Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act, (the “TCJA”) was enacted. The TCJA includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate tax rate from 35% to 21%, for tax years beginning after December 31, 2017. We recorded a benefit of $5.5 million in deferred income tax expense for the remeasurement of our net deferred tax liability at the 21% tax rate. The TCJA also provides for acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes beginning in 2018, including additional limitations on deductibility of executive compensation and employee meal benefits.
The $5.5 million benefit represents what we believe is the impact of the TCJA. As the benefit is based on currently available information and interpretations, which are continuing to evolve, the benefit should be considered provisional. We will continue to analyze additional information and guidance related to the TCJA as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. The final impacts may differ from the recorded amounts as of December 31, 2017, and we will continue to refine such amounts within the measurement period provided by Staff Accounting Bulletin No. 118. We expect to complete our analysis no later than the fourth quarter of 2018.
Income tax expense (benefit) for the fiscal years 2017, 2016 and 2015 consists of the following (in thousands):
|
| | | | | | | | | | | |
| Fiscal Year |
| December 30,
2017 | | December 31,
2016 | | December 26,
2015 |
Current expense | |
| | |
| | |
|
Federal | $ | 6,204 |
| | $ | 8,854 |
| | $ | 5,813 |
|
State | 800 |
| | 847 |
| | 736 |
|
Foreign | 346 |
| | 132 |
| | 236 |
|
Deferred expense (benefit) | | | | | |
Federal | (3,645 | ) | | (662 | ) | | (802 | ) |
State | 140 |
| | (52 | ) | | (244 | ) |
Income tax expense | $ | 3,845 |
| | $ | 9,119 |
| | $ | 5,739 |
|
A reconciliation of income tax at the United States federal statutory tax rate (using a statutory tax rate of 35%) to income tax expense for fiscal years 2017, 2016 and 2015 in dollars is as follows (in thousands):
|
| | | | | | | | | | | |
| Fiscal Year |
| December 30,
2017 | | December 31,
2016 | | December 26,
2015 |
Expected income tax expense at statutory rate | $ | 10,902 |
| | $ | 8,594 |
| | $ | 5,546 |
|
Tax Act impact on deferred taxes | (5,473 | ) | | — |
| | — |
|
Permanent differences | (2,300 | ) | | 92 |
| | 64 |
|
State tax expense, net of federal benefit | 616 |
| | 395 |
| | 544 |
|
Foreign tax expense | 347 |
| | 132 |
| | 236 |
|
Foreign tax credits | (347 | ) | | (132 | ) | | (236 | ) |
Increase in unrecognized tax benefit | 114 |
| | 185 |
| | 104 |
|
Valuation allowance | — |
| | — |
| | (317 | ) |
Other | (14 | ) | | (147 | ) | | (202 | ) |
Income tax expense | $ | 3,845 |
| | $ | 9,119 |
| | $ | 5,739 |
|
The components of deferred tax assets (liabilities) are as follows (in thousands):
|
| | | | | | | |
| December 30, 2017 | | December 31, 2016 |
Deferred tax assets: | |
| | |
|
Deferred revenue | $ | 1,403 |
| | $ | 3,394 |
|
Accrued bonus | 53 |
| | 706 |
|
Property and equipment | — |
| | 136 |
|
Stock based compensation | 607 |
| | 818 |
|
Deferred rent | 270 |
| | 453 |
|
Intangible assets | 191 |
| | 593 |
|
Other | 157 |
| | 248 |
|
Net operating loss carryforwards and credits | 443 |
| | 443 |
|
Valuation allowance | (482 | ) | | (482 | ) |
| 2,642 |
| | 6,309 |
|
Deferred tax liabilities: | | | |
Intangible assets | (11,302 | ) | | (18,613 | ) |
Property and equipment | (139 | ) | | — |
|
| (11,441 | ) | | (18,613 | ) |
Net deferred tax liability | $ | (8,799 | ) | | $ | (12,304 | ) |
The Company had a state net operating loss carry-forward of $23.3 million at December 30, 2017 and December 31, 2016. The state net operating loss carry forwards begin to expire in 2030.
As of December 30, 2017, the Company had a valuation allowance of $482,000 against its deferred tax assets. In assessing whether a deferred tax asset will be realized, the Company considers whether it is more likely than not that some portion, or all of the deferred tax assets will not be realized. The Company considers the reversal of existing taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not we will realize a portion of the benefits of the federal and state deductible differences with the exception of $39,000 and $443,000, respectively.
As of December 31, 2016, the Company had not recognized a deferred tax asset for excess tax benefits of $4.3 million related to net operating losses that result from excess stock-based compensation. Beginning in 2017, losses resulting from excess stock-based compensation are recognized immediately as a result of the adoption of ASU 2016-09.
The Company files income tax returns, which are periodically audited by various federal and state jurisdictions. The Company was not subject to federal or state tax examinations prior to 2009. In fiscal 2013 the Internal Revenue Service (“IRS”) commenced an examination of the Company’s U.S. income tax returns for fiscal 2010 and 2011, which was subsequently settled and closed.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
| | | |
Balance as of December 27, 2014 | $ | 129 |
|
Additions for tax positions of prior years | — |
|
Subtractions for tax positions of prior years | — |
|
Additions for tax positions of current year | 336 |
|
Subtractions for tax positions of current year | — |
|
Balance as of December 26, 2015 | 465 |
|
Additions for tax positions of prior years | — |
|
Subtractions for tax positions of prior years | — |
|
Additions for tax positions of current year | 137 |
|
Subtractions for tax positions of current year | — |
|
Balance as of December 31, 2016 | 602 |
|
Additions for tax positions of prior years | — |
|
Subtractions for tax positions of prior years | — |
|
Additions for tax positions of current year | 78 |
|
Subtractions for tax positions of current year | — |
|
Balance as of December 30, 2017 | $ | 680 |
|
The Company currently anticipates that none of the $680,000 of unrecognized tax benefits will be recognized as of December 30, 2017.
As of December 30, 2017 and December 31, 2016, the accrued interest and penalties on the unrecognized tax benefits were $151,000 and $116,000, respectively, excluding any related income tax benefits. The Company recorded accrued interest related to the unrecognized tax benefits and penalties as a component of the provision for income taxes recognized in the Consolidated Statement of Operations.