13. Income Taxes
The Company files income tax returns in the U.S. for federal and various state jurisdictions. The Company is subject to U.S. federal income tax examination for calendar tax years 2010 through 2016 as well as state income tax examinations for various years depending on statutes of limitations of those jurisdictions.
The following summarizes the components of income tax expense for the years ended December 31:
|
Current: |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
State and local |
|
|
15 |
|
|
|
17 |
|
|
|
25 |
|
|
Total current expense |
|
$ |
15 |
|
|
$ |
17 |
|
|
$ |
25 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
State and local |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total deferred taxes |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Reconciliation between the effect of applying the federal statutory rate and the effective income tax rate used to calculate the Company’s income tax provision is as follows for the years ended December 31:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal statutory rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
Effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit |
|
|
6.8 |
% |
|
|
6.0 |
% |
|
|
6.0 |
% |
|
Change in state tax rates |
|
|
0.8 |
% |
|
|
2.6 |
% |
|
|
1.7 |
% |
|
Change in federal tax rates |
|
|
(145.2 |
%) |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
Change in valuation allowance |
|
|
98.7 |
% |
|
|
(46.4 |
%) |
|
|
(42.9 |
%) |
|
State tax credits |
|
|
0.7 |
% |
|
|
4.1 |
% |
|
|
2.5 |
% |
|
Stock-based compensation |
|
|
7.4 |
% |
|
|
(0.1 |
%) |
|
|
0.0 |
% |
|
Section 162(m) |
|
|
(2.4 |
%) |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
Other permanent items |
|
|
(0.9 |
%) |
|
|
(0.2 |
%) |
|
|
(0.7 |
%) |
|
Deferred true-up |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
(0.6 |
%) |
|
Income tax provision effective rate |
|
|
(0.1 |
%) |
|
|
0.0 |
% |
|
|
0.0 |
% |
The significant components of the Company’s deferred tax asset and liability were as follows as of December 31:
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets relating to: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
69,452 |
|
|
$ |
65,467 |
|
|
Deferred revenue |
|
|
12,275 |
|
|
|
19,255 |
|
|
Commissions and incentive accrual |
|
|
547 |
|
|
|
1,563 |
|
|
Deferred rent |
|
|
471 |
|
|
|
733 |
|
|
State tax credits |
|
|
7,866 |
|
|
|
6,348 |
|
|
Stock-based compensation |
|
|
4,060 |
|
|
|
5,199 |
|
|
Compensation and other accruals |
|
|
2,539 |
|
|
|
5,222 |
|
|
Property and equipment and intangible assets |
|
|
551 |
|
|
|
- |
|
|
Total gross deferred tax assets |
|
|
97,761 |
|
|
|
103,787 |
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
|
Property and equipment and intangible assets |
|
$ |
- |
|
|
$ |
(578 |
) |
|
Total gross deferred tax liabilities |
|
|
- |
|
|
|
(578 |
) |
|
Deferred tax assets less liabilities |
|
|
97,761 |
|
|
|
103,209 |
|
|
Less: valuation allowance |
|
|
(97,761 |
) |
|
|
(103,209 |
) |
|
Net deferred tax asset (liability) |
|
$ |
- |
|
|
$ |
- |
|
As of December 31, 2017 and 2016, the Company’s gross deferred tax was reduced by a valuation allowance of $97,761 and $103,209, respectively.
The valuation allowance decreased by $5,448 and increased by $17,894 during the years ended December 31, 2017 and 2016, respectively. The decrease in the valuation allowance in 2017 resulted primarily from the revaluation of the deferred tax assets and liabilities in connection with enactment of the Tax Cuts & Jobs Act (“Tax Reform”) on December 22, 2017. Among other things, the primary provision of Tax Reform impacting the Company is the reduction to the U.S. corporate income tax rate from 35% to 21%. The valuation allowance increase in 2016 resulted primarily from changes in the deferred tax assets related to the net operating loss carryforwards and deferred revenue.
On December 22, 2017, the SEC issued Staff Accounting Bulletin 118, which provides guidance on accounting for tax effects of Tax Reform when a company does not have all the necessary information available, prepared or analyzed in reasonable detail to complete its accounting for the effect of the changes in Tax Reform and provides a measurement period for companies to complete its accounting. As of December 31, 2017, the Company has completed its initial accounting for the income tax effects of Tax Reform except for the impact of state tax conformity of each change and further evaluation of executive compensation. The Company is not able to determine a reasonable estimate for these items and continues to account for these items based on the tax laws that were in effect immediately before the enactment of Tax Reform. The Company expects to complete its analysis during 2018 as states make known their conformity with federal tax laws and additional transition guidance is provided related to executive compensation.
The Company adopted the provisions of ASU 2016-09 as of January 1, 2017, which requires recognition through opening accumulated deficit of any pre-adoption date net operating loss carryforwards from nonqualified stock options and other employee share-based payments, as well as recognition of all income tax effects from share-based payments arising on or after the date of adoption in income tax expense. As a result, the Company was required to recognize through opening accumulated deficit the tax impact of pre-adoption date net operating loss carryforwards with remaining carryforward periods of more than 10 years. Due to the Company’s existing valuation allowance on deferred tax assets, the amount recognized in opening accumulated deficit was $0. The corresponding deferred tax asset recorded upon adoption was $18,383. However, the Company has determined that a valuation allowance is required against this amount due to the fact that it is more likely than not that the net operating loss carryforwards will expire before use. In addition, due to the valuation allowance, no windfall tax benefits were recognized in tax expense by the Company in the interim period of adoption as required by ASU 2016-09.
Net operating loss carryforwards for federal income tax purposes were approximately $253,946 and $183,528 at December 31, 2017 and 2016, respectively. State net operating loss carryforwards were $221,189 and $176,389 at December 31, 2017 and 2016, respectively. The federal net operating loss carryforwards will expire at various dates beginning in 2022 through 2036, if not utilized. Net operating loss carryforwards and credit carryforwards reflected above may be limited due to historical and future ownership changes.
South Carolina jobs tax credit and headquarters tax credit carryovers of $10,322 and $10,055 were available at December 31, 2017 and 2016, respectively. Headquarters credits are expected to be used to offset future state income tax license fees. The credits expire in various amounts during 2020 through 2032.
The Company follows FASB ASC 740-10 for accounting for unrecognized tax benefits. As of December 31, 2017, the Company had gross unrecognized tax benefits of $437.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows for the years ended December 31:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Balance at beginning of year |
|
$ |
437 |
|
|
$ |
437 |
|
|
$ |
437 |
|
|
Additions based on tax positions related to the current year |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Additions for tax positions in prior years |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Reductions for tax positions of prior years |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Reductions for tax positions due to lapse of statute |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Settlements |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Balance at end of year |
|
$ |
437 |
|
|
$ |
437 |
|
|
$ |
437 |
|
At December 31, 2017 and 2016, none of the $437 liabilities for unrecognized tax benefits could impact the Company’s effective tax rate, if recognized. The Company does not expect the unrecognized tax benefits to change within the next twelve months.
The Company is subject to U.S. income taxes, as well as various taxes state and local jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years before the tax year ended December 31, 2013, although carryforward attributes that were generated prior to 2013 may still be adjusted upon examination by the taxing authorities if they either have been used or will be used in a future period.