In December 2017, the Tax Act was enacted which includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. The Tax Act also provides for the acceleration of depreciation for certain assets placed into service after September 27, 2017 and prospective changes beginning in 2018, including repeal of the domestic manufacturing deduction, acceleration of tax revenue recognition, capitalization of research and development expenditures, additional limitations on executive compensation and limitations on the deductibility of interest. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Act, the Company revalued its ending net deferred tax liabilities at December 31, 2017 and recognized a $15.5 million tax benefit in the Company’s consolidated statement of operations for the year ended December 31, 2017. The tax benefit recognized may be impacted if additional guidance is released.
The provision for income taxes consisted of the following (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | |
| | |
| | |
|
Federal | $ | 2,194 |
| | $ | 7,480 |
| | $ | 31,351 |
|
State | 2,162 |
| | 5,788 |
| | 10,937 |
|
Foreign (Puerto Rico) | 78 |
| | 267 |
| | 574 |
|
Total current provision | 4,434 |
| | 13,535 |
| | 42,862 |
|
Deferred: | |
| | |
| | |
|
Federal | (8,333 | ) | | (1,533 | ) | | 4,708 |
|
State | 1,668 |
| | (207 | ) | | 1,078 |
|
Total deferred provision | (6,665 | ) | | (1,740 | ) | | 5,786 |
|
Total provision for income taxes | $ | (2,231 | ) | | $ | 11,795 |
| | $ | 48,648 |
|
The provision for income taxes reconciles to the amount computed by applying the federal statutory rate, 35.0%, to income before income taxes as follows (in thousands, except percentages):
|
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Expected federal income tax | 35.0 | % | | $ | 11,406 |
| | 35.0 | % | | $ | 13,650 |
| | 35.0 | % | | $ | 40,149 |
|
State income taxes, net of federal income tax effect | 8.0 | % | | 2,606 |
| | 7.4 | % | | 2,859 |
| | 6.8 | % | | 7,753 |
|
Permanent items | 0.3 | % | | 88 |
| | (0.9 | )% | | (357 | ) | | 0.3 | % | | 390 |
|
Research and development tax credits | (2.6 | )% | | (850 | ) | | (1.9 | )% | | (756 | ) | | (0.8 | )% | | (864 | ) |
Excess tax benefits and stock-based compensation | (0.7 | )% | | (243 | ) | | (3.0 | )% | | (1,165 | ) | | — | % | | — |
|
Acquisition-related tax adjustments | (1.4 | )% | | (445 | ) | | (4.3 | )% | | (1,686 | ) | | — | % | | — |
|
Enactment of the Tax Act | (47.4 | )% | | (15,461 | ) | | — | % | | — |
| | — | % | | — |
|
Other | 2.0 | % | | 668 |
| | (2.0 | )% | | (750 | ) | | 1.1 | % | | 1,220 |
|
Income tax expense | (6.8 | )% | | $ | (2,231 | ) | | 30.3 | % | | $ | 11,795 |
| | 42.4 | % | | $ | 48,648 |
|
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 were as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Components of deferred tax assets and liabilities | |
| | |
|
Deferred tax assets: | |
| | |
|
Accrued expenses and reserves | $ | 313 |
| | $ | 3,135 |
|
Stock-based compensation | 3,040 |
| | 2,849 |
|
Deferred rent | 581 |
| | 987 |
|
Net operating loss carryforwards | 2,654 |
| | 1,047 |
|
Other | 758 |
| | 904 |
|
Total deferred tax assets | 7,346 |
| | 8,922 |
|
Deferred tax liabilities: | |
| | |
|
Intangibles | 9,568 |
| | 18,046 |
|
Property, equipment and capitalized software | 21,564 |
| | 23,108 |
|
Prepaids and other | 2,639 |
| | 2,083 |
|
Total deferred tax liabilities | 33,771 |
| | 43,237 |
|
Net deferred tax liabilities before valuation allowance | 26,425 |
| | 34,315 |
|
Valuation Allowance | 217 |
| | 238 |
|
Net deferred tax liabilities | $ | 26,642 |
| | $ | 34,553 |
|
Uncertain Tax Positions—During the years ended December 31, 2017, 2016, and 2015, changes in the liability for gross uncertain tax position, including interest, totaled $0.1 million, $0.1 million, and $0.0 million, respectively. The following table presents the changes in uncertain tax position (in thousands).
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Uncertain tax position | |
| | |
| | |
|
January 1 | $ | 80 |
| | $ | — |
| | $ | — |
|
Gross increase in tax positions in prior period | 291 |
| | 80 |
| | — |
|
Gross decrease in tax positions in prior period | (160 | ) | | — |
| | — |
|
Gross increase in tax positions from acquisitions | — |
| | — |
| | — |
|
Settlement | (211 | ) | | — |
| | — |
|
Lapse of statute of limitations | — |
| | — |
| | — |
|
Uncertain tax position at December 31 | $ | — |
| | $ | 80 |
| | $ | — |
|
Net Operating Losses (“NOL”) carryforwards —At December 31, 2017 and 2016, we had U.S. federal and state NOL carryforwards of approximately $3.3 million and $1.0 million, respectively. These NOL carryforwards will expire by 2037.
While the Company believes it has adequately provided for all tax positions, amounts asserted by taxing authorities could differ from the Company’s accrued position. Accordingly, additional provisions on federal, state and foreign tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.
The Company is subject to taxation by the United States of America, various United States of America jurisdictions, and Puerto Rico. The number of years with open tax audits varies depending on the tax jurisdiction.