The components of income (loss) before income tax provision are as follows for the years ended December 31:
| 2017 | 2016 | 2015 | ||||||||||
| (in thousands) | ||||||||||||
| United States | $ | (40,090 | ) | $ | 6,448 | $ | 8,079 | |||||
| International | 565 | 238 | — | |||||||||
| Total income (loss) before income tax provision | $ | (39,525 | ) | $ | 6,686 | $ | 8,079 | |||||
Income tax expense from continuing operations consists of the following for the years ended December 31:
| 2017 | 2016 | 2015 | ||||||||||
| (in thousands) | ||||||||||||
| Current: | ||||||||||||
| Federal | $ | — | $ | 244 | $ | 212 | ||||||
| State | 36 | 508 | 226 | |||||||||
| Foreign | 139 | 69 | — | |||||||||
| 175 | 821 | 438 | ||||||||||
| Deferred: | ||||||||||||
| Federal | (2,916 | ) | 1,726 | 2,997 | ||||||||
| State | (175 | ) | 1,040 | 586 | ||||||||
| Foreign | — | — | — | |||||||||
| (3,091 | ) | 2,766 | 3,583 | |||||||||
| Change in federal tax rate | 11,693 | — | — | |||||||||
| Valuation allowance | 16,662 | (772 | ) | (588 | ) | |||||||
| Total income tax expense | $ | 25,439 | $ | 2,815 | $ | 3,433 | ||||||
The reconciliations of the U.S. federal statutory rate to the effective income tax rate for the years ended December 31, 2017, 2016 and 2015 are as follows:
| 2017 | 2016 | 2015 | ||||||||||
| Tax provision at U.S. federal statutory rates | 34.0 | % | 34.0 | % | 34.0 | % | ||||||
| State income taxes net of federal benefit | 2.7 | 3.1 | 2.3 | |||||||||
| Deferred tax asset adjustments – NOL related | (12.1 | ) | 16.1 | 6.8 | ||||||||
| Non-deductible permanent items | (0.1 | ) | — | 0.7 | ||||||||
| Stock options | (0.1 | ) | — | — | ||||||||
| Acquisition costs | — | — | 7.0 | |||||||||
| Goodwill impairment | (17.5 | ) | — | — | ||||||||
| Other | 0.3 | 0.4 | (1.0 | ) | ||||||||
| Transition tax adjustment | 0.2 | — | — | |||||||||
| Change in rate | (29.6 | ) | — | — | ||||||||
| Change in valuation allowance | (42.2 | ) | (11.5 | ) | (7.3 | ) | ||||||
| Effective income tax rate | (64.4 | %) | 42.1 | % | 42.5 | % | ||||||
Deferred income taxes reflect the net tax effect 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, 2017 and 2016 are as follows:
| 2017 | 2016 | |||||||
| (in thousands) | ||||||||
| Deferred tax assets: | ||||||||
| Allowance for doubtful accounts | $ | 225 | $ | 381 | ||||
| Accrued liabilities | 574 | 1,596 | ||||||
| Net operating loss carry-forwards | 17,286 | 25,563 | ||||||
| Intangible assets | 161 | — | ||||||
| Share-based compensation expense | 2,727 | 3,225 | ||||||
| Other | 1,062 | 1,191 | ||||||
| Total gross deferred tax assets | 22,035 | 31,956 | ||||||
| Valuation allowance | (21,318 | ) | (4,656 | ) | ||||
| 717 | 27,300 | |||||||
| Deferred tax liabilities: | ||||||||
| Fixed assets | (25 | ) | (114 | ) | ||||
| Intangible assets | — | (7,698 | ) | |||||
| Unremitted foreign earnings | — | (20 | ) | |||||
| Total gross deferred tax liabilities | (25 | ) | (7,832 | ) | ||||
| Net deferred tax assets | $ | 692 | $ | 19,468 | ||||
On December 22, 2017, the U.S. government enacted comprehensive tax legislation known as the TCJA. The TCJA establishes new tax laws that will take effect in 2018, including, but not limited to (1) reduction of the U.S. federal corporate tax rate from a maximum of 35% to 21%; (2) elimination of the corporate AMT; (3) a new limitation on deductible interest expense; (4) the Transition Tax; (5) limitations on the deductibility of certain executive compensation; (6) changes to the bonus depreciation rules for fixed asset additions: and (7) limitations on NOLs generated after December 31, 2017, to 80% of taxable income.
ASC 740, Income Taxes, requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the TCJA's provisions, the SEC staff issued Staff Accounting Bulletin 118 (“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.
