6. Income Taxes
The Tax Act was enacted in December 2017. The Tax Act significantly changes U.S. tax law by, among other things, lowering U.S. corporate income tax rates, implementing a territorial tax system and imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. The Tax Act reduces the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. 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 provisional $0.8 million tax benefit.
The Tax Act provided for a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”). Due to a current year tax loss in excess of the required deemed repatriation,we have not recognized a provisional income tax expense related to the transition tax. After utilization of the current year tax loss, existing net operating loss and tax credits carryforwards, the Company expects to pay minimal U.S. federal cash taxes on the deemed repatriation.
While the Tax Act provides for a modified territorial tax system, beginning in 2018, global intangible low-taxed income (“GILTI”) provisions will be applied providing an incremental tax on low taxed foreign income. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. Under U.S. GAAP, the Company is required to make an accounting policy election to either (1) treat taxes due related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factor such amounts into its measurement of its deferred taxes (the “deferred method”). The Company is continuing to evaluate the GILTI tax rules and has not yet adopted its policy to account for the related impacts.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act and allows the registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company has included in its taxable income the provisional impact related to the one-time transition tax and the revaluation of deferred tax balances and included these estimates in its consolidated financial statements for the year ended December 31, 2017. The Company is in the process of analyzing the impact of the various provisions of the Tax Act. The ultimate impact may materially differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. The company expects to complete its analysis within the measurement period in accordance with SAB 118.
The Company's loss from continuing operations before income taxes for the years ended December 31, was as follows (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Income (loss) before provision for income taxes: | | | | | |
United States | $ | (22,748 | ) | | $ | (14,242 | ) | | $ | (13,254 | ) |
Foreign | 5,319 |
| | 2,259 |
| | 629 |
|
| $ | (17,429 | ) | | $ | (11,983 | ) | | $ | (12,625 | ) |
The components of the provision (benefit) for income taxes attributable to continuing operations are as follows (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 177 |
| | 37 |
| | (100 | ) |
Foreign | 1,381 |
| | 964 |
| | 932 |
|
Total Current | $ | 1,558 |
| | $ | 1,001 |
| | $ | 832 |
|
| | | | | |
Deferred | | | | | |
Federal | $ | (168 | ) | | $ | 727 |
| | $ | 293 |
|
State | 128 |
| | 131 |
| | 31 |
|
Foreign | (222 | ) | | (329 | ) | | (117 | ) |
Total Deferred | (262 | ) | | 529 |
| | 207 |
|
| $ | 1,296 |
| | $ | 1,530 |
| | $ | 1,039 |
|
As of December 31, 2017, the Company had federal net operating loss carryforwards of approximately $181.9 million and research and development credit carryforwards of approximately $3.9 million. The net operating loss and credit carryforwards will expire beginning in 2018, if not utilized. Utilization of the net operating losses and tax credits may be subject to substantial annual limitation due to the “change of ownership” provisions of the Internal Revenue Code of 1986. The annual limitation will result in the expiration of approximately $77 million of net operating losses and $3.9 million of credit carryforwards before utilization.
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 taxes as of December 31 are as follows (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Deferred tax assets: | | | | | |
Accrued expenses and allowances | $ | 1,715 |
| | $ | 993 |
| | $ | 793 |
|
Deferred revenue | — |
| | 573 |
| | 671 |
|
Stock compensation | 901 |
| | 1,054 |
| | 582 |
|
Net operating loss and tax credit carryforwards | 26,810 |
| | 24,895 |
| | 20,871 |
|
Capital expenses | 294 |
| | 307 |
| | — |
|
Other | 129 |
| | 176 |
| | 196 |
|
Valuation allowance for noncurrent deferred tax assets | (15,730 | ) | | (24,588 | ) | | (18,507 | ) |
Net deferred tax assets | $ | 14,119 |
| | $ | 3,410 |
| | $ | 4,606 |
|
| | | | | |
Deferred tax liabilities: | | | | | |
Capital expenses | $ | — |
| | $ | — |
| | $ | (2 | ) |
Deferred revenue | (401 | ) | | — |
| | — |
|
Prepaid expenses | (58 | ) | | (31 | ) | | (1 | ) |
Intangible assets | (15,298 | ) | | (5,716 | ) | | (6,481 | ) |
Goodwill | (1,214 | ) | | (1,029 | ) | | (561 | ) |
Tax credit carryforwards | (410 | ) | | (38 | ) | | (379 | ) |
Net deferred tax liabilities | $ | (17,381 | ) | | $ | (6,814 | ) | | $ | (7,424 | ) |
Net deferred taxes | $ | (3,262 | ) | | $ | (3,404 | ) | | $ | (2,818 | ) |
Due to the uncertainty surrounding the timing of realizing the benefits of its domestic favorable tax attributes in future tax returns, the Company has placed a valuation allowance against its domestic net deferred tax asset, exclusive of goodwill. During the year ended December 31, 2017 and 2016, the valuation allowance decreased by approximately $8.8 million and increased by approximately $6.1 million, respectively, due primarily to operations, acquisitions, and the impact of changes in tax law.
