10. Income Taxes
The consolidated income (loss) from continuing operations before income taxes, by domestic and foreign entities, is as follows (in thousands):
|
|
Year Ended |
|
|||||||||
|
|
December 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Domestic |
$ |
(2,981 |
) |
|
$ |
(6,362 |
) |
|
$ |
(9,010 |
) |
|
Foreign |
|
841 |
|
|
|
1,199 |
|
|
|
2,646 |
|
|
Total |
$ |
(2,140 |
) |
|
$ |
(5,163 |
) |
|
$ |
(6,364 |
) |
A reconciliation of the difference between the expected income tax expense (benefit) from continuing operations at the U.S. federal statutory corporate tax rate of 34% and the Company’s effective tax rate is as follows (in thousands):
|
|
Year Ended |
|
|||||||||
|
|
December 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Income tax benefit computed at statutory rate |
$ |
(728 |
) |
|
$ |
(1,755 |
) |
|
$ |
(2,164 |
) |
|
Foreign dividends received |
|
591 |
|
|
|
388 |
|
|
|
193 |
|
|
Items not deductible for tax purposes |
|
663 |
|
|
|
(956 |
) |
|
|
467 |
|
|
Change in valuation allowance |
|
(10,503 |
) |
|
|
4,285 |
|
|
|
1,940 |
|
|
Impact of Tax Reform Act |
|
12,112 |
|
|
|
— |
|
|
— |
|
|
|
State taxes |
|
558 |
|
|
|
568 |
|
|
|
477 |
|
|
Foreign exchange rate difference |
|
(102 |
) |
|
|
(67 |
) |
|
|
258 |
|
|
Net operating loss adjustments |
|
— |
|
|
|
183 |
|
|
|
167 |
|
|
Prior year return-to-provision true-up |
|
(932 |
) |
|
|
(127 |
) |
|
|
(21 |
) |
|
Other |
|
165 |
|
|
|
(152 |
) |
|
|
180 |
|
|
Provision for income taxes |
$ |
1,824 |
|
|
$ |
2,367 |
|
|
$ |
1,497 |
|
On December 22, 2017, the United States government enacted the Tax Cuts and Jobs Act, commonly referred to as the Tax Reform Act. The Tax Reform Act includes significant changes to the U.S. income tax system, including, but not limited to: a federal corporate rate reduction from 35% to 21%; limitations on the deductibility of interest expense and executive compensation; repeal of the Alternative Minimum Tax (“AMT”); full expensing provisions related to business assets; creation of new minimum taxes, such as the base erosion anti-abuse tax (“BEAT”) and Global Intangible Low Taxed Income (“GILTI”) tax; and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, which will result in a one time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”). The provisional impacts of this legislation are outlined below:
|
|
• |
Beginning January 1, 2018, the U.S. corporate income tax rate will be 21%. The Company is required to recognize the impacts of this rate change on its deferred tax assets and liabilities in the period enacted. We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Tax Reform 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 related to the remeasurement of our deferred tax balance was $12.1 million that was mostly offset by a change in the valuation allowance, except for a $0.6 million benefit that was recorded to our income statement related to tax amortization of goodwill. |
|
|
• |
The Transition Tax on unrepatriated foreign earnings is a tax on previously untaxed accumulated and current earnings and profits ("E&P") of the Company's foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, among other factors, the amount of post-1986 E&P of its foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Based on the Company’s reasonable estimate of the Transition Tax, there is no provisional Transition Tax expense. The Company has not completed accounting for the income tax effects of the transition tax and is continuing to evaluate this provision of the Tax Reform Act. |
|
|
|
|
|
|
• |
The Tax Reform Act creates a new requirement that GILTI income earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Reform Act. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred or to factor such amounts into the Company's measurement of its deferred taxes. The Company has not yet completed its analysis of the GILTI tax rules and is not yet able to reasonably estimate the effect of this provision of the Tax Reform Act or make an accounting policy election for the accounting treatment whether to record deferred taxes attributable to the GILTI tax. The Company has not recorded any amounts related to potential GILTI tax in the Company’s consolidated financial statements. |
The income tax effects recorded in the Company’s consolidated financial statements as a result of the Tax Reform Act are provisional in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin number 118 (“SAB 118”) as the Company has not yet completed its evaluation of the impact of the new law. SAB 118 allows for a measurement period of up to one year after the enactment date of the Tax Reform Act to finalize the recording of the related tax impacts.