At December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the TCJA; however, the Company has made a reasonable estimate of the effects of the TCJA’s change in the federal rate and revalued its deferred tax assets based on the rates at which they are expected to reverse in the future, which is generally the new 21% federal corporate tax rate plus applicable state tax rate. The Company recorded a decrease in deferred tax assets and deferred tax liabilities of $11.7 million and $0.0 million, respectively, with a corresponding net adjustment to deferred income tax expense of $11.7 million for the year ended December 31, 2017. In addition, the Company recognized a deemed repatriation of $0.6 million of deferred foreign income from its Guatemala subsidiary, which did not result in any incremental tax cost after application of foreign tax credits. The Company’s provisional estimates will be adjusted during the measurement period defined under SAB 118, based upon ongoing analysis of data and tax positions along with the new guidance from regulators and interpretations of the law.
The Company adopted the provisions of ASU 2016-09 as of January 1, 2017, which requires recognition through opening retained earnings of any pre-adoption date NOL carryforwards from nonqualified stock options and other employee share-based payments (e.g., restricted shares and share appreciation rights), as well as recognition of all income tax effects from share-based payments arising on or after January 1, 2017 in income tax expense. As a result, the Company has recognized $18.4 million of pre-adoption date NOL carryforwards with remaining carryforward periods of at least seven years. The Company recognized excess tax benefits of $6.5 million as an increase to deferred tax assets and a cumulative-effect adjustment to retained earnings of $6.5 million. Based on the weight of available evidence, the Company believes that it is more likely than not that these NOLs will not be realized and has placed a valuation allowance against the deferred tax asset.
During 2017, management assessed the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative losses incurred over the three-year period ended December 31, 2017. The Company was projecting pre-tax income for 2017 until the three months ended December 31, 2017, in which the Company incurred a significant pre-tax loss due to goodwill impairment. The Company experienced increased costs in servicing its customers and started to see a decrease in market share as a result of more competition. The Company also projects that 2018 pre-tax profits may not offset the cumulative three-year pre-tax loss as of December 31, 2017. Based on this evaluation, the Company recorded an additional valuation allowance of $16.7 million against its deferred tax assets during the year. At December 31, 2017, the Company has recorded a valuation allowance of $21.3 million against its deferred tax assets.
At December 31, 2017, the Company had federal and state NOLs of approximately $74.0 million and $26.2 million, respectively. The federal NOLs expire through 2035 as follows (in millions):
| 2025 | $ | 4.1 | ||
| 2026 | 25.5 | |||
| 2027 | 15.5 | |||
| 2028 | 5.2 | |||
| 2029 | 7.7 | |||
| 2030 | 10.6 | |||
| 2031 | 1.3 | |||
| 2032 | — | |||
| 2033 | 0.1 | |||
| 2034 | 2.5 | |||
| 2035 | 1.5 | |||
| $ | 74.0 |
The state NOLs expire through 2035 as follows (in millions):
| 2028 | $ | 2.7 | ||
| 2029 | 5.8 | |||
| 2030 | 11.0 | |||
| 2034 | 1.5 | |||
| 2035 | 0.8 | |||
| California NOLs | 21.8 | |||
| Other State NOLs | 4.4 | |||
| Total State NOLs | $ | 26.2 |
Utilization of the net operating loss and tax credit carry-forwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the IRC, as well as similar state provisions. These ownership changes may limit the amount of NOLs and research and development credit carry-forwards that can be utilized annually to offset future taxable income and tax, respectively. A Section 382 ownership change occurred in 2006 and any changes have been reflected in the NOLs presented above as of December 31, 2017. As a result of an acquisition in 2001, approximately $9.9 million of the NOLs are subject to an annual limitation of approximately $0.5 million per year.
The federal and state NOLs begin to expire in 2025 and 2028, respectively. Approximately $10.8 million and $5.0 million, respectively, of the federal and state NOLs were incurred by subsidiaries prior to the date of the Company’s acquisition of such subsidiaries. The Company established a valuation allowance of $4.1 million at the date of acquisitions related to these subsidiaries. The tax benefits associated with the realization of such NOLs was credited to the provision for income taxes.
At December 31, 2017, the Company has federal and state research and development tax credit carry-forwards of $0.3 million and $0.2 million, respectively. The federal credits begin to expire in 2021. The state credits do not expire.
As of December 31, 2017 and 2016, the Company had unrecognized tax benefits of approximately $0.5 million and $0.5 million, respectively, all of which, if subsequently recognized, would have affected the Company’s tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| 2017 | 2016 | |||||||
| (in thousands) | ||||||||
| Balance at January 1, | $ | 464 | $ | 527 | ||||
| Reductions based on tax positions related to prior years and settlements | — | (63 | ) | |||||
| Balance at December 31, | $ | 464 | $ | 464 | ||||
The Company is subject to taxation in the United States and various foreign and state jurisdictions. In general, the Company is no longer subject to U.S. federal and state income tax examinations for years prior to 2013 (except for the use of tax losses generated prior to 2013 that may be used to offset taxable income in subsequent years). The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next twelve months.
The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company has not accrued any interest associated with its unrecognized tax benefits in the years ended December 31, 2017 and 2016.