7. Income Taxes

 

In order to determine the quarterly provision for income taxes, the Company considers the estimated annual effective tax rate, which is based on expected annual taxable income and statutory tax rates in the various jurisdictions in which the Company operates. Certain significant or unusual items are separately recognized in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

 

Income tax expense was $0.2 million and $0.2 million for the three months ended June 30, 2017 and 2016, respectively, or approximately 6% and 24% of income (loss) before income taxes, respectively. Income tax benefit was $2.5 million and $9.9 million for the six months ended June 30, 2017 and 2016, respectively, or approximately 115% and 362% of income (loss) before income taxes, respectively. The effective tax rate for the three and six months ended June 30, 2017 differs from the U.S. federal statutory rate of 34% primarily due to the domestic valuation allowance offsetting most of the statutory rate, offset by the partial reversal of the Company’s valuation allowance due to the deferred tax liability that was recorded as part of the Triad acquisition, primarily due to the differences between the book and tax basis of the acquired intangible assets. The rate is further increased by foreign income taxes, state income taxes or taxes in states for which net operating loss carryforwards are not available, the U.S. federal alternative minimum tax and the impact of incentive stock options as well as other permanent differences. As of December 31, 2016, the Company’s NOL carryforward amounts for U.S. federal income and state tax purposes were $59.5 million and $61.0 million, respectively. The NOL carryforwards will expire between 2017 and 2034. In addition to the NOL carryforwards, as of December 31, 2016, the Company had U.S. federal and state research and development credit carryforwards of $7.1 million and $2.8 million, respectively, which will expire between 2017 and 2034.

 

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. Due to historical net losses incurred and the uncertainty of realizing the deferred tax assets, for all the periods presented, the Company has a full valuation allowance against domestic deferred tax assets. To the extent that the Company generates positive income and expects, with reasonable certainty, to continue to generate positive domestic income, 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. In addition, the effective tax rate in subsequent periods would increase, and more closely approximate the federal statutory rate of 34%, after giving consideration to state income taxes, foreign income taxes, tax credits, the effect of stock-based compensation windfalls or shortfalls, and exercising incentive stock options.

 

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. We are subject to federal income tax as well as income tax of multiple state and foreign jurisdictions. We are no longer subject to income tax examinations for the following jurisdictions and years: federal, for years before 2013; state and local, for years before 2012; or foreign; for years before 2010. 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.