12. Income Taxes
Income before provision for income taxes was as follows:
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. |
|
$ |
9,435 |
|
|
$ |
3,351 |
|
|
$ |
11,040 |
|
|
Foreign |
|
|
282 |
|
|
|
1,666 |
|
|
|
881 |
|
|
Income before income taxes |
|
$ |
9,717 |
|
|
$ |
5,017 |
|
|
|
11,921 |
|
The income tax provision for the years ended December 31, 2017, 2016, and 2015 consisted of the following:
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
1,543 |
|
|
$ |
1,627 |
|
|
$ |
2,500 |
|
|
State |
|
|
419 |
|
|
|
(569 |
) |
|
|
167 |
|
|
Foreign |
|
|
57 |
|
|
|
415 |
|
|
|
320 |
|
|
Total current |
|
|
2,019 |
|
|
|
1,473 |
|
|
|
2,987 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
598 |
|
|
|
1,592 |
|
|
|
796 |
|
|
State |
|
|
382 |
|
|
|
(21 |
) |
|
|
796 |
|
|
Foreign |
|
|
(85 |
) |
|
|
(446 |
) |
|
|
156 |
|
|
Total deferred |
|
|
895 |
|
|
|
1,125 |
|
|
|
1,748 |
|
|
|
|
$ |
2,914 |
|
|
$ |
2,598 |
|
|
$ |
4,735 |
|
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“the Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017 and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. We have calculated our best estimate of the impact of the Act in our year end income tax provision in accordance with our understanding of the Act and guidance available as of the date of this filing and as a result have recorded $0.4 million as additional income tax benefit in the fourth quarter of 2017, the period in which the legislation was enacted. The amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was a benefit of $0.4 million. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $45 thousand, based on cumulative foreign earnings net of deficits of $0.9 million.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company has determined that the $45 thousand of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate at December 31, 2017. Additional investigation is necessary to do a more detailed analysis of historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to the amount will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
The income tax provision for the years ended December 31, 2017, 2016, and 2015 differs from the amounts computed by applying the statutory federal income tax rate to the consolidated income before provision for income taxes as follows:
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Provision computed at statutory rate |
|
$ |
3,401 |
|
|
$ |
1,757 |
|
|
$ |
4,172 |
|
|
Increase resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference in rates for foreign jurisdictions |
|
|
37 |
|
|
|
(146 |
) |
|
|
(181 |
) |
|
Tax exempt interest income |
|
|
(12 |
) |
|
|
(21 |
) |
|
|
(6 |
) |
|
Stock-based compensation |
|
|
(304 |
) |
|
|
315 |
|
|
|
(430 |
) |
|
Other non-deductible expenses |
|
|
(101 |
) |
|
|
67 |
|
|
|
14 |
|
|
Non-deductible officers compensation |
|
|
447 |
|
|
|
738 |
|
|
|
408 |
|
|
State income tax provision |
|
|
653 |
|
|
|
(380 |
) |
|
|
573 |
|
|
Losses not benefitted |
|
|
4 |
|
|
|
1 |
|
|
|
9 |
|
|
Subsidiary earnings taxed in the US |
|
|
127 |
|
|
|
253 |
|
|
|
— |
|
|
True-up of prior year returns |
|
|
(161 |
) |
|
|
11 |
|
|
|
197 |
|
|
Research and development credit |
|
|
(801 |
) |
|
|
— |
|
|
|
— |
|
|
Tax Cuts and Jobs Act of 2017 |
|
|
(376 |
) |
|
|
— |
|
|
|
— |
|
|
Other |
|
|
— |
|
|
|
3 |
|
|
|
(21 |
) |
|
Provision for income taxes |
|
$ |
2,914 |
|
|
$ |
2,598 |
|
|
$ |
4,735 |
|
Significant components of the Company’s net deferred tax assets and liabilities are as follows:
|
|
|
As of December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
166 |
|
|
$ |
308 |
|
|
Deferred revenue |
|
|
187 |
|
|
|
187 |
|
|
Accruals and allowances |
|
|
972 |
|
|
|
1,721 |
|
|
Stock-based compensation |
|
|
815 |
|
|
|
1,656 |
|
|
Deferred rent expense |
|
|
1,327 |
|
|
|
809 |
|
|
Other |
|
|
4 |
|
|
|
— |
|
|
Gross deferred tax assets |
|
|
3,471 |
|
|
|
4,681 |
|
|
Less valuation allowance |
|
|
(352 |
) |
|
|
(443 |
) |
|
Total deferred tax assets |
|
|
3,119 |
|
|
|
4,238 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Intangible asset amortization |
|
|
(2,036 |
) |
|
|
(1,865 |
) |
|
Depreciation |
|
|
(1,823 |
) |
|
|
(2,434 |
) |
|
