Mattersight Corp

Note Thirteen — Income Taxes

Loss before income taxes consisted of the following:

	2017			2016			2015
United States	$	(16.4	)	$	(20.9	)	$	(15.5	)
Foreign		—			—			(0.1	)
Total	$	(16.4	)	$	(20.9	)	$	(15.6	)

The income tax benefit (provision) consists of the following:

	2017		2016			2015
Current:
Federal	$	—	$	(0.1	)	$	—
State		—		—			—
Foreign		—		—			—
Total current		—		(0.1	)		—
Deferred:
Federal		0.1		—			—
State		—		—			—
Foreign		—		—			—
Total deferred		0.1		—			—
Income tax benefit (provision)	$	0.1	$	(0.1	)	$	—

Total income tax benefit differed from the amount computed by applying the federal statutory income tax rate due to the following:

	2017			2016			2015
Valuation allowance	$	25.7		$	(7.7	)	$	(4.9	)
Federal tax benefit, at statutory rate		5.7			7.2			5.5
Stock-based compensation		3.1			—			—
Deferrals		0.7			—			—
State tax benefit, net of federal benefit		0.5			0.6			0.4
Tax reform(1)		(32.2	)		—			—
Expiration of state NOLs		(1.7	)		—			—
Expiration of vested stock options		(1.4	)		—			—
Nondeductible expenses		(0.3	)		(0.3	)		0.1
Other		—			0.1			(1.1	)
Income tax benefit (provision)	$	0.1		$	(0.1	)	$	—

(1)

On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) was signed into law. The Company has completed its accounting for tax reform under the Tax Cuts and Jobs Act as of December 31, 2017. This act includes, among other items, a permanent reduction to the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, and requires immediate taxation of accumulated, unremitted non-U.S. earnings. We did not recognize a liability for the tax on accumulated unremitted non-U.S. earnings because we have an accumulated foreign loss. At December 31, 2017, we recognized a tax benefit of $0.1 million from revaluing U.S. net deferred tax liabilities.

The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Significant judgment is used to determine the likelihood of the benefit.

A reconciliation of the gross amounts of unrecognized tax benefits at the beginning and end of the year are as follows:

	2017		2016		2015
Balance at beginning of year	$	12.7	$	12.7	$	12.7
Additions based on tax positions related to the current year		—		—		—
Additions for tax positions of prior years		—		—		—
Reductions for tax positions of prior years		—		—		—
Reductions for tax positions as a result of lapse of statute		—		—		—
Settlements		—		—		—
Balance at end of year	$	12.7	$	12.7	$	12.7

Due to the Company’s net operating loss carryforward position, these unrecognized tax benefits will not impact the Company’s effective tax rate, if recognized. Any change in the amount of unrecognized tax benefits within the next twelve months is not expected to result in a significant impact on the results of operations or the financial position of the Company.

Due to the Company’s net operating loss carryforward position, accrued interest and penalties associated with uncertain tax positions as of December 31, 2017 are not material. Interest and penalties associated with uncertain tax positions are recorded as part of income tax expense.

The statutes of limitation for the Company’s income tax returns after 2001 effectively remain open for examination by the IRS because the net operating loss carryforward from those years can be examined by the IRS for a period of three years after filing the tax return for the year the loss is used.

Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three to five years. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. The Company and its subsidiaries may have various state and foreign income tax returns for immaterial jurisdictions in the process of examination throughout the reporting period.

Deferred tax assets and liabilities comprised the following:

	December 31, 2017			December 31, 2016
Deferred tax assets:
Net operating loss carryforwards	$	53.9		$	75.2
Other accruals		4.0			8.8
Depreciation and amortization, including goodwill		0.7			0.8
Tax credit carryforward		0.5			0.5
Valuation allowance		(58.1	)		(83.8	)
Total deferred tax assets		1.0			1.5
Deferred tax liabilities:
Prepaid expenses		(1.1	)		(1.7	)
Total deferred tax liabilities		(1.1	)		(1.7	)
Net deferred tax liability	$	(0.1	)	$	(0.2	)

Deferred income taxes are not provided on certain undistributed earnings of foreign subsidiaries because such foreign subsidiaries are in an accumulated foreign loss position.

During 2002, the Company established a valuation allowance related to deferred tax assets for the U.S. This was in addition to the valuation allowance established in 2001 for non-U.S. deferred tax assets. The Company continues to provide a valuation allowance on significantly all domestic and foreign deferred tax assets as the Company has determined that it is more likely than not that the deferred tax assets in these jurisdictions will not be realized. As of December 31, 2017, net deferred tax assets of $58.1 million were fully offset by a valuation allowance. The Company’s U.S. federal net operating losses (NOLs) of $260.5 million and U.S. state NOLs of $108.9 million will expire beginning in 2022 and 2018, respectively. The Company’s non-U.S. NOLs of $0.8 million are subject to various expiration dates beginning in 2029. The Company also carries $0.5 million in research and development credit carryforwards that will expire beginning in 2020.

The Company’s ability to utilize its NOLs could become subject to significant limitations under Section 382 of the Internal Revenue Code if the Company were to undergo an ownership change. An ownership change would occur if the stockholders who own or have owned, directly or indirectly, 5% or more of the Company’s Common Stock or are otherwise treated as 5% stockholders under Section 382 and the regulations promulgated thereunder, increase their aggregate percentage ownership of the Company’s stock by more than 50 percentage points over the lowest percentage of the stock owned by these stockholders at any time during the testing period, which is generally the three-year period preceding the potential ownership change. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of taxable income a corporation may offset with NOL carryforwards. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOL carryforwards. The Company has undergone a Section 382 analysis and does not believe there is currently a limitation on the use of NOLs under Section 382; however, due to ongoing ownership changes, the Company may be subject to significant limitations in the future. If a change in ownership is deemed to have occurred during the past three years, then it may be possible that the Company’s NOL carryforward could be subject to limitation under Section 382 for tax return purposes. However, since its NOL carryforward is fully reserved with a valuation allowance, there would be no impact for financial statement purposes from a Section 382 limitation.