|12 Months Ended|
Dec. 31, 2017
14. Income Taxes
Income (loss) before income tax provision was generated in the following jurisdictions:
The components of the income tax provision 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 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, (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 minimum tax on certain foreign earnings and a new base erosion anti-abuse tax, (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.
The Company recognized the income tax effects of the Act in its 2017 financial statements in accordance with Staff Accounting Bulletin 118 which provides SEC staff guidance for the application of ASC Topic 740.
The Company has completed its assessment for the income tax effects of the Act for the following items:
The Company has not completed its assessment for the income tax effects of the Act but has recorded a reasonable estimate of the effects for the items below. The Company anticipates completing the analyses for these estimates by the fourth quarter of 2018, within the one year measurement period for the following items:
The Company has not completed its assessment for the income tax effects of the Act and is unable to calculate a reasonable estimate of such effect for the items below. The Company anticipates completing the analysis for these items by the fourth quarter of 2018, within the one year measurement period:
The valuation allowance for net deferred tax assets as of December 31, 2017 and 2016 was $32,513 and $29,610, respectively. The change in the valuation allowance from 2016 to 2017 was primarily related to the amortization of book intangible assets, which increased the valuation allowance, and the change in the federal tax rate due to the Act, which reduced the value of the ending valuation allowance. 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, 2017. 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, 2017, a valuation allowance of $32,513 was recorded to offset the portion of deferred tax assets for which the Company is not at more likely than not that they will 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 has now claimed permanent reinvestment on accumulated earnings of approximately $20,600. 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 will not be recorded.
The expected tax provision calculated at the statutory federal rate differs from the actual provision as follows:
At December 31, 2017, the Company had NOL carryforwards, before any uncertain tax position reserves, for federal income tax purposes of $249,653 which are available to offset future federal taxable income, if any, and expire through 2035. In addition, as of December 31, 2017, the Company had NOL carryforwards for state income tax purposes of $143,775 available to reduce future income subject to income taxes. The state NOL carryforwards expire through 2037.
In addition, at December 31, 2017, the Company had AMT credit carryforwards of approximately $1,330 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 percent (100 percent 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 $21 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 $10,430 for federal and $8,103 for California and Illinois, as well as foreign tax credits of $2,459 available to offset federal income tax.
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
At December 31, 2017, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $18,312.
The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. For the years ended December 31, 2017 and 2016, income tax expense included $1,690 and $880, respectively, of potential interest and penalties related to unrecognized tax benefits. The Company had accrued interest and penalties of $6,018 and $4,328 as of December 31, 2017 and 2016, 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 begun. The Company’s tax returns for the calendar years ended December 31, 2016, 2015, and 2014 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, 2012 and forward 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 and forward. 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 sheets.
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