|
5. |
Income Taxes |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax (BEAT), a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
Accounting Standards Codification (ASC) 740, Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin (SAB) 118, which allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. The Company has recorded a reasonable estimate when possible and with the understanding that the provisional amount is subject to further adjustments under SAB 118.
As a result, the Company has recorded the following provisional amounts in the financial statements, which will be revised, if necessary, as the computations become finalized during the measurement period.
Deferred tax assets and liabilities: The Company remeasured certain deferred tax assets and liabilities based on the federal rate at which they are expected to reverse in the future, which is generally 21%. The Company also remeasured the state rate at which certain deferred tax assets and liabilities are expected to reverse in the future associated with the reduction in the future federal benefit from state deferred tax assets and liabilities from 34% to 21%. However, the Company is still analyzing certain aspects of the Act relating to compensation expense and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of the Company's deferred tax balance was a tax expense of $1.7 million, including the remeasurement of its federal valuation allowance.
Foreign tax effects: The one-time transition tax is based on the Company's total post-1986 earnings and profits (E&P) that were previously deferred from U.S. income taxes. The Company currently estimates there will be no liability for the one-time transition tax for all of its foreign subsidiaries since the accumulated post-1986 earnings is currently estimated to be negative. The Company has not yet completed its calculation of the total post-1986 E&P for these foreign subsidiaries and this amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets.
The Company has not provided for any additional outside basis difference inherent in its foreign subsidiaries, as these amounts continue to be indefinitely reinvested in foreign operations.
The Company has not yet made a policy election with respect to its treatment of potential global intangible low-taxed income (GILTI). Companies can either account for taxes on GILTI as incurred or recognize deferred taxes when basis differences exist that are expected to affect the amount of the GILTI inclusion upon reversal. The Company is still in the process of analyzing the provisions of the Act associated with GILTI and the expected impact of GILTI on the Company in the future.
The provision for income taxes for 2017, 2016, and 2015 consists of the following:
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|
2017 |
|
|
2016 |
|
|
2015 |
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|
(amounts in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic and foreign components of income (loss) before income taxes are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
591 |
|
|
$ |
(35,100 |
) |
|
$ |
9,867 |
|
|
Foreign |
|
|
3,466 |
|
|
|
1,564 |
|
|
|
862 |
|
|
Total income (loss) before income taxes |
|
$ |
4,057 |
|
|
$ |
(33,536 |
) |
|
$ |
10,729 |
|
|
The provision (benefit) for income taxes consists of: |
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|
|
|
|
|
|
|
|
|
|
|
|
Current tax: |
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|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
(570 |
) |
|
$ |
47 |
|
|
$ |
2,212 |
|
|
Foreign |
|
|
1,458 |
|
|
|
1,533 |
|
|
|
1,085 |
|
|
U.S. state and local |
|
|
116 |
|
|
|
101 |
|
|
|
495 |
|
|
Total current tax |
|
|
1,004 |
|
|
|
1,681 |
|
|
|
3,792 |
|
|
Deferred tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Enactment of the Tax Cuts and Jobs Act |
|
|
1,704 |
|
|
|
— |
|
|
|
— |
|
|
U.S. federal |
|
|
347 |
|
|
|
(584 |
) |
|
|
337 |
|
|
Foreign |
|
|
(25 |
) |
|
|
28 |
|
|
|
(19 |
) |
|
U.S. state and local |
|
|
221 |
|
|
|
(23 |
) |
|
|
109 |
|
|
Total deferred tax |
|
|
2,247 |
|
|
|
(579 |
) |
|
|
427 |
|
|
Total tax |
|
$ |
3,251 |
|
|
$ |
1,102 |
|
|
$ |
4,219 |
|
|
The effective and statutory income tax rate can be reconciled as follows: |
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|
|
|
|
|
|
|
|
|
|
|
|
Tax at statutory rate of 34% |
|
$ |
1,379 |
|
|
$ |
(11,402 |
) |
|
$ |
3,648 |
|
|
State tax, net of federal benefit |
|
|
212 |
|
|
|
47 |
|
|
|
409 |
|
|
Non-taxable income |
|
|
(573 |
) |
|
|
(495 |
) |
|
|
(576 |
) |
|
Non-deductible expenses |
|
|
971 |
|
|
|
13,465 |
|
|
|
686 |
|
|
Change in estimate primarily related to foreign taxes |
|
|
(69 |
) |
|
|
46 |
|
|
|
192 |
|
|
Change in estimate primarily related to U.S. federal taxes |
|
|
— |
|
|
|
— |
|
|
|
178 |
|
|
Tax credits |
|
|
(289 |
) |
|
|
(552 |
) |
|
|
(253 |
) |
|
Enactment of the Tax Cuts and Jobs Act |
|
|
1,704 |
|
|
|
— |
|
|
|
— |
|
|
Foreign rate differential |
|
|
(164 |
) |
|
|
(46 |
) |
|
|
69 |
|
|
Other, net |
|
|
80 |
|
|
|
39 |
|
|
|
(134 |
) |
|
Total tax |
|
$ |
3,251 |
|
|
$ |
1,102 |
|
|
$ |
4,219 |
|
|
Effective income tax rate |
|
|
80.1 |
% |
|
|
(3.3 |
)% |
|
|
39.3 |
% |
The Company’s effective tax rate (ETR) is calculated based upon the full year's operating results, and various tax related items. The Company’s normal ETR ranges from 38% to 40%. The ETR in 2017 was 80.1%, while the 2016 ETR was (3.3)%.