At December 31, 2017, we did not provide deferred income taxes on temporary differences resulting from earnings of certain foreign subsidiaries which are indefinitely reinvested. The reversal of these temporary differences could result in additional tax; however, it is not practicable to estimate the amount of any unrecognized deferred income tax liabilities at this time. Deferred income taxes are provided as necessary with respect to earnings that are not indefinitely reinvested.
The Company’s provision for income taxes differs from the expected tax expense (benefit) amount computed by applying the statutory federal income tax rate of 34% to income before taxes due to the following:
|
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
State taxes, net of federal benefit | 4.7 | % | | 1.2 | % | | 3.5 | % |
Tax credits | 1.0 | % | | (0.1 | )% | | (0.2 | )% |
Effect of foreign operations | 2.1 | % | | 1.1 | % | | (2.2 | )% |
Stock compensation | 7.9 | % | | (1.7 | )% | | (2.9 | )% |
Permanent items and other | (0.5 | )% | | (1.6 | )% | | (3.3 | )% |
Effect of Tax Act | (43.7 | )% | | — | % | | — | % |
Tax carryforwards not benefited | (12.9 | )% | | (45.7 | )% | | (37.1 | )% |
| (7.4 | )% | | (12.8 | )% | | (8.2 | )% |
Under ASC 740-10, Income Taxes - Overall, the Company periodically reviews the uncertainties and judgments related to the application of complex income tax regulations to determine income tax liabilities in several jurisdictions. The Company uses a “more likely than not” criterion for recognizing an asset for unrecognized income tax benefits or a liability for uncertain tax positions. The Company has determined it has the following unrecognized assets or liabilities related to uncertain tax positions as of December 31, 2017. The Company does not anticipate any significant changes in such uncertainties and judgments during the next 12 months. To the extent the Company is required to recognize interest and penalties related to unrecognized tax liabilities, this amount will be recorded as an accrued liability, (in thousands).
|
| | | |
Balance at December 31, 2015 | $ | 621 |
|
Additional based on tax positions related to the current year | — |
|
Additions for tax positions of prior years | 84 |
|
Reductions for tax positions of prior years | — |
|
Settlements | — |
|
Balance at December 31, 2016 | $ | 705 |
|
Additional based on tax positions related to the current year | — |
|
Additions for tax positions of prior years | — |
|
Reductions for tax positions of prior years | (225 | ) |
Settlements | — |
|
Balance at December 31, 2017 | $ | 480 |
|
Due to the existence of the valuation allowance, future changes in our unrecognized tax benefits will not materially impact the Company’s effective tax rate. If the Company were to recognize unrecognized tax benefits as of December 31, 2017, $399,000 would impact the effective tax rate. The Company’s assessment of its unrecognized tax benefits is subject to change as a function of the Company’s financial statement audit.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2017, the Company had no accrued interest or penalties related to uncertain tax positions.
The Company and its subsidiaries file tax returns in the U.S. federal jurisdiction and in several state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years ending before December 31, 2014 and is no longer subject to state and local or foreign income tax examinations by tax authorities for years ending before December 31, 2013. The Company is not currently under audit for federal, state or any foreign jurisdictions.