Income Taxes
The following table presents domestic and foreign components of income (loss) before income taxes for the periods presented (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | (158,187 | ) | | $ | 5,577 |
| | $ | 286,380 |
|
Foreign | (36,457 | ) | | (114,872 | ) | | 1,569 |
|
Total | $ | (194,644 | ) | | $ | (109,295 | ) | | $ | 287,949 |
|
The income tax expense (benefit) is composed of the following (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | (87,961 | ) | | $ | 78,782 |
| | $ | 140,396 |
|
State | (8,429 | ) | | 9,878 |
| | 13,307 |
|
Foreign | 5,032 |
| | 5,256 |
| | 1,107 |
|
Total current | (91,358 | ) | | 93,916 |
| | 154,810 |
|
Deferred: | | | | | |
Federal | 154,817 |
| | (87,584 | ) | | (33,421 | ) |
State | 18,902 |
| | (11,622 | ) | | (8,941 | ) |
Foreign | 187 |
| | (1,228 | ) | | (176 | ) |
Total deferred | 173,906 |
| | (100,434 | ) | | (42,538 | ) |
Total income tax expense (benefit) | $ | 82,548 |
| | $ | (6,518 | ) | | $ | 112,272 |
|
The reconciliation of the Company’s effective tax rate to the statutory federal rate is as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Tax at federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State taxes, net of federal effect | (5.4 | ) | | 4.3 |
| | 1.5 |
|
Foreign rate differential | (9.3 | ) | | (38.9 | ) | | (0.8 | ) |
Tax credits | 4.1 |
| | 9.0 |
| | (2.0 | ) |
Domestic production activities deduction | (3.5 | ) | | 5.0 |
| | (3.3 | ) |
Stock-based compensation(1) | (5.3 | ) | | (4.6 | ) | | 1.7 |
|
Change in prior year reserves | (2.0 | ) | | 1.9 |
| | — |
|
Out-of-period adjustment | — |
| | (2.8 | ) | | — |
|
Warrant fair value adjustment | — |
| | — |
| | 6.9 |
|
Change in valuation allowance | (35.2 | ) | | — |
| | — |
|
Effect of change in tax rate due to Tax Act | (23.4 | ) | | — |
| | — |
|
Other | 2.6 |
| | (2.9 | ) | | — |
|
Effective tax rate | (42.4 | )% | | 6.0 | % | | 39.0 | % |
(1) Starting in 2017, excess tax benefits from share-based award activity are reflected as reduction of the provision for income taxes, whereas they were previously recognized in equity. This will result in increased volatility in the Company’s effective tax rate. The amount of net stock compensation windfalls previously recognized by the Company in equity in 2015 and 2016 was $32.1 million and $22.0 million, respectively.
For 2017, the Company recorded an expense for income taxes of $82.5 million, resulting in an effective tax rate of (42.4)%. The effective tax rate is different than the statutory federal tax rate primarily due to losses in certain foreign jurisdictions for which a tax benefit may not be realized and the establishment of a full valuation allowance on its U.S. deferred tax assets, partially offset by the anticipated carryback of losses incurred in 2017.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law and includes several key tax provisions that affected the Company, including a reduction of the statutory corporate tax rate from 35% to 21% effective for tax years beginning after December 31, 2017, elimination of the carryback of net operating losses generated after December 31, 2017, and changes to how the United States imposes income tax on multinational corporations, among others. The Company recorded a provisional tax expense for the impact of the 2017 Tax Act of approximately $45.5 million as a result of re-measurement of the federal portion of its deferred tax assets as of December 31, 2017 from 35% to the new 21% tax rate. As the Company completes its analysis of the 2017 Tax Act, any subsequent adjustments to provisional amounts that it has recorded may or may not impact its provision for income taxes in the period in which the adjustments are made due to a full valuation allowance on its U.S. deferred tax assets.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets were as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating losses and credits | $ | 23,338 |
| | $ | 9,446 |
|
Fixed assets and intangible assets | 10,625 |
| | 16,272 |
|
Accruals and reserves | 49,886 |
| | 112,915 |
|
Stock-based compensation | 12,154 |
| | 17,864 |
|
Inventory | 4,345 |
| | 8,513 |
|
Other | 3,325 |
| | 11,134 |
|
Total deferred tax assets | 103,673 |
| | 176,144 |
|
Less: valuation allowance | (99,570 | ) | | — |
|
Deferred tax assets, net of valuation allowance | 4,103 |
| | 176,144 |
|
| | | |
Deferred tax liabilities: | | | |
Other | (369 | ) | | (353 | ) |
Total deferred tax liabilities | (369 | ) | | (353 | ) |
Net deferred tax assets | $ | 3,734 |
| | $ | 175,791 |
|
The Company accounts for deferred taxes under ASC Topic 740, “Income Taxes” (“ASC 740”) which involves weighing positive and negative evidence concerning the realizability of the Company’s deferred tax assets in each jurisdiction. The Company evaluated its ability to realize the benefit of its net deferred tax assets and weighed all available positive and negative evidence both objective and subjective in nature. In determining the need for a valuation allowance, the weight given to positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Consideration was given to negative evidence such as: the duration and severity of losses in prior years, high seasonal revenue concentrations, increasing competitive pressures, and a challenging retail environment. Realization of the Company’s net deferred tax assets is dependent upon its generation of sufficient taxable income in future years in appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences, net operating loss carryforwards and tax credit carryforwards. The amount of net deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income change.
