Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.19.3.a.u2
Income Taxes
12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The income tax expense consists of (in thousands):
 
2019
 
2018
 
2017
Current:
 
 
 
 
 
Federal
$
22,342

 
$
3,333

 
$
(5
)
State
6,913

 
5,561

 
1,834

Foreign
3,470

 
790

 

      
32,725

 
9,684

 
1,829

 
 
 
 
 
 
Deferred:
 
 
 
 
 
Federal
1,753

 
15,396

 
9,029

State
387

 
(2,250
)
 
(1,213
)
Foreign
(3,345
)
 
(558
)
 

 
(1,205
)
 
12,588

 
7,816

Income tax expense
$
31,520

 
$
22,272

 
$
9,645


Income tax expense differs from the amounts computed by applying the U.S. federal statutory tax rate as a result of the following (in thousands):
 
2019
 
2018
 
2017
Income tax at U.S. federal statutory tax rate
$
19,057

 
$
40,092

 
$
56,087

State income tax, net of federal benefit
5,332

 
3,488

 
1,825

Foreign rate differential
1,372

 
226

 

Stock-based compensation
2,352

 
(19,631
)
 
(57,358
)
Nondeductible items
2,611

 
1,119

 
1,181

Research and development
(2,379
)
 
(4,622
)
 
(6,418
)
Uncertain tax positions
2,714

 
2,699

 
850

Change in tax rate – other

 
(508
)
 
614

Change in tax rate – U.S tax reform

 

 
13,017

Change in valuation allowance
530

 
692

 
410

Other, net
(69
)
 
(1,283
)
 
(563
)
Income tax expense
$
31,520

 
$
22,272

 
$
9,645



The difference between the statutory federal income tax rate and the Company’s effective tax rate in 2019, 2018, and 2017 is primarily attributable to the effect of state income taxes, impact of tax reform, research and development tax credits, share-based compensation and other non-deductible permanent items.
The tax effect of temporary differences that give rise to a significant portion of the deferred tax assets and liabilities at December 31, 2019 and 2018 are presented below (in thousands):
 
2019
 
2018
Deferred tax assets:
 
 
 
   Net operating loss carryforward
$
4,006

 
$
2,893

   Tax credit carryforwards
7,287

 
11,691

   Lease right of use liabilities
4,537

 

   Stock compensation
15,466

 
7,388

   Accruals
6,496

 
9,276

      Gross deferred tax assets
37,792

 
31,248

Less: Valuation allowance
(1,717
)
 
(1,189
)
Deferred tax assets, net of valuation allowance
36,075

 
30,059

Deferred tax liabilities:
 
 
 
   Fixed assets
(127
)
 
(585
)
   Intangibles
(15,331
)
 
(17,034
)
  Lease right of use assets
(4,140
)
 

   Federal benefit of state tax deferred tax assets
(876
)
 
(1,231
)
      Gross deferred tax liabilities
(20,474
)
 
(18,850
)
      Deferred tax assets, net
$
15,601

 
$
11,209



As of December 31, 2019, we have approximately $15.6 million of net deferred tax assets. We recognize valuation allowances on deferred tax assets if, based on the weight of the evidence, we believe that it is more likely than not that some or all of the deferred tax assets will not be realized. We have recorded a valuation allowance of $1.7 million and $1.2 million as of December 31, 2019 and 2018, respectively, against certain state research and development credits and foreign net operating loss carry-forwards.
As of December 31, 2019, we have federal net operating loss carry-forwards of approximately $2.0 million and state net operating loss carry-forwards of $8.1 million, expiring at various times starting in 2023 with certain losses carried over indefinitely. In addition, as of December 31, 2019, we have foreign net operating loss carry-forwards of $18.5 million that can be carried over indefinitely.
We have no available tax credit carry-forwards for federal income tax purposes at December 31, 2019. We have available tax credit carry-forwards of approximately $7.2 million, net of unrecognized tax benefit for state income tax purposes at December 31, 2019, which can be carried forward to offset future taxable liabilities. Under California law, the California tax credits do not have an expiration date. Under Texas law, Texas R&D credits can be carried forward 20 years, and will begin to expire in 2034.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017 (in thousands):
 
Unrecognized Tax Benefits
Balance at December 31, 2016
$
(6,153
)
Addition for tax positions of prior years
(293
)
Reduction for tax positions of prior years
300

Addition for tax position of the current year
(3,504
)
Balance at December 31, 2017
$
(9,650
)
Additions for tax positions of prior years
(1,396
)
Reduction for tax positions of prior years
275

Additions for tax position of the current year
(2,418
)
Balance at December 31, 2018
$
(13,189
)
Additions for tax positions of prior years
(1,416
)
Reduction for tax positions of prior years
104

Additions for tax position of the current year
(1,522
)
Additions related to acquisitions
$
(523
)
Balance at December 31, 2019
$
(16,546
)


Included in the balance of unrecognized tax benefits as of December 31, 2019, 2018, and 2017 were $16.6 million, $13.2 million, and $9.7 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate.
Our policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. During 2019 and 2018, we recognized income tax expense on interest and penalties of $806,000 and $655,000, respectively, in connection with our unrecognized tax benefits. There was no material interest or penalty expense during the year ended December 31, 2017. The Company does not expect any material changes in the amount of unrecognized tax benefits within the next twelve months.
We are subject to taxation in the United States, various state jurisdictions, and various foreign jurisdictions. We are subject to income tax examination by U.S. and state tax authorities for the calendar year ended December 31, 2016 and forward. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where net operating losses and credits were generated and carried forward, and make adjustments up to the amount of the net operating losses and credits utilized in open tax years.
As of December 31, 2019, taxes were not provided for an immaterial amount of cumulative earnings of the foreign subsidiaries as we have invested or expect to invest the undistributed earnings indefinitely. If these earnings are repatriated to the United States, or if we determine that the earnings will be remitted in the foreseeable future, the unremitted earnings could be subject to withholding taxes and certain state taxes. Due to the complexities in the laws of foreign jurisdictions and assumptions that would have to be made, it is not practical to estimate the amount of foreign withholding or state taxes associated with such unremitted earnings.
The Tax Cuts and Jobs Act (Tax Reform Act), was enacted on December 22, 2017, which significantly changes the U.S. corporate income tax system by, among other things, effecting a Federal corporate rate reduction from 35% to 21%, includes limitations on certain deductions including executive compensation arrangements, reduces the maximum deduction of net operating loss with no carry-back but indefinite carry-forward provision, and repeals the corporate alternative minimum tax. Additionally, the Tax Reform Act created a tax on certain foreign sourced earnings known as the global intangible low-tax income (GILTI) tax for tax year 2018. The SEC staff has indicated that a company should make and disclose certain policy elections related to the accounting for GILTI. We have elected to account for the tax effect of GILTI as a current-period expense when incurred and will not establish deferred taxes.

In connection with the Tax Reform Act, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts to the extent a reasonable estimate can be made. Additional tax effects and adjustments to previously recorded provisional amounts can be recorded upon obtaining, preparing, or analyzing additional information within one year from the enactment date of the Tax Reform Act. During 2018, we completed our accounting for the tax effects of the enactment of the Tax Reform Act. We concluded that the reduction to our net deferred tax assets of $13 million, and corresponding increase to income tax expense recorded in 2017 was a reasonable estimate of the impact of the Tax Reform Act on our deferred tax balances, and that no further adjustments were necessary during the measurement period.