8. Income Taxes

On December 22, 2017, the United States enacted tax reform legislation commonly referred to as the Tax Cuts and Jobs Act (“the Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code, including, but not limited to, a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018. The Company was required to recognize the effect of the tax law changes in the period of enactment. In order to calculate the effect of the Tax Act, the Company was required to determine the transition tax amount and remeasure U.S. deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allowed the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. For the year ended December 31, 2017, the Company recorded provisional amounts in accordance SAB 118 where it was possible to make reasonable estimates of the effects of the Tax Act.

 

The Tax Act reduced the U.S. federal corporate tax rate from 34% to 21% for tax years beginning after December 31, 2017. The Company evaluated the decrease in the tax rate and recorded a provisional, one-time tax expense of approximately $9.0 million as of December 31, 2017. This expense was offset by an equal change in the valuation allowance, resulting in a net tax expense or benefit of $0.  The Company also recorded a one-time tax benefit and corresponding reduction to the valuation allowance of $0.4 million related to Alternative Minimum Tax credit carryforwards that are expected to be refundable as of December 31, 2017; the Tax Act contributed to $0.2 million of this tax benefit.

 

During the year ended December 31, 2018, the Company recorded the federal income tax impact of the one-time mandatory transition tax on unrepatriated foreign earnings under the Tax Act resulting in a one-time deferred tax expense of $0.5 million. The Company fully offset the one-time deferred tax expense with a corresponding reduction to the valuation allowance of $0.5 million. All aspects of the Tax Act were accounted for prior to the closure of the one-year measurement period provided by SAB 118.

 

The Tax Act also created a new requirement on global intangible low-taxed income (“GILTI”) earned by foreign subsidiaries for tax years beginning on or after January 1, 2018. The GILTI provisions require foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s assets to be included in the Company’s U.S. income tax return. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into the Company's measurement of its deferred taxes. The Company has made the election to account for GILTI as a component of current taxes incurred rather than as a component of deferred taxes.

 

The domestic and foreign components of net income before income tax expense consists of the following for the periods shown below (in thousands):

 

The provision for income taxes consisted of the following components (in thousands):

 

A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate follows:

 

Deferred tax assets and (liabilities) are comprised of the following (in thousands):

 

Significant judgment is required in determining the Company’s provision for income taxes, recording valuation allowances against deferred tax assets and evaluating the Company’s uncertain tax positions. In evaluating the ability to recover its deferred tax assets, in full or in part, the Company considers all available positive and negative evidence, including past operating results, forecast of future market growth, forecasted earnings, future taxable income and prudent and feasible tax planning strategies.

 

We have historically provided a full valuation allowance against the deferred tax assets of our domestic and U.K. operations. Given our current level of pre-tax income in the U.S., and assuming, at a minimum, we maintain our current level of pre-tax income, we expect to fully utilize our U.S. federal and state net operating loss carryforward balances. As a result, in the fourth quarter 2018, we released the full valuation allowance against our U.S. federal and state deferred tax assets, with the exception of our foreign tax credit carryovers, resulting in a non-cash benefit to income tax expense.

 

Due to the net losses incurred and the uncertainty of realizing the deferred tax assets in the U.K., we continue to maintain a full valuation allowance against the deferred tax assets of our U.K. operations. To the extent that the Company generates positive income and expects, with reasonable certainty, to continue to generate positive income in the U.K., the Company may release the valuation allowance in a future period. This release would result in the recognition of certain deferred tax assets, resulting in a decrease to income tax expense for the period such release is made.

 

The net valuation allowance decreased by approximately $25.0 million and $0.1 million and during the years ended December 31, 2018 and 2017, respectively.

 

Net operating loss and tax credit carryforwards as of December 31, 2018 are as follows (in thousands):

 

The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits, excluding interest and penalties (in thousands):

 

No additional unrecognized tax benefits were computed for the 2018, 2017 or 2016 tax years, pending completion of a U.S. federal research and development credit tax study. Domestic research and development credits are the only source of unrecognized tax benefits.  As there are no new domestic credits, there is no current year change in unrecognized tax benefits.  As of December 31, 2018, the amount of unrecognized tax benefits that would, if recognized, impact the Company’s effective income tax rate is approximately $3.6 million.

The Company files income tax returns in the United States, including various state and local jurisdictions. The Company’s subsidiaries file income tax returns in the United Kingdom, Australia, China, Germany, India and Serbia. The Company is subject to federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company is no longer subject to income tax examinations for the following jurisdictions and years: federal, for years before 2015; state and local, for years before 2014; or foreign; for years before 2013. However, federal net operating loss and credit carryforwards from all years are subject to examination and adjustments for at least three years following the year in which the attributes are used.

During the year ended December 31, 2018, the Company concluded a U.S. federal income tax examination with the IRS for the tax years ended December 31, 2015 and December 31, 2016.  The examination resulted in reductions to U.S. federal NOL carryovers of $0.6 million.  The Company recognized a deferred tax expense of $0.1 million as a result of the IRS exam, which was offset by a corresponding reduction in the valuation allowance and a deferred tax benefit of $0.1 million, for a net tax impact of $0.

 

At December 31, 2018, the Company had undistributed foreign earnings of $0.5 million, which the Company intends to permanently reinvest in foreign subsidiaries in Australia. The undistributed foreign earnings from Australia have already been taxed for US income tax purposes, and due to the tax treaty between the US and Australia, any dividends from Australia would likely be subject to a preferential dividend withholding tax rate of 0%.  Accordingly, the Company has not recorded a deferred tax liability in connection with the permanently reinvested unremitted Australian earnings.  The Company anticipates that future overseas earnings in this jurisdiction will also be reinvested indefinitely. In accordance with the indefinite reinvestment criteria, the foreign currency gains recorded in other comprehensive income related to foreign currency translation in these jurisdictions have not been tax effected.