Income Taxes
The components of our provision for/(benefit from) income taxes are summarized as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 273 |
| | $ | 321 |
| | $ | 173 |
|
State | 424 |
| | 153 |
| | 50 |
|
Total provision for income taxes | 697 |
| | 474 |
| | 223 |
|
Deferred: | | | | | |
Federal | 6,201 |
| | (32,484 | ) | | 220 |
|
State | (151 | ) | | (5,657 | ) | | 25 |
|
Total deferred provision for/(benefit from) income taxes | 6,050 |
| | (38,141 | ) | | 245 |
|
Total provision for/(benefit from) income taxes | $ | 6,747 |
| | $ | (37,667 | ) | | $ | 468 |
|
Reconciliations between expected income taxes computed at the federal rate of 35% for each of the years ended December 31, 2017, 2016 and 2015, and the provision for/(benefit from) income taxes is as follows:
|
| | | | | | | | | | | |
| Years ended December 31, |
(in thousands) | 2017 | | 2016 | | 2015 |
Income tax (benefit)/provision at statutory rate | $ | (3,638 | ) | | $ | 5,520 |
| | $ | 2,763 |
|
State income tax, net of federal benefit | 177 |
| | 259 |
| | (239 | ) |
Research and development | — |
| | — |
| | 634 |
|
Permanent difference | (392 | ) | | — |
| | — |
|
Deferred tax asset adjustments | 485 |
| | 4,336 |
| | — |
|
Tax Reform impact | 8,048 |
| | — |
| | — |
|
Unrecognized tax benefit | — |
| | 3,559 |
| | — |
|
Foreign rate differential | 1,107 |
| | — |
| | — |
|
Other | (16 | ) | | 289 |
| | 549 |
|
Increase/(decrease) in valuation allowance | 976 |
| | (51,630 | ) | | (3,239 | ) |
Provision for/(benefit from) income taxes | $ | 6,747 |
| | $ | (37,667 | ) | | $ | 468 |
|
At December 31, 2017, we had federal net operating loss carryforwards of approximately $140.4 million to offset future federal taxable income expiring in various years starting in 2023 through 2037. At December 31, 2017, we had state net operating loss carryforwards of $83.5 million, which expire in various years starting in 2018 through 2037. We also had $121.2 million of foreign net operating loss carryforwards, for which we have recorded a valuation allowance against most of the net operating loss balance and expire in various years starting in 2018 through 2024.
The timing and manner in which we can utilize our net operating loss carryforwards and future income tax deductions in any year may be limited by provisions of the IRC. Section 382 of the IRC imposes limitations on a corporation’s ability to utilize net operating losses if it experiences an “ownership change.” Section 383 of the IRC imposes similar limitations on other tax attributes such as research and development credits. Currently, a portion of our loss carryforwards is limited under Section 382 and therefore, is not included in the total net operating losses disclosed above.
The U.S. Internal Revenue Service concluded its examination of our U.S. federal tax returns for all years through 2011. Because of net operating losses, our U.S. federal tax returns statutes for those years will remain subject to examination until the losses are utilized. Additionally, state tax return statutes generally remain open due to operating losses.
We have deferred income tax assets totaling $57.7 million at December 31, 2017, consisting primarily of federal and state net operating loss and credit carryforwards, stock-based compensation, non-deductible accruals and allowance for doubtful accounts. Our provision from income taxes for 2017 of $6.7 million primarily relates to the re-measurement of our deferred tax assets and liabilities at the new federal corporate rate of 21 percent.
Deferred taxes result from temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. As of December 31, 2017, our deferred income tax assets were primarily the result of federal and state net operating losses, stock-based compensation, non-deductible accruals and allowance for doubtful accounts. A valuation allowance of $6.0 million and $0.1 million was recorded against our deferred income tax asset balance as of December 31, 2017 and 2016, respectively.
As of each reporting date, our management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred income tax assets.