Total deferred tax liabilities |
|
|
(3,859 |
) |
|
|
(4,299 |
) |
|
Net deferred tax liabilities |
|
$ |
(740 |
) |
|
$ |
(61 |
) |
|
As reported: |
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets |
|
$ |
98 |
|
|
$ |
139 |
|
|
Non-current deferred tax liabilities |
|
$ |
(838 |
) |
|
$ |
200 |
|
In evaluating the ability to realize the net deferred tax liability, the Company considers all available evidence, both positive and negative, including past operating results, the existence of cumulative losses in the most recent fiscal years, tax planning strategies that are prudent and feasible, and forecasts of future taxable income. In considering sources of future taxable income, the Company makes certain assumptions and judgments which are based on the plans and estimates used to manage the underlying business of the Company. Changes in the Company’s assumptions and estimates, as well as changes in tax rates, may materially impact income tax expense for the period. The Company remeasured deferred assets and liabilities at the applicable tax rate of 21% in accordance with the Act. The remeasurement resulted in a net decrease in these assets and liabilities of $0.4 million.
The deferred tax assets relating to the foreign net operating losses (“NOLs”) are fully offset by a valuation allowance. The valuation allowance of $0.4 million at each of December 31, 2017 and 2016 relates primarily to foreign NOLs that the Company determined were not more likely than not to be realized based on projections of future taxable income in China and Hong Kong. The valuation allowance decreased by $91, $85, and $686 during the years ended December 31, 2017, 2016, and 2015, respectively. To the extent realization of the deferred tax assets for foreign NOLs becomes more likely than not, recognition of these acquired tax benefits would reduce income tax expense. As of December 31, 2017, the Company had a foreign NOL carryforward of approximately $0.7 million, which may be used to offset future taxable income in foreign jurisdictions until they expire at various dates through 2022.
The Company considers the excess of its financial reporting over its tax basis in its investment in foreign subsidiaries essentially permanent in duration and as such has not recognized a deferred tax liability related to this difference.
The Company had no unrecognized tax benefits at December 31, 2017. It is not expected that the amount of unrecognized tax benefits will change significantly within the next twelve months.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2017, 2016, and 2015 is as follows:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Balance at beginning of year |
|
$ |
— |
|
|
$ |
184 |
|
|
$ |
672 |
|
|
Reductions due to amnesty and settlement |
|
|
— |
|
|
|
(188 |
) |
|
|
(160 |
) |
|
Payments |
|
|
— |
|
|
|
— |
|
|
|
(336 |
) |
|
Gross increases related to positions taken in prior periods |
|
|
— |
|
|
|
4 |
|
|
|
8 |
|
|
Balance at end of year |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
184 |
|
The Company files income tax returns in the U.S. and in foreign jurisdictions. Generally, the Company is no longer subject to U.S., state, local and foreign income tax examinations by tax authorities in its major jurisdictions for years before 2014, except to the extent of NOL and tax credit carryforwards from those years. Major taxing jurisdictions include the U.S., both federal and state. As of December 31, 2017, the Company also had foreign NOL carryforwards of $0.7 million, which may be used to offset future taxable income in foreign jurisdictions until they expire at various dates through 2022. The deferred tax assets related to the foreign NOL carryforwards have been fully offset by a valuation allowance.
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $5.7 million as of December 31, 2017. The Company has not provided any additional federal or state income taxes or foreign withholding taxes on the undistributed earnings as such earnings have been indefinitely reinvested in the business. Due to the various methods by which such earnings could be repatriated in the future, the amount of taxes attributable to the undistributed earnings is not practicably determinable.