Income Taxes

The components of the Company’s income tax provision (benefit) are as follows (in thousands):



	Year Ended December 31,
	2017			2016		2015
Current:
Federal	$	—		$	—	$	—
State	18			74		25
Total current provision	18			74		25
Deferred:
Federal	410			547		547
State	40			34		34
Tax Act impact	(2,632		)	—		—
Total deferred (benefit) provision	(2,182		)	581		581
Total income tax (benefit) provision	$	(2,164	)	$	655	$	606

The Tax Act was enacted on December 22, 2017, and has several key provisions impacting accounting for and reporting of income taxes. The most significant provisions applicable to the Company include the reduction of the U.S. corporate statutory tax rate from 35% to 21%, the limitations on net operating losses (“NOLs”) generated after December 31, 2017 to 80% of taxable income, and the indefinite carryforward period applicable to NOLs generated after December 31, 2017. Although most provisions of the Tax Act are not effective until January 1, 2018, the Company is required to record the effect of a change in tax law in the period of enactment (2017).

The 2017 income tax benefit of $2.2 million included a $2.6 million impact from the change in tax law. Of the $2.6 million Tax Act impact, $1.2 million results from the remeasurement of our U.S. federal deferred tax assets and liabilities at the tax rate expected to apply when the temporary differences are realized/settled (remeasured at a rate of 21% versus 34% for the majority of our deferred tax assets and liabilities) and $1.4 million results from the decrease in valuation allowance associated with the partial recognition of the Company’s tax-deductible goodwill amortization as an available source of income to realize deferred tax assets.

The Company has obtained and analyzed all necessary information to record the effect of the change in tax law, and do not anticipate reporting additional tax effects in the future. However, should the Internal Revenue Service (“IRS”) issue further guidance or interpretation of relevant aspects of the new tax law, the Company may adjust these amounts.

Our 2016, and 2015 income tax provisions of $0.7 million, and $0.6 million, respectively, primarily reflect the amortization of tax-deductible goodwill that is not an available source of income to realize deferred tax assets.

The overall effective income tax rate differs from the statutory federal rate of 34% as follows:



	Year Ended December 31,
	2017		2016		2015
Income tax benefit based on the federal statutory rate	34.0	%	34.0	%	34.0	%
State income taxes, net of federal benefit	9.4		3.2		2.4
Nondeductible expenses	(1.2	)	(1.7	)	(0.3	)
Change in valuation allowance, excluding Tax Act impact	(130.0	)	(33.0	)	(30.7	)
Stock-based compensation	86.5		(4.1	)	(6.4	)
Tax Act impact	7.5		—		—
Other	—		—		0.1
Overall effective income tax rate	6.2	%	(1.6	)%	(0.9	)%

The components of deferred tax assets (liabilities) are as follows (in thousands):



	December 31,
	2017			2016
Deferred income tax assets:
Net operating loss carryforwards	$	99,551		$	95,342
Stock-based compensation	11,854			25,278
Accrued expenses	1,878			3,338
Research and development tax credits	568			543
Other	271			371
Gross deferred tax assets	114,122			124,872
Valuation allowance	(107,046		)	(115,689		)
Net deferred tax assets	7,076			9,183
Deferred tax liabilities:
Property, equipment and software	(3,540		)	(5,424		)
Intangible assets and goodwill	(4,348		)	(6,753		)
Gross deferred tax liabilities	(7,888		)	(12,177		)
Total net deferred tax liabilities	$	(812	)	$	(2,994	)

The net deferred tax liability at December 31, 2017 and 2016 relates to amortization of tax-deductible goodwill that is not an available source of income to realize deferred tax assets. Accordingly, the net deferred tax liability does not reduce the need for a valuation allowance related to the Company’s net deferred tax assets.

At December 31, 2017, the Company had federal and state net operating loss carryforwards of $393.6 million and $247.5 million, respectively. The Company’s federal and state net operating loss carryforwards begin to expire in the years ending December 31, 2025 and 2018, respectively. At December 31, 2017, the Company had federal and state research and development tax credit carryforwards of approximately $0.8 million and $0.4 million, respectively. The federal tax credit carryforwards begin to expire in the year ending December 31, 2028. The state tax credit carryforward can be carried forward indefinitely.

The Internal Revenue Code of 1986, as amended, imposes substantial restrictions on the utilization of net operating losses and other tax attributes in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use pre-change net operating loss and research tax credits may be limited as prescribed under IRC Sections 382 and 383. Events which may cause limitation in the amount of the net operating losses and credits that the Company utilizes in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. As a result of historical equity issuances, the Company has determined that annual limitations on the utilization of its net operating losses and credits do exist pursuant to IRC Sections 382 and 383, however, such limitations are not expected to impact the Company’s ability to utilize these deferred tax assets prior to their statutory expiration dates.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2017. Such objective evidence limits the ability to consider other subjective evidence such as its projections for future growth. On the basis of this evaluation, at December 31, 2017, a valuation allowance of $107.0 million has been recorded since it is more likely than not that the deferred tax assets will not be realized.

The change in the valuation allowance for the years ended December 31, 2017, 2016, and 2015 is as follows (in thousands):



	Year Ended December 31,
	2017			2016		2015
Valuation allowance, at beginning of year	$	115,689		$	84,167	$	64,449
Increase in valuation allowance- share-based compensation guidance impact	—			17,959		—
Valuation allowance, at beginning of year, as adjusted	$	115,689		$	102,126	$	64,449
Increase in valuation allowance, excluding Tax Act impact	45,512			13,563		19,718
Decrease in valuation allowance - federal tax rate change	(52,757		)	—		—
Release of valuation allowance due to the Tax Act	(1,398		)	—		—
Valuation allowance, at end of year	$	107,046		$	115,689	$	84,167

The $1.4 million release of valuation allowance pertains to the partial recognition