,188 |
) |
|
|
237 |
|
|
|
204 |
|
|
Total income tax (benefit) expense |
|
$ |
(9,335 |
) |
|
$ |
34,295 |
|
|
$ |
23,852 |
|
On December 22, 2017, the U.S. legislature enacted the Tax Act resulting in significant modifications to existing tax law. The Company has completed its determination of the accounting effects of the Tax Act for the year ended December 31, 2017. The Tax Act reduces the corporate income tax rate from 35% to 21%, subjects certain foreign earnings on which U.S. income tax was previously deferred to a one-time transition tax, as well as other changes. As a result of the Tax Act, the Company incurred an incremental income tax benefit of $34.1 million during the year ended December 31, 2017, which consisted primarily of the remeasurement of deferred tax assets and liabilities at the 21% corporate income tax rate and the one-time transition tax on accumulated foreign earnings of $0.4 million.
The tax effects of temporary differences giving rise to deferred income tax assets and liabilities as of December 31, 2017 and 2016 were as follows:
|
|
|
As of December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Loss and credit carryforwards |
|
$ |
11,184 |
|
|
$ |
6,714 |
|
|
Accrued expenses |
|
|
2,089 |
|
|
|
2,096 |
|
|
Stock-based compensation |
|
|
9,914 |
|
|
|
9,823 |
|
|
Total deferred tax assets |
|
|
23,187 |
|
|
|
18,633 |
|
|
Valuation allowance |
|
|
(4,803 |
) |
|
|
(1,610 |
) |
|
Net deferred tax assets |
|
|
18,384 |
|
|
|
17,023 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Fixed assets |
|
|
(5,909 |
) |
|
|
(5,738 |
) |
|
Intangible assets |
|
|
(86,462 |
) |
|
|
(117,172 |
) |
|
Prepaid expenses |
|
|
(305 |
) |
|
|
(2,135 |
) |
|
Total deferred tax liabilities |
|
|
(92,676 |
) |
|
|
(125,045 |
) |
|
Net deferred tax liability |
|
$ |
(74,292 |
) |
|
$ |
(108,022 |
) |
The Company classified its net deferred tax liabilities as long-term liabilities on the consolidated balance sheets as of December 31, 2017 and 2016.
A partial valuation reserve of $4.8 million and $1.6 million was recorded as of December 31, 2017 and 2016, respectively, against certain state-only credits as those credits have a short carryover period and the Company believes that this portion of the credit carryovers will more likely than not expire before they are utilized.
In accordance with the Tax Act, the Company recorded a tax liability of $0.4 million as of December 31, 2017 related to the one-time tax on the foreign earnings of its U.K. subsidiary. The Tax Act generally allows companies to repatriate future foreign source earnings without incurring additional U.S. taxes by providing a 100% exemption for the foreign source portion of dividends from certain foreign subsidiaries. As a result, the Company plans to repatriate cash from its U.K. subsidiary to the U.S. The Company estimates no additional tax liability as there are no applicable withholding taxes for the repatriation of unremitted earnings of its U.K. subsidiary.
The Company had the following tax loss and credit carryforwards as of December 31, 2017 and 2016:
|
|
|
2017 |
|
|
2016 |
|
|
Beginning Year of Expiration |
||
|
|
|
(in thousands) |
||||||||
|
U.S. federal loss carryforwards |
|
$ |
595 |
|
|
$ |
483 |
|
|
2027 |
|
U.S. state and local loss carryforwards |
|
|
4,362 |
|
|
|
5,265 |
|
|
2027 |
|
Illinois Edge Credits(a) |
|
|
8,422 |
|
|
|
5,045 |
|
|
2018 |
|
|
(a) |
Amounts are before the federal benefit of state tax |
Upon adoption of ASU 2016-09 (see Note 2, Summary of Significant Accounting Policies, Recently Issued Accounting Pronouncements), the Company recorded a net deferred tax asset for state net operating losses (“NOLs”), including excess tax benefits, of $4.1 million. The adoption of ASU 2016-09 resulted in a $2.6 million cumulative effect adjustment to retained earnings, including the federal benefit of state taxes, on the consolidated balance sheets as of January 1, 2017. The Company also recorded a net deferred tax asset of $0.7 million for the year ended December 31, 2017 related to Illinois Edge Credit carryforward to record the impact of excess tax benefits, fully offset by a valuation allowance. For federal purposes, $0.1 million of additional NOL was recorded during the year ended December 31, 2017 related to the adoption of ASU 2016-09.
The Company is currently under examination in New York for corporate income tax returns for the tax years ended December 31, 2014, 2015 and 2016. The Company cannot predict with certainty whether there will be any additional tax liabilities, penalties and/or interest as a result of the audit. In June of 2017, the New York City Department of Finance completed a routine examination of Seamless Holdings Corporation for General Corporation Tax for the short tax period from October 17, 2012 through August 8, 2013 and proposed no changes. The Company does not expect any additional tax liabilities, penalties and/or interest as a result of the audit. The Company’s tax returns are subject to the normal statute of limitations, three years from the filing date for federal income tax purposes. The federal and state statute of limitations generally remain open for years in which tax losses are generated until three years from the year those losses are utilized. Under these rules, the 2006 and later year NOLs of Slick City Media, Inc. are still subject to audit by the IRS and state and local jurisdictions. Also, the 2007 and later year NOLs of Grubhub Holdings Inc. and its acquired businesses are still subject to audit by the IRS and state and local jurisdictions. The December 31, 2014 and later period U.K. returns of Seamless Europe Ltd., the Company’s U.K. subsidiary, are subject to exam by the U.K. tax authorities.
The Company is subject to taxation in the U.S. federal and various state jurisdictions. Significant judgment is required in determining the provision for income taxes and recording the related income tax assets and liabilities. The Company’s practice for accounting for uncertainty in income taxes is to recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not criteria, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.
The following table summarizes the Company’s unrecognized tax benefit activity during the years ended December 31, 2017 and 2016, excluding the related accrual for interest:
|
|
|
As of December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Balance at beginning of period |
|
$ |
3,345 |
|
|
$ |
2,932 |
|
|
Reductions for tax positions taken in prior years |
|
|
(937 |
) |
|
|
— |
|
|
Additions for tax positions taken in prior years |
|
|
— |
|
|
|
413 |
|
|
Additions for tax positions taken in the current year |
|
|
456 |
|
|
|
— |
|
|
Balance at end of period |
|
$ |
2,864 |
|
|
$ |
3,345 |
|
Included in the net deferred tax liabilities on the consolidated balance sheets at December 31, 2017 and 2016 were deferred tax assets that relate to the potential settlement of these unrecognized tax benefits. After consideration of these amounts, $1.3 million and $1.0 million of the amount accrued December 31, 2017 and 2016, respectively, would impact the effective tax rate if reversed. As of December 31, 2017, the Company anticipates that a portion of the unrecognized tax benefit will be reversed in 2018 due to the closing of the statute of limitations for one of its tax positions. Should the statute of limitations close, the impact of the benefit is estimated to be $0.8 million.
The Company records interest and penalties, if any, as a component of its income tax (benefit) expense in the consolidated statements of operations. Interest expense of less than $0.1 million and no penalties were recognized during each of the years ended December 31, 2017 and 2016.