|
10. |
Income Taxes |
The provision for income taxes consists of the following (in thousands):
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|
Year Ended December 31, |
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2017 |
|
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2016 |
|
|
2015 |
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Current: |
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|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
6 |
|
|
$ |
— |
|
|
$ |
— |
|
|
State |
|
|
550 |
|
|
|
435 |
|
|
|
900 |
|
|
Deferred: |
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|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
1,940 |
|
|
|
— |
|
|
|
— |
|
|
State |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
$ |
2,496 |
|
|
$ |
435 |
|
|
$ |
900 |
|
The provision (benefit) for income taxes differed from the amounts of income tax provision (benefit) determined by applying the U.S. federal statutory income tax rate to income before provision (benefit) for income taxes as a result of the following (in thousands):
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|
Year Ended December 31, |
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|
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2017 |
|
|
2016 |
|
|
2015 |
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|||
|
Tax (benefit) provision at federal statutory rates |
|
$ |
(14,168 |
) |
|
$ |
(9,335 |
) |
|
$ |
(4,515 |
) |
|
State income tax expense, net of federal effects |
|
|
(648 |
) |
|
|
(550 |
) |
|
|
64 |
|
|
Change in deferred tax asset valuation allowance |
|
|
7,857 |
|
|
|
8,569 |
|
|
|
4,986 |
|
|
Tax reform impact on deferred income taxes |
|
|
13,959 |
|
|
|
— |
|
|
|
— |
|
|
Share based compensation ASU 2016-09 adoption |
|
|
(5,326 |
) |
|
|
— |
|
|
|
— |
|
|
Other |
|
|
822 |
|
|
|
1,751 |
|
|
|
365 |
|
|
|
|
$ |
2,496 |
|
|
$ |
435 |
|
|
$ |
900 |
|
A summary of the Company’s deferred tax assets and liabilities, are as follows (in thousands):
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|
December 31, |
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|
|
2017 |
|
|
2016 |
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|
Deferred tax assets: |
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|
|
|
|
|
|
|
|
Deferred gains on sale/leaseback transactions |
|
$ |
2,890 |
|
|
$ |
5,416 |
|
|
Net operating loss carryforward (expiring up to 2037) |
|
|
25,441 |
|
|
|
23,206 |
|
|
Compensation costs |
|
|
2,245 |
|
|
|
3,707 |
|
|
Depreciation and amortization |
|
|
4,367 |
|
|
|
— |
|
|
Other |
|
|
2,099 |
|
|
|
3,221 |
|
|
Total deferred tax assets |
|
|
37,042 |
|
|
|
35,550 |
|
|
Deferred tax asset valuation allowance |
|
|
(36,737 |
) |
|
|
(30,821 |
) |
|
Total deferred tax assets, net |
|
|
305 |
|
|
|
4,729 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(2,246 |
) |
|
|
(4,729 |
) |
|
Total deferred tax liabilities |
|
$ |
(2,246 |
) |
|
$ |
(4,729 |
) |
|
Net deferred tax (liabilities) assets |
|
$ |
(1,941 |
) |
|
$ |
— |
|
Income taxes are computed using the asset and liability method and current income taxes are recorded based on amounts refundable or payable in the current year. Deferred income taxes are recorded based on the estimated future tax effects of loss carryforwards and temporary differences between 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 that are expected to apply to taxable income in the years in which we expect those carryforwards and temporary differences to be recovered or settled. Management regularly evaluates the future realization of deferred tax assets and provides a valuation allowance, if considered necessary, based on such evaluation. As part of the evaluation, management has evaluated taxable income in carryback years, future reversals of taxable temporary differences, feasible tax planning strategies, and future expectations of income. Based upon this evaluation, a valuation allowance has been recorded to reduce the Company’s net deferred tax assets to the amount that is more likely than not to be realized. A significant component of objective evidence evaluated was the cumulative losses before income taxes incurred by the Company over the past several fiscal years. Such objective evidence severely limits the ability to consider other subjective evidence such as the Company’s ability to generate sufficient taxable income in future periods to fully recover the deferred tax assets. However, in the event that we were to determine that it would be more likely than not that the Company would realize the benefit of deferred tax assets in the future in excess of their net recorded amounts, adjustments to deferred tax assets would increase net income in the period we made such a determination. The benefits of the net deferred tax assets might not be realized if actual results differ from expectations.