The preliminary net tax effects recorded may differ in the future due to changes in the interpretations of the Tax Reform Act, legislative action, and changes to estimates we have utilized to calculate the tax impact. We expect to finalize the tax analysis related to the Tax Reform Act with the filing of our tax return and record any differences between the final and provisional amounts in the 2018 fourth quarter at that time, if any.
Current and deferred income tax expense (benefit) is summarized as follows (in thousands):
|
|
December 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
$ |
3 |
|
|
$ |
19 |
|
|
$ |
27 |
|
|
State |
|
558 |
|
|
|
568 |
|
|
|
479 |
|
|
Foreign |
|
1,537 |
|
|
|
957 |
|
|
|
933 |
|
|
Total Current |
|
2,098 |
|
|
|
1,544 |
|
|
|
1,439 |
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
127 |
|
|
|
824 |
|
|
— |
|
|
|
State |
|
12 |
|
|
|
3 |
|
|
|
3 |
|
|
Foreign |
|
(413 |
) |
|
|
(4 |
) |
|
|
55 |
|
|
Total Deferred |
|
(274 |
) |
|
|
823 |
|
|
|
58 |
|
|
Provision for income taxes |
$ |
1,824 |
|
|
$ |
2,367 |
|
|
$ |
1,497 |
|
The components of the deferred tax asset (liability) are as follows (in thousands):
|
|
Year Ended |
|
|||||
|
|
December 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
$ |
77 |
|
|
$ |
606 |
|
|
Inventory reserve |
|
100 |
|
|
|
185 |
|
|
Property and equipment |
|
708 |
|
|
|
244 |
|
|
Accrued expenses |
|
1,353 |
|
|
|
1,803 |
|
|
Net operating loss carryforwards |
|
14,608 |
|
|
|
23,883 |
|
|
Other |
|
5,994 |
|
|
|
6,182 |
|
|
|
|
22,840 |
|
|
|
32,903 |
|
|
Less - Valuation allowance |
|
22,222 |
|
|
|
32,725 |
|
|
Total deferred tax assets |
|
618 |
|
|
|
178 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Other |
|
(951 |
) |
|
|
(824 |
) |
|
Total deferred tax liabilities |
|
(951 |
) |
|
|
(824 |
) |
|
Deferred tax assets (liabilities), net |
$ |
(333 |
) |
|
$ |
(646 |
) |
Management believes that PFSweb has not established a sufficient history of earnings, on a stand-alone basis, to support the more likely than not realization of certain deferred tax assets in excess of existing taxable temporary differences. A valuation allowance has been provided for the majority of these net deferred income tax assets as of December 31, 2017 and 2016. The remaining net deferred tax assets at both December 31, 2017 and 2016 primarily relate to the Company’s European operations and certain state tax benefits and are included in other non-current and current assets on the consolidated balance sheets. At December 31, 2017, net operating loss (“NOL”) carryforwards relate to taxable losses of PFSweb’s Canadian subsidiary totaling approximately $3.6 million and PFSweb’s U.S. subsidiaries totaling approximately $61.2 million that expire at various dates from 2019 through 2036. The U.S. NOL also includes approximately $4.4 million of NOL created before February 2006 subject to annual limits of $1.4 million, and $0.2 million acquired September 2014 subject to annual limits of $0.1 million under IRS Section 382.
The Company evaluates its tax positions for potential liabilities associated with unrecognized tax benefits. The Company does not expect to record unrecognized tax benefits in the next twelve months.
For federal income tax purposes, tax years that remain subject to examination include years 2014 through 2017. However, the utilization of net operating loss carryforwards that arose prior to 2014 remains subject to examination through the years such carryforwards are utilized. For Europe, tax years that remain subject to examination include years 2015 to 2017. For Canada, tax years that remain subject to examination include years 2009 to 2017, depending on the subsidiary. For state income tax purposes, the tax years that remain subject to examination include years 2013 to 2017, depending upon the jurisdiction in which the Company files tax returns. The Company and its subsidiaries have various income tax returns in the process of examination. The Company does not expect these examinations will result in unrecognized tax benefits.