The ETR was higher than the normal range in 2017 primarily due to the effects of the Tax Cuts & Jobs Act which resulted in the Company reducing its U.S. deferred tax assets by $1.7 million and the adoption of ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which required the Company to record approximately $0.3 million in 2017 of additional tax expense for shortfalls that would previously have been recorded to capital in excess of par value on the Company’s consolidated balance sheet. This additional tax expense was partially offset by tax benefits for the Work Opportunity Tax Credit (WOTC) and Research and Development tax credit (R&D).
The ETR was lower than the normal range in 2016 primarily due to the non-deductible goodwill impairment charges totaling $37.3 million in the 2016 first and third quarters, and also due to the extension of the Work Opportunity Tax Credit (WOTC) and the Research and Development tax credit (R&D) which were renewed by the U.S. federal government in the 2015 fourth quarter and were effective for all of 2016. These credits totaled approximately $0.6 million.
The expected relationship between foreign income before taxes and the foreign provision for income taxes differs from the actual relationship above in 2016 and 2015 as a result of certain foreign losses incurred for which no tax benefit has been recognized. Management has determined that it is unclear whether operations in those jurisdictions will produce taxable income in future years sufficient to realize the benefit of the losses in those jurisdictions. In addition, certain costs deducted for financial statement purposes are not deductible for tax purposes in some foreign jurisdictions, such as various employee benefit costs, resulting in a substantial increase to foreign taxable income.
The Company’s deferred tax assets and liabilities at December 31, 2017 and 2016 consist of the following:
|
December 31, |
|
2017 |
|
|
2016 |
|
||
|
(amounts in thousands) |
|
|
|
|
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|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
Deferred compensation |
|
$ |
4,348 |
|
|
$ |
6,735 |
|
|
Loss and credit carryforwards |
|
|
1,362 |
|
|
|
1,568 |
|
|
Accruals deductible for tax purposes when paid |
|
|
247 |
|
|
|
403 |
|
|
Depreciation |
|
|
15 |
|
|
|
63 |
|
|
Allowance for doubtful accounts |
|
|
15 |
|
|
|
150 |
|
|
State taxes |
|
|
556 |
|
|
|
593 |
|
|
Other |
|
|
24 |
|
|
|
24 |
|
|
Gross deferred tax assets |
|
|
6,567 |
|
|
|
9,536 |
|
|
Deferred tax asset valuation allowance |
|
|
(2,505 |
) |
|
|
(2,650 |
) |
|
Gross deferred tax assets less valuation allowance |
|
|
4,062 |
|
|
|
6,886 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Other |
|
|
(229 |
) |
|
|
— |
|
|
Gross deferred tax liabilities |
|
|
(229 |
) |
|
|
— |
|
|
Net deferred tax assets |
|
$ |
3,833 |
|
|
$ |
6,886 |
|
|
Net deferred tax assets and liabilities are recorded as follows: |
|
|
|
|
|
|
|
|
|
Net non-current assets |
|
$ |
3,861 |
|
|
$ |
6,886 |
|
|
Net non-current liabilities |
|
|
(28 |
) |
|
|
— |
|
|
Deferred tax assets, net of deferred tax liabilities |
|
$ |
3,833 |
|
|
$ |
6,886 |
|
The significant decrease in net deferred tax assets is due to the Tax Act, which resulted in the Company reducing its U.S. deferred tax assets by $1.7 million. In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is more likely than not that all or some portion of the deferred tax assets will be realized, or that a valuation allowance is required. Management considers all available evidence, both positive and negative, in assessing realizability of its deferred tax assets. A key component of this assessment is management’s critical evaluation of current and future impacts of business and economic factors on the Company’s ability to generate future taxable income. Factors that may affect the Company’s ability to generate taxable income include, but are not limited to: increased competition, a decline in revenue or margins, a loss of market share, the availability of qualified professional staff, and a decrease in demand for the Company’s services. Based on the Company’s long history of profitability for tax purposes and expected profitability in future years and assessment of the factors discussed above, management has determined that it is more likely than not that it will realize its U.S. deferred tax assets, and accordingly no valuation allowance has been recorded against these assets. Additionally, management has determined that valuation allowances are required against its UK, Netherlands, and India deferred taxes. The total valuation allowance recorded against these deferred tax assets is $2.4 million, a decrease of $0.2 million during the year.
The Company has various U.S. state net operating loss carryforwards of $0.2 million which begin to expire in 2021 and has recorded a valuation allowance of $0.1 million against these assets. The Company has U.S. federal credit carryovers of $0.3 million, which expire in 2037. The Company has net operating loss carryforwards in the Netherlands, United Kingdom, and Belgium of $0.5 million, $3.9 million, and $0.2 million, respectively. The carryforwards in the Netherlands expire between 2018 and 2024, and the carryforwards in the United Kingdom and Belgium have no expiration date.
The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2014.
At December 31, 2017, the Company believes it has adequately provided for its tax-related liabilities, and that no reserve for unrecognized tax benefits is necessary. No significant change in the total amount of unrecognized tax benefits is expected within the next twelve months. The Company recognizes accrued interest and penalties related to unrecognized tax benefits (if any) in tax expense, as applicable. At December 31, 2017, the Company had no accrual for the payment of interest and penalties.
At December 31, 2017, the undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for taxes has been provided thereon. Given the complexities of the foreign tax credit calculations, it is not practicable to compute the tax liability that would be due upon distribution of those earnings in the form of dividends or liquidation or sale of the foreign subsidiaries.
During 2017, the Company recorded approximately $0.3 million of additional tax expense for tax shortfalls that would previously have been recorded in excess of par value. In 2016 and 2015, the Company recorded tax expense (benefit) to capital in excess of par value in the amounts of $0.2 million and $(0.4) million, respectively. These tax benefits have also been recognized in the consolidated balance sheets as an increase (reduction) of income taxes payable.
Net income tax payments during 2017, 2016, and 2015 totaled $1.6 million, $2.1 million, and $2.2 million, respectively.