The Company completed an analysis determining its best estimate for provisional tax adjustments based on the revised tax legislation associated with the Tax Cuts and Jobs Act (“TCJA”), which was enacted on December 22, 2017. Additionally, the Securities and Exchange Commission issued Staff Accounting Bulletin 118 (“SAB 118”), to address the accounting and reporting of the Act. SAB 118 allows companies to take a reasonable period, which should not extent beyond one year from enactment of the TCJA, to measure and recognize the effects of the new tax law. The Company is still analyzing certain aspects of the TCJA and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts; however, based upon the Company’s analysis of the TCJA and consideration of SAB 118, the Company remeasured its deferred income taxes on a provisional basis as of December 31, 2017, which resulted in a net $14.0 million reduction in the Company’s deferred tax assets and liabilities. The remeasurement consisted of a $15.9 million reduction to the Company’s deferred tax assets for the change in the corporate statutory tax rate from 34% to 21% and a $0.3 million reduction to the Company’s deferred tax asset valuation allowance for the repeal of the corporate Alternative Minimum Tax (“AMT”), partially offset by a $2.2 million increase to the Company’s deferred tax asset valuation allowance for maximum deduction limits for future net operating loss (“NOL”) carryforwards to 80% of taxable income for losses arising in tax years beginning after December 31, 2017.
As of December 31, 2017, the Company has federal and state NOL carryforwards of $108.5 million and $91.6 million and related deferred tax assets of $22.8 million and $5.3 million, respectively, and a federal AMT credit carryforward of $0.3 million. The federal and state NOL carryforwards in the income tax returns filed included unrecognized tax benefits. The deferred tax assets recognized for those NOLs are presented net of the unrecognized benefits. If not used, the federal NOL will expire during fiscal 2033 to 2037 and state NOL’s will expire during fiscal 2018 to 2037.
The Company evaluates uncertain tax positions through consideration of accounting and reporting guidance on criteria, measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better financial-statement comparability among different companies. The Company is required to recognize a tax benefit in its financial statements for an uncertain tax position only if management’s assessment is that its position is “more likely than not” (i.e., a greater than 50 percent likelihood) to be upheld on audit based only on the technical merits of the tax position. The Company’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as income tax expense. As of December 31, 2017, the Company has unrecognized tax benefits of $3.4 million for an uncertain tax position associated with a change in accounting method. The unrecognized tax benefits as of December 31, 2017 are timing-related uncertainties that if recognized would not impact the effective tax rate of the Company.
A summary of the Company’s unrecognized tax benefits activity and related information for the years ended December 31, 2017, 2016, and 2015 is presented below (in thousands):
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|
2017 |
|
|
2016 |
|
|
2015 |
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|
Beginning balance, January 1 |
|
$ |
3,786 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Gross increases – tax positions in prior period |
|
|
— |
|
|
|
2,451 |
|
|
|
— |
|
|
Gross decreases – tax positions in prior period |
|
|
(370 |
) |
|
|
— |
|
|
|
— |
|
|
Gross increases – tax positions in current period |
|
|
— |
|
|
|
1,335 |
|
|
|
— |
|
|
Settlements |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Lapse of statute of limitations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Ending balance, December 31 |
|
$ |
3,416 |
|
|
$ |
3,786 |
|
|
$ |
— |
|
The effective tax rates for fiscal 2017 and 2016 differ from the statutory tax rates due to state income taxes, permanent tax differences, and changes in the deferred tax asset valuation allowance. The Company is impacted by the Texas Margin Tax (“TMT”), which effectively imposes tax on modified gross revenues for communities within the State of Texas and accounts for the majority of the Company’s current state tax expense. During each of fiscal 2017 and 2016 the Company consolidated 38 Texas communities and the TMT increased the overall provision for income taxes. The Company is generally no longer subject to federal and state tax audits for years before 2014.