Note 13. Income Tax
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent that the Company believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that the Company would be able to realize our deferred taxes in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. Accrued interest and penalties would be included on the related tax liability line in the consolidated balance sheet.
|
|
2017 |
|
|
2016 |
|
||
|
Current: |
|
|
|
|
|
|
|
|
Federal |
$ |
- |
|
|
$ |
- |
|
|
State and local |
|
16 |
|
|
|
- |
|
|
Total current provision (benefit) |
|
16 |
|
|
|
- |
|
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
|
(564 |
) |
|
|
- |
|
|
State and local |
|
(60 |
) |
|
|
- |
|
|
Total deferred provision (benefit) |
|
(624 |
) |
|
|
- |
|
|
Total provision (benefit) |
$ |
(608 |
) |
|
$ |
- |
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating losses |
$ |
74 |
|
|
$ |
- |
|
|
Amortization of intangible assets |
|
278 |
|
|
|
|
|
|
Share-based compensation |
|
77 |
|
|
- |
|
|
|
Inventory |
515 |
|
|
- |
|
||
|
Accruals and reserves |
|
326 |
|
|
- |
|
|
|
Tax credits |
|
74 |
|
|
- |
|
|
|
Total deferred tax assets |
|
1,344 |
|
|
- |
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Amortization of goodwill |
$ |
(466 |
) |
|
$ |
- |
|
|
Fixed assets |
|
(254 |
) |
|
- |
|
|
|
Total deferred tax liabilities |
|
(720 |
) |
|
- |
|
|
|
Net deferred tax assets |
$ |
624 |
|
|
- |
|
|
In assessing the Company’s ability to recover its deferred tax assets, the Company evaluated whether it is more likely than not that some portion or the entire deferred tax asset will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating losses can be utilized. The Company considered all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, historical earnings, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Based on these factors the Company determined that the deferred tax assets are realizable on a more-likely-than-not basis.
As of December 31, 2017, the Company had federal net operating loss carryforwards of approximately $318which are set to expire in 2037 if not utilized. The Company also had approximately $25 of U.S. federal research and development tax credit carryforwards and $61 of state research and development tax credits which are set to expire in 2037 and 2032 respectively.
The Company’s effective tax rate differs from the U.S. federal statutory income tax rate of 34% as follows:
|
|
2017 |
|
|
2016 |
|
||
|
Income tax expense (benefit) at federal statutory rate |
|
34 |
% |
|
|
0 |
% |
|
Partnership income not subject to tax |
|
-17 |
% |
|
|
0 |
% |
|
State and local taxes |
|
-2 |
% |
|
|
0 |
% |
|
Change in entity tax status |
|
-93 |
% |
|
|
0 |
% |
|
Federal tax reform |
|
25 |
% |
|
|
0 |
% |
|
R&D tax credits |
|
-2 |
% |
|
|
0 |
% |
|
Effective tax rate |
|
-55 |
% |
|
|
0 |
% |
On December 22, 2017, the U.S. government enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). Under ASC 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. Among other things, the TCJA (1) reduces the U.S. statutory corporate income tax rate from 34% to 21% effective January 1, 2018 (2) eliminates the corporate alternative minimum tax (3) eliminates the Section 199 deduction (4) changes rules related to uses and limitations of net operating loss carryforwards beginning after December 31, 2017.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under ASC 740. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.
The TCJA reduces the corporate tax rate to 21% effective January 1, 2018. We have recorded a provisional decrease in our deferred tax assets and liabilities with a corresponding net adjustment to deferred income tax expense of $0.3 million for the year ended December 31, 2017. While we are able to make a reasonable estimate of the impact of the reduction in the corporate rate, it may be affected by other analyses related to the TCJA.
For the year ended December 31, 2017, the Company recorded an income tax benefit of $(0.6) million which consists of the recognition of a net deferred tax asset related to a change in the entity’s tax status with the conversion from a Minnesota limited liability company to a Delaware corporation on May 11, 2017, offset by the one-time re-measurement of our deferred tax assets and liabilities for the TCJA. Prior to May 11, 2017, the Company was taxed as partnership and not was not subject to federal and state income tax.
The Company applies the applicable authoritative guidance which prescribes a comprehensive model for the manner in which a company should recognize, measure, present and disclose in its financial statements all material uncertain tax positions that the Company has taken or expects to take on a tax return. As of December 31, 2017, the Company has no uncertain tax positions. There are no uncertain tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months from December 31, 2017.
The Company files federal income tax returns and income tax returns in various state tax jurisdictions with varying statutes of limitations.