Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax 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 which impacted 2017 including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent for tax years beginning 2018.

ASC 740 requires a company to record the effects of a tax law change in the period of enactment, however, shortly after the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year

In connection with the Company's initial analysis of the impact of the Tax Act, it was able to make a reasonable estimate of the impact of the Tax Act and recorded a provisional net tax expense of $8.0 million in the period ended December 31, 2017, primarily related to the impact of the tax rate reduction on the Company's deferred tax assets and deferred tax liabilities. This amount includes a $0.4 million increase in the Company's valuation allowance.

Reasonable estimates have also been made for the effects of other provisions of the Tax Act, but they do not have a material impact on the Company’s consolidated financial statements. These estimates may be impacted by the need for further analysis, future clarification and guidance regarding available tax accounting methods and elections. Any subsequent adjustments to these provisional amounts will be recorded in the quarter in 2018 when the analysis is complete.

The Company has completed its analysis of the one-time transition tax on undistributed earnings of its foreign subsidiaries, the Alternative Minimum Tax (“AMT”), and the Base Erosion Anti-abuse Tax (“BEAT”) and is not being affected by these provisions.

Income before income taxes included the following components for the years ended December 31 (in thousands):



	2017		2016			2015
United States	$	14,978	$	38,414		$	42,761
Foreign	783		(6,917		)	(7,400		)
Total	$	15,761	$	31,497		$	35,361

Significant components of the Company’s deferred income tax assets and liabilities are as follows at December 31 (in thousands):



	2017			2016
Deferred income tax assets:
Net operating loss carryforward	$	3,691		$	2,405
Deferred revenue	9,442			11,537
Deferred compensation	1,109			1,695
Inventory reserve	702			1,126
Non-qualified and non-employee stock option expense	3,704			4,410
Capitalized research and development	485			1,991
Research and development tax credit carryforward	3,817			2,722
Reserves, accruals, and other	1,921			1,239
Total deferred income tax assets	24,871			27,125
Deferred income tax liabilities:
Depreciation	(2,027		)	(2,364		)
Amortization	(1,398		)	(1,473		)
Other	(256		)	(294		)
Total deferred income tax liabilities	(3,681		)	(4,131		)
Net deferred income tax assets before valuation allowance	21,190			22,994
Valuation allowance	(5,435		)	(3,479		)
Net deferred income tax assets	$	15,755		$	19,515

For the year ended December 31, 2017, the provision for income taxes, in accordance with the provisions set forth in ASC 2016-09, included $1.8 million of tax expense resulting from stock-based compensation tax benefits that were recorded as a decrease in the provision for income taxes, and for the years ended December 31, 2016 and 2015, $1.4 million and $6.9 million, respectively, of tax expense resulting from stock-based compensation tax benefits that have been recorded as increases to additional paid-in capital on the consolidated statement of changes in stockholders’ equity.

The Company has $4.5 million of state net operating losses (“NOLs”) which expire at various dates between 2019 and 2036. The Company also has Federal NOLs of $2.2 million which expire between 2035 and 2036, and are subject to limitation under Internal Revenue Code (“IRC”) Section 382. The Company has $0.1 million of federal R&D credits, which expire in 2024 and 2027, and are also subject to limitation under IRC Section 382. The Company has $7.3 million of Arizona R&D credits carrying forward, which expire at various dates between 2018 and 2032. In Australia, the U.K., Canada, and Germany, the Company has $2.2 million, $10.3 million, $1.6 million, and $0.3 million of NOLs, respectively, which expire at various dates or may be carried forward indefinitely.

In preparing the Company’s consolidated financial statements, management has assessed the likelihood that deferred income tax assets will be realized from future taxable income. In evaluating the ability to recover its deferred income tax assets, management considers all available evidence, positive and negative, including the Company’s operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred income tax assets will not be realized. Management exercises significant judgment in determining the Company’s provisions for income taxes, its deferred income tax assets and liabilities and its future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred income tax assets.

Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of each reporting date, management considers new evidence, both positive and negative, that could impact management’s view with regards to future realization of deferred tax assets. As of December 31, 2017, the Company continues to demonstrate three-year cumulative pre-tax income in the U.S. federal and Arizona tax jurisdictions; however, the Arizona R&D Tax Credits start to expire in 2018 with a significant tranche with a gross value of $1.2 million expiring in 2019. Therefore, management has concluded that it is more likely than not that a portion of the Company’s U.S. deferred tax assets will not be realized.

As of December 31, 2017, the Company has cumulative losses in Australia, the U.K., and Canada, and a history of losses in Germany, which limits the ability to consider other subjective evidence, such as projections for future growth. On the basis of this evaluation, a full valuation allowance has been recorded for these jurisdictions. The amount of the deferred tax asset considered realizable, however, could be adjusted in future periods if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for growth.

Significant components of the provision for income taxes are as follows for the years ended December 31 (in thousands):



	2017			2016			2015
Current:
Federal	$	6,039		$	16,346		$	13,594
State	1,263			1,534			996
Foreign	656			1,050			—
Total current	7,958			18,930			14,590
Deferred:
Federal	4,539			(4,145		)	288
State	(1,631		)	(977		)	984
Foreign	(78		)	(45		)	(278		)
Total deferred	2,830			(5,167		)	994
Tax provision recorded as an increase (decrease) in liability for unrecorded tax benefits	(234		)	437			(156		)
Provision for income taxes	$	10,554		$	14,200		$	15,428

A reconciliation of the Company’s effective income tax rate to the federal statutory rate follows for the years ended December 31 (in thousands):



	2017			2016			2015
Federal income tax at the statutory rate	$	5,518		$	11,024		$	12,347
State income taxes, net of federal benefit	339			889			1,061
Difference between statutory and foreign tax rates	(560		)	1,521			2,442
Permanent differences ⁽ⁱ⁾	300			(457		)	(205		)
Research and development	(2,380		)	(1,928		)	(1,050		)
Return to provision adjustment	23			327			(67		)
Change in liability for unrecognized tax benefits	7			700			(156		)
Excess stock-based compensation benefit	(1,819		)	(77		)	(144		)
Change in valuation allowance	1,949			1,779			1,200
Tax effects of intercompany transactions	(277		)	630			—
Adjustments to deferreds resulting from enactment of new tax law⁽ⁱⁱ⁾	7,601			—			—
Other	(147		)	(208		)	—
Provision for income taxes	$	10,554		$	14,200		$	15,428
Effective tax rate	66.9		%	45.1		%	43.6		%


⁽ⁱ⁾	Permanent differences include certain expenses that are not deductible for tax purposes including lobbying fees as well as favorable items including the domestic production activities deduction.


⁽ⁱⁱ⁾	The adjustment to deferreds of $7.6 million was a result of the impact of changes in the U.S. federal effective tax rate, as well as a reduction of the stock-based compensation deferred tax asset due to expected permanent limitations on its deductibility for certain key executives under the recently enacted tax law.

The Company has completed R&D tax credit studies, which identified approximately $15.2 million in tax credits for federal, Arizona and California income tax purposes related to the 2003 through 2017 tax years. Management has made the determination that it is more likely than not that the full benefit of the R&D tax credit will not be sustained on examination and recorded a liability for unrecognized tax benefits of $4.1 million as of December 31, 2017. In addition, management accrued approximately $0.1 million for estimated uncertain tax positions related to certain state income tax liabilities. Should the unrecognized tax benefit of $4.2 million be recognized, the Company’s effective tax rate would be favorably impacted.

The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statements of operations. As of December 31, 2017 and 2016, the Company had accrued interest of $0.1 million.

The following table presents a roll forward of the Company's liability for unrecognized tax benefits, exclusive of accrued interest, as of December 31 (in thousands):



	2017			2016		2015
Balance, beginning of period	$	4,050		$	3,396	$	3,325
Increase (decrease) in previous year tax positions	123			—		(389		)
Increase in current year tax positions	587			448		270
Decrease due to lapse of statute of limitations	(773		)	—		(14		)
Increase related to adjustment of previous estimates of activity	256			206		204
Balance, end of period	$	4,243		$	4,050	$	3,396

Federal income tax returns for 2014 through 2017 remain open to examination by the U.S. Internal Revenue Service (the “IRS”), and state taxing authorities. The 2004 through 2013 income tax returns are only open to the extent that net operating loss or other tax attributes carrying forward from those years were utilized in 2014 through 2017. The foreign tax returns for 2013 through 2017 also generally remain open to examination. The Company has not been notified by any major federal, foreign, or state tax jurisdictions that it will be subject to examination.

The Company considers the earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside of the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and the Company's specific plans for reinvestment of those subsidiary earnings. It is not practicable to estimate the amount of the deferred tax liability, if any, related to investments in those foreign subsidiaries. If the Company decides to repatriate the foreign earnings, it would need to adjust its income tax provision in the period it determined that the earnings will no longer be indefinitely invested outside the United States.