Note 7. Income Taxes
We are subject to federal and state income taxes in the United States and foreign jurisdictions. In 2017, we recorded a tax benefit of $97,000, and in 2016 and 2015 tax expenses of $168,000 and $166,000, respectively.
The following table presents the detail of income tax benefit (expense) for the periods presented (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. - Federal |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
U.S. - State |
|
|
(8 |
) |
|
|
(15 |
) |
|
|
(56 |
) |
|
Foreign |
|
|
(126 |
) |
|
|
(63 |
) |
|
|
(22 |
) |
|
|
|
|
(134 |
) |
|
|
(78 |
) |
|
|
(78 |
) |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. - Federal |
|
|
241 |
|
|
|
(91 |
) |
|
|
(88 |
) |
|
U.S. - State |
|
|
(10 |
) |
|
|
1 |
|
|
|
— |
|
|
Foreign |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
231 |
|
|
|
(90 |
) |
|
|
(88 |
) |
|
Total income tax benefit (expense) |
|
$ |
97 |
|
|
$ |
(168 |
) |
|
$ |
(166 |
) |
We have not recorded a liability for U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries of December 31, 2017 as we have no foreign undistributed earnings. We intend to permanently reinvest future such earnings outside the United States. The amount of unrecognized deferred tax liability related to these temporary differences is estimated to be approximately $17,000.
The following table presents a reconciliation of the federal statutory rate and our effective tax rate for the periods presented:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. Statutory Rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
Change in valuation allowance |
|
|
56.4 |
|
|
|
(11.8 |
) |
|
|
9.9 |
|
|
State taxes (net of federal benefit) |
|
|
1.9 |
|
|
|
(4.4 |
) |
|
|
3.8 |
|
|
Federal research and development credit |
|
|
7.1 |
|
|
|
67.4 |
|
|
|
(60.8 |
) |
|
Incentive stock options |
|
|
12.5 |
|
|
|
(46.2 |
) |
|
|
19.5 |
|
|
Unrecognized tax benefits |
|
|
(3.5 |
) |
|
|
(47.1 |
) |
|
|
28.8 |
|
|
Preferred stock warrant revaluation |
|
|
— |
|
|
|
12.6 |
|
|
|
(22.4 |
) |
|
Impact of Tax Cuts and Jobs Act of 2017 |
|
|
(113.5 |
) |
|
|
— |
|
|
|
— |
|
|
Return to provision - deductible transaction costs |
|
|
5.6 |
|
|
|
— |
|
|
|
— |
|
|
Other, net |
|
|
0.1 |
|
|
|
(15.5 |
) |
|
|
2.9 |
|
|
Effective income tax rate |
|
|
0.6 |
% |
|
|
(11.0 |
)% |
|
|
15.7 |
% |
The effective tax rate increased from the prior year due to the change in tax rates as a result of the enactment of new U.S. tax law in December 2017 and increase in taxes in foreign jurisdictions. We continue to maintain a full valuation allowance against our net deferred tax assets in the U.S. but recognize deferred income tax expense in the U.S. solely based on the amortization of goodwill intangibles. As a result of the change in tax law in the United States, the change in deferred tax liabilities related to goodwill decreased, resulting in a tax benefit. We also record current tax expense for certain state margin taxes that are based on income and on earnings in foreign jurisdictions.
Deferred federal, state and foreign income taxes reflect the net tax impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes. The following table presents the significant components of our deferred tax assets and liabilities as of the dates presented (in thousands):
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Net operating loss carryforwards (1) |
|
$ |
27,090 |
|
|
$ |
34,287 |
|
|
Credit carryforwards |
|
|
7,478 |
|
|
|
6,492 |
|
|
Capitalized research and development |
|
|
3,665 |
|
|
|
6,992 |
|
|
Deferred rent |
|
|
1,189 |
|
|
|
1,825 |
|
|
Allowances |
|
|
1,466 |
|
|
|
767 |
|
|
Deferred compensation |
|
|
218 |
|
|
|
1,209 |
|
|
Deferred revenue |
|
|
108 |
|
|
|
331 |
|
|
Stock compensation |
|
|
525 |
|
|
|
220 |
|
|
Deferred tax assets |
|
|
41,739 |
|
|
|
52,123 |
|
|
Less: valuation allowance |
|
|
(41,130 |
) |
|
|
(50,959 |
) |
|
Net deferred tax assets |
|
$ |
609 |
|
|
$ |
1,164 |
|
|
Deferred tax liability |
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
(532 |
) |
|
|
(766 |
) |
|
Depreciation and amortization |
|
|
(609 |
) |
|
|
(1,164 |
) |
|
Deferred tax liabilities |
|
|
(1,141 |
) |
|
|
(1,930 |
) |
|
Net deferred tax liability |
|
$ |
(532 |
) |
|
$ |
(766 |
) |
|
(1) During the prior year, we recorded an increase to the NOL and increase to the valuation allowance of $727,000 as a result of the adoption of ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” |
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Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. We have provided a full valuation allowance against the net deferred tax assets as of December 31, 2017 and 2016 because, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized. The valuation allowance decreased $9.8 million during the year ended December 31, 2017 due to the change in enacted future tax rates under the Tax Cuts and Jobs Act, and increased $905,000 during the year ended December 31, 2016.
We have accumulated federal tax losses of approximately $126.4 million and $100.0 million, respectively, as of December 31, 2017 and 2016, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $18.4 million and $15.1 million, respectively, as of December 31, 2017 and 2016. Additionally, we have net research and development credit carryforwards of $9.7 million and $8.5 million, respectively, as of December 31, 2017 and 2016, which are available to reduce future tax liabilities. The tax loss and research and development credit carryforwards begin to expire in 2023. Under Sections 382 and 383 of the Internal Revenue Code, if a corporation undergoes an ownership change, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income or income tax liability may be limited.
We are currently not under audit in any tax jurisdiction. Tax years from 2000 through 2017 are currently open for audit by federal and state taxing authorities.
We establish reserves for tax positions based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when we believe that positions might be challenged by taxing authorities despite our belief that our tax return positions are fully supportable.
The following table presents the total balance of unrecognized tax benefits as of the dates presented (in thousands):
|
|
|
Year ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Unrecognized tax benefits at beginning of the period |
|
$ |
2,597 |
|
|
$ |
1,878 |
|
|
$ |
1,732 |
|
|
Gross increases to tax positions in prior periods |
|
|
2 |
|
|
|
210 |
|
|
|
— |
|
|
Gross increases to tax positions in current periods |
|
|
307 |
|
|
|
509 |
|
|
|
146 |
|
|
Unrecognized tax benefits at end of the period |
|
$ |
2,906 |
|
|
$ |
2,597 |
|
|
$ |
1,878 |
|
At December 31, 2017, the total amount of unrecognized tax benefits of $2.9 million is recorded as a reduction to the deferred tax asset. We do not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. Accrued interest and penalties related to unrecognized tax benefits are recorded as income tax expense and are zero.
Tax Cuts and Jobs Act
The Tax Act, was enacted on December 22, 2017. As described above, the Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. Additionally, on December 22, 2017, the SEC issued Staff Accounting Bulletin 118, (“SAB 118”), which allows companies to record provisional amounts during a measurement period. As of December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Tax Act; however, in certain cases, as described below, we have made a reasonable estimate of (1) the effects on our existing deferred tax balances and (2) the one-time transition tax. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on the provisions of the tax laws that were in effect immediately prior to enactment, as prescribed by SAB 118. Additional work is necessary to analyze the impact of the Tax Act on our unremitted foreign earnings position and other components of the Tax Act. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete. In accordance with SAB 118, for the items which we are able to determine a reasonable estimate, we recognized a provisional amount of $19.8 million related to the revaluation of deferred tax assets, which is entirely offset by a corresponding decrease to the valuation allowance, resulting in no impact to current tax expense. In all cases, we will continue to make and refine our calculation as additional analysis is completed. In addition our estimates may also be affected as we gain a more thorough understanding of the new tax law and further guidance is issued from taxing authorities.
We have not assessed the impact of certain other provisions of the Tax Act such as Global Intangible Low Taxed Income (“GILTI”). Further, we have not made a policy election with respect to the treatment of potential deferred tax assets or liabilities affected by GILTI. We will continue to refine our calculations and understanding of the Tax Act and make the necessary adjustments within the measurement period ending December 22, 2018.
Provisional Amounts
Deferred tax assets and liabilities were re-measured to reflect the reduction in the U.S. corporate income tax rate at the rates they are expected to reverse in the future, generally 21%. However, we are still analyzing certain aspects of the Tax Act and refining our 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 re-measurement of our deferred tax balances was $19.8 million.
The impact of the one-time transition tax is based on our total post-1986 earnings and profits, or E&P, that we previously deferred from U.S. income taxes. We did not record a provisional amount due to E&P deficits from foreign operations. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. The amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities as of December 31, 2017 is estimated to be $17,000.