The significant components of our deferred taxes are as follows:
|
| | | | | | | |
| December 31, |
(in thousands) | 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 38,245 |
| | $ | 33,404 |
|
Research and development and AMT credit carryforwards | 1,198 |
| | 912 |
|
Stock option grants | 4,300 |
| | 5,602 |
|
Property and equipment | 690 |
| | — |
|
Non-deductible accruals | 4,471 |
| | — |
|
Transaction costs | 2,361 |
| | — |
|
Allowance for doubtful accounts | 5,324 |
| | 4,965 |
|
Deferred revenue | 937 |
| | 885 |
|
Other, net | 158 |
| | 1,868 |
|
Total deferred tax assets | 57,684 |
| | 47,636 |
|
Less valuation allowance | (6,032 | ) | | (95 | ) |
Net deferred tax assets | 51,652 |
| | 47,541 |
|
Deferred tax liabilities: | | | |
Property and equipment | — |
| | (3,604 | ) |
Intangible assets | (33,854 | ) | | (7,124 | ) |
Prepaid insurance | (117 | ) | | (177 | ) |
Total deferred tax liabilities | (33,971 | ) | | (10,905 | ) |
Net deferred tax asset/(liability) | $ | 17,681 |
| | $ | 36,636 |
|
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The TCJA 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.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the 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. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA.
Our accounting for the following elements of the TCJA is incomplete. However, we were able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments as follows:
Reduction of US federal corporate tax rate: The TCJA reduces the corporate tax rate to 21 percent, effective January 1, 2018. For certain of our DTAs and DTLs, we have recorded a provisional net decrease of $8.0 million, with a corresponding net adjustment to deferred income tax expense for the year ended December 31, 2017. While we are able to make a reasonable estimate of the impact of the reduced corporate rate, it may be affected by other analyses related to the TCJA, including, but not limited to, our calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences.
Deemed Repatriation Transition Tax: As part of U.S. international tax reform, the TCJA imposes a transition tax on certain accumulated foreign earnings aggregated across all non-U.S. subsidiaries, net of foreign deficits. As we are in an aggregate net foreign deficit position for U.S. tax purposes, we are not liable for the transition tax. However, we are continuing to gather additional information to more precisely compute our aggregate net foreign deficit position.
Cost recovery: While we have not yet completed all of the computations necessary or completed an inventory of our 2017 expenditures that qualify for immediate expensing, we have recorded a provisional benefit of $1.1 million based on our current intent to fully expense all qualifying expenditures.
Global intangible low-taxed income: The TJCA subjects a U.S. shareholder to current tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. We have elected to recognize the tax on GILTI as a period expense in the period the tax is incurred.
During 2017, in connection with our acquisitions, we identified uncertain tax positions for periods prior to our ownership related to items recorded through purchase accounting. The following summarizes the changes in our unrecognized tax benefit:
|
| | | | | | | |
| Year ended |
(in thousands) | December 31,
2017 | | December 31,
2016 |
Unrecognized tax benefit at the beginning of the year | $ | 3,899 |
| | $ | — |
|
Additions to uncertain tax positions related to current year | 35,811 |
| | — |
|
Additions to uncertain tax positions related to prior years | — |
| | 3,899 |
|
Unrecognized tax benefit at the end of the year | $ | 39,710 |
| | $ | 3,899 |
|
The balance of unrecognized tax benefits, if recognized, would affect the effective tax rate. As of December 31, 2017, we have recorded a net reserve of $22.0 million for uncertain tax positions as a component of other long-term liabilities within our consolidated balance sheets. The unrecognized tax benefit, or a portion of an unrecognized tax benefit, is presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward.
We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statements of operations and comprehensive income/(loss). As of December 31, 2017, we have not recorded any interest and penalties on our uncertain tax positions.
It is reasonably possible that a portion of these unrecognized tax benefits could be resolved within the next twelve months that may result in a decrease in our effective tax rate.