|12 Months Ended|
Dec. 31, 2018
|Income Tax Disclosure [Abstract]|
Income (loss) before income tax provision (benefit) was generated in the following jurisdictions:
The components of the income tax provision (benefit) charged to operations are summarized as follows:
Net deferred tax assets (liabilities) consist of the following:
On December 22, 2017 the Tax Cuts and Jobs Act (“the Act”) was signed into United States law. The Act significantly changes U.S. income tax law and is the first major overhaul of the federal income tax code in more than 30 years. Key provisions of the Act that may impact the Company include: (i) reduction of the U.S. federal corporate income tax rate from 35% to 21%, (ii) repeal of the Corporate Alternative Minimum Tax (“AMT”) system, (iii) replacement of the worldwide taxation system with a territorial tax system which exempts certain foreign operations from U.S. taxation but also taxes certain foreign income under a new regime, called Global Intangible Low-Taxed Income ("GILTI"), (iv) further limitation on the deductibility of certain executive compensation, (v) modification of earnings calculations for certain foreign subsidiaries that were previously tax deferred to a one-time tax, (vi) creation of a new base erosion anti-abuse tax (Base Erosion Anti-Abuse Tax, or "BEAT"), (vii) allowance for immediate capital expensing of certain qualified property, (viii) limitation on the deduction for net interest expense incurred by a U.S. corporation, and (ix) modification and/or repeal of a number of other international provisions.
Due to the complexities involved in accounting for the enactment of the Tax Reform, SAB 118 allowed us to record provisional amounts in earnings for the year ended December 31, 2017. In 2017 and the first nine months of 2018, we recorded provisional amounts for certain enactment-date effects of the Act by applying the guidance in SAB 118 because we had not yet completed our enactment-date accounting for these effects. SAB 118 provides that where reasonable estimates can be made, the provisional accounting should be based on such estimates and when no reasonable estimate can be made, the provisional accounting may be based on the tax law in effect before the Tax Reform. SAB 118 allowed a measurement period of up to one year from the enactment date to identify Tax Reform impacts. As of the period ended December 31, 2018, we completed our analysis of the Tax Reform on our consolidated financial statements and recorded additional tax expense of $814 primarily related to the one-time tax on deferred foreign earnings in the tax provision. Our accounting for the final income tax effects of the Tax Reform has been finalized and the measurement period under SAB 118 ended during the period ended December 31, 2018. Despite the completion of our accounting for the Tax Reform under SAB 118, many aspects of the law remain unclear and we expect ongoing guidance to be issued at both the federal and state levels. We will continue to monitor and assess the impact of any new developments.
Related to the Act's new provision on GILTI, under GAAP, the Company is allowed to make an accounting policy choice to either (i) treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period cost method"); or (ii) factor in such amounts into the measurement of our deferred taxes (the "deferred method"). The selection of an accounting policy related to the GILTI tax provisions depends, in part, on analyzing our global income to determine whether the Company expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. While the future global operations depend on a number of different factors, the Company does expect to have future U.S. inclusions in taxable income related to GILTI. Further, the Company has made a policy decision to record GILTI tax as a current-period expense when incurred.
In addition, the BEAT provision has an impact on the Company in the current year. In accordance with FASB guidance, the incremental effect of BEAT is recognized in the year the BEAT is incurred and also there is no need to evaluate the effect of potentially paying the BEAT in future years. The current year estimated BEAT liability and therefore impact to the Company's tax expense is $3,760.
The valuation allowance for net deferred tax assets as of December 31, 2018 and 2017 was $15,531 and $32,513, respectively. The change in the valuation allowance from 2017 to 2018 was primarily related to the acquisition of Folio and the Company's convertible debt incurred in 2018 in addition to the current year movement related to the amortization of book intangible assets. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some or all of the deferred tax assets will be realized.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence is the cumulative loss incurred over the three-year period ended December 31, 2018. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth.
On the basis of this evaluation, as of December 31, 2018, a valuation allowance of $15,531 has been recorded to record only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.
Prior to December 31, 2017, the Company did not claim permanent reinvestment of our accumulated foreign earnings, and recorded taxes on these earnings. The amount of this estimated liability at December 31, 2016 was approximately $4,500. As of December 31, 2017, the Company changed our position on this matter and claimed permanent reinvestment on accumulated earnings of approximately $20,600. As of December 31, 2018, the Company has claimed permanent reinvestment on accumulated earnings of approximately $33,000. Post Tax Reform, the primary deferred tax liability that is not being recorded by the Company relates to India withholding tax. The reinvested foreign earnings of the Company will be used to fund future foreign acquisitions, capital expenditures, headcount expansion and other operating expenses. As these earnings will be permanently reinvested in the foreign jurisdictions, deferred taxes were not recorded.
The expected tax provision (benefit) calculated at the statutory federal rate differs from the actual provision as follows:
At December 31, 2018, the Company had NOL carryforwards, before any uncertain tax position reserves, for federal income tax purposes of approximately $267,000 which are available to offset future federal taxable income, if any, and expire through 2038. In addition, as of December 31, 2018, the Company had NOL carryforwards for state income tax purposes of approximately $153,000 available to reduce future income subject to income taxes. The state NOL carryforwards expire through 2038.
In addition, at December 31, 2018, the Company had AMT credit carryforwards of approximately $1,455 for Federal purposes. As a result of tax reform, AMT credits are refundable for any taxable year beginning after 2017 and before 2022 in an amount equal to 50% (100% in the case of taxable years beginning in 2021) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability. Thus, the minimum tax credit was reclassified from a deferred tax asset to an income tax receivable. The Company also had AMT credits of $19 for California, which are available to reduce future California income taxes, if any, over an indefinite period. In addition, the Company had research and development credit carryforwards of approximately $15,259 for federal and $9,452 for California and Illinois, as well as foreign tax credits of $1,401 available to offset federal income tax.
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
At December 31, 2018, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $15,628. The Company estimates it is reasonably possible that there will not be a material change to the liability for unrecognized tax benefits in the next twelve months.
The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. For the years ended December 31, 2018 and 2017, income tax expense included $126 and $1,690, respectively, of potential interest and penalties related to unrecognized tax benefits. The Company had accrued interest and penalties of $5,977 and $6,018 as of December 31, 2018 and 2017, respectively.
The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, foreign subsidiaries of the Company file tax returns in foreign jurisdictions. The Company was notified by the Internal Revenue Service as of December 18, 2017 that the calendar year 2015 and 2016 federal income tax returns have been have been selected for audit by the Internal Revenue Service. As of the date of this report, no additional taxes had been assessed, as the audit has not yet concluded. The Company’s tax returns for the calendar years ended December 31, 2017, 2016, and 2015 remain open to examination by the Internal Revenue Service in their entirety. With respect to state taxing jurisdictions, the Company’s tax returns for calendar years ended December 31, 2017, 2016, 2015, and 2014 remain open to examination by various state revenue services.
Our Indian subsidiaries are currently under examination by the India Tax Authority for the fiscal years ended March 31, 2005, 2008, 2011, 2012, 2013, 2014, 2015, 2016, and 2017. Based on the outcome of examinations of our subsidiary or the result of the expiration of statutes of limitations it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the consolidated balance sheet. It is possible that one or more of these audits may be finalized within the next twelve months.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/presentationRef