In evaluating the need for a valuation allowance, and determining that a valuation allowance was appropriate, the Company considered the fact that it has had five consecutive quarters of losses through December 31, 2017 and the effect of the recently enacted 2017 Tax Act. As of December 31, 2017, the Company established a valuation allowance of $99.6 million against its U.S. deferred tax assets. No valuation allowance has been recorded against the Company’s foreign deferred tax assets. The Company will continue to assess the realizability of its deferred tax assets in each of the applicable jurisdictions going forward.
As of December 31, 2017, the Company has federal net operating loss carryforwards of $2.2 million which expire beginning after 2033, California net operating loss carryforwards of $25.8 million which expire beginning after 2034, and other states net operating loss carryforwards of $27.2 million which expire beginning after 2033. As of December 31, 2017, the Company has federal research tax credit carryforwards of approximately $1.6 million, which if not utilized, begin to expire after 2030, California research tax credit carryforwards of approximately $25.6 million, which do not expire, Massachusetts research tax credit carryforwards of approximately $1.2 million, which if not utilized, begin to expire after 2031, and California hiring tax credit carryforwards of approximately $0.3 million, which if not utilized, begin to expire after 2026. As of December 31, 2017, the Company has United Kingdom net operating loss carryforwards of $15.6 million, which do not expire.
Utilization of the net operating loss and tax credit carry forwards are subject to an annual limitation due to the ownership percentage change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of the net operating loss before utilization. The Company does not expect the limitation to result in a reduction in total amount utilizable.
The Company is subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when the Company believes that certain positions might be challenged despite its belief that its tax return positions are fully supportable. The Company adjusts these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate. As of December 31, 2017 and 2016, the Company has $29.9 million and $35.6 million of unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Balance at beginning of year | $ | 35,584 |
| | $ | 23,518 |
| | $ | 10,594 |
|
Reductions based on tax positions related to prior year | (6,335 | ) | | (2,100 | ) | | (18 | ) |
Additions based on tax positions related to prior year | 108 |
| | 2,809 |
| | — |
|
Additions based on tax positions related to current year | 9,289 |
| | 11,357 |
| | 12,942 |
|
Reductions due to tax authorities’ settlements | (8,603 | ) | | — |
| | — |
|
Reductions due to expiration of statutes of limitation | (105 | ) | | — |
| | — |
|
Balance at end of year | $ | 29,938 |
| | $ | 35,584 |
| | $ | 23,518 |
|
At December 31, 2017, the total amount of gross unrecognized tax benefits was $29.9 million, of which $24.8 million would affect the Company’s effective tax rate if recognized. The Company does not have any tax positions as of December 31, 2017 for which it is reasonably possible the total amount of gross unrecognized tax benefits will increase or decrease within the following 12 months. The Company’s policy is to record interest and penalties related to unrecognized tax benefits as income tax expense. As of December 31, 2017 and 2016, the Company has accrued and $2.4 million and $2.2 million related to interest and penalties.
The Company is subject to taxation in the United States and various states and foreign jurisdictions. The material jurisdictions in which the Company is subject to potential examination include the United States and Ireland. The Company believes that adequate amounts have been reserved for these jurisdictions. For federal, state and non-U.S. tax returns, the Company is generally no longer subject to tax examinations for years prior to 2015.