Income Taxes

12 Months Ended

Dec. 31, 2019

The federal and state tax provision is summarized as follows:


	Year Ended December 31,
	2019		2018		2017
Federal income tax (benefit) expense:
Current	$	(371)	$	3,462	$	19,011
Deferred	(1,166)		(1,157)		(19,762)
Total federal income tax (benefit) expense	(1,537)		2,305		(751)

State income tax expense (benefit):
Current	2,562		2,113		4,048
Deferred	(1,598)		266		706
Total state income tax expense	964		2,379		4,754
Total (benefit) provision for income taxes	$	(573)	$	4,684	$	4,003

A reconciliation of the provision for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income from continuing operations before income taxes is as follows:


	Year Ended December 31,
	2019			2018			2017
Federal statutory rates	21.0		%	21.0		%	35.0		%
Federal income tax at statutory rates	$	(1,160)		$	4,812		$	19,281
Revaluation of net deferred tax liabilities due to U.S. tax reform	—			(286)			(19,304)
U.S. tax reform impact on equity income of investees	—			—			(1,646)
Change in valuation allowance	10			36			177
Change in uncertain tax positions	181			108			7
State income taxes, net of federal benefit	721			1,843			3,157
Non-taxable income	(93)			—			—
Compensation expense	606			235			—
Stock-based compensation	(101)			76			3,400
Meals and entertainment	81			74			99
Transaction costs	—			263			159
Gain on remeasurement of cost method investment	—			(1,381)			—
Tax credits	(858)			(1,208)			(354)
Legal expense	—			—			(805)
Other	40			112			(168)
(Benefit) provision for income taxes	$	(573)		$	4,684		$	4,003
Effective income tax rate	10.4		%	20.4		%	7.3		%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities of continuing operations are as follows:


	December 31,
	2019		2018
Deferred tax assets:
Net operating loss carryforwards	$	14,357	$	19,485
Capital loss carryforward	1,406		1,072
Tax credit carryforwards	792		840
Accounts receivable allowance	1,497		227
Accrued items and reserves	2,854		6,817
Stock-based compensation	1,276		1,480
Deferred rent	476		543
Deferred revenue	207		272
Other	68		773
Total deferred tax assets	22,933		31,509
Deferred tax liabilities:
Deferred financing costs	—		12
Prepaids	1,766		900
Property and equipment depreciation	3,404		3,492
Goodwill and intangibles amortization	5,312		6,944
Equity investment	32,774		40,577
Total deferred tax liabilities	43,256		51,925
Deferred tax liabilities, net of deferred tax assets	(20,323)		(20,416)
Less valuation allowance	(2,584)		(2,633)
Net deferred tax liabilities	$	(22,907)	$	(23,049)

At December 31, 2019, the Company had approximately $63,055 of federal net operating loss carryforwards which can be carried forward indefinitely. In addition, at December 31, 2019, the Company had approximately $20,453 of state net operating loss carryforwards which expire as follows:






2023	$	2,141
2028 and thereafter	18,312
Total state net operating loss carryforwards	$	20,453

Approximately $10,500 of the U.S. and state net operating loss carryforwards relate to Circulation, Inc. pre-acquisition tax periods and are subject to change of ownership limitations on their use. These limitations are not expected to restrict the ultimate use of these loss carryforwards.

Realization of the Company’s net operating loss carryforwards is dependent on generating sufficient taxable income. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized, to the extent they are not covered by a valuation allowance. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

The net change in the total valuation allowance for the year ended December 31, 2019 was a decrease of $49, of which $10 related to an increase from current operations and $59 related to a decrease from discontinued operations. The valuation allowance of $2,584 includes amounts for state net operating loss, capital loss and tax credit carryforwards for which the Company has concluded that it is more likely than not that these carryforwards will not be realized in the ordinary course of operations. The Company will continue to assess the valuation allowance, and to the extent it is determined that the valuation allowance should be changed, an appropriate adjustment will be recorded.

U.S. Tax Reform

On December 22, 2017, the Tax Reform Act was enacted which institutes fundamental changes to the taxation of multinational corporations. The Tax Reform Act includes changes to the taxation of foreign earnings by implementing a dividend exemption system, expansion of the current anti-deferral rules, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion. The Tax Reform Act also includes a permanent reduction in the corporate tax rate to 21%, repeal of the corporate alternative minimum tax, expensing of capital investment, and limitation of the deduction for interest expense. Furthermore, as part of the transition to the new tax system, a one-time transition tax is imposed on a U.S. shareholder’s historical undistributed earnings and profits (“E&P”) of foreign affiliates. Although the Tax Reform Act is generally effective January 1, 2018, GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date, which was December 22, 2017.

As a result of the reduction in the U.S. corporate income tax rate, the Company revalued its ending net deferred tax liabilities as of December 31, 2017 and recognized a provisional tax benefit of $20,950. The Company projected net accumulated deficits in foreign E&P; therefore, no provisional tax expense for deemed repatriation was recognized.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. In accordance with the SAB 118 guidance, the Company has recognized the provisional tax impacts related to the benefit for the revaluation of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 31, 2017. The financial reporting impact of the Tax Reform Act was completed in the fourth quarter of 2018 and an additional benefit of $286 was recorded.

Unrecognized Tax Benefits

The Internal Revenue Service is currently auditing our consolidated U.S. income tax returns for 2015-2018 due to the large refunds (total of $30,570) received from the loss on the WD Services sale. In addition, we are being examined by various states and by the Saudi Arabian tax authorities. All known adjustments have been fully reserved.

The Company recognizes interest and penalties as a component of income tax expense. During the years ended December 31, 2019, 2018 and 2017, the Company recognized approximately $60, $47 and $65, respectively, in interest and penalties from continuing operations. The Company had approximately $163 and $109, for the payment of penalties and interest of continuing operations accrued as of December 31, 2019, and 2018, respectively.

A reconciliation of the liability for unrecognized income tax benefits for continuing operations is as follows:


	December 31,
	2019		2018		2017
Unrecognized tax benefits, beginning of year	$	1,222	$	1,115	$	1,108
Increase related to prior year tax positions	133		104		22
Increase related to current year tax positions	128		160		101
Statute of limitations expiration	(80)		(157)		(116)
Unrecognized tax benefits, end of year	$	1,403	$	1,222	$	1,115

The entire ending balance in unrecognized tax benefits of $1,403 as of December 31, 2019 would reduce tax expense and our effective tax rate. The Company expects no material amount of the unrecognized tax benefits to be recognized during the next twelve months.

The Company is subject to taxation in the U.S. and various state jurisdictions. The statute of limitations is generally three years for the U.S. and between three and four years for the various states in which the Company operates. The tax years that remain open for examination by the U.S. and states principally include the years 2015 to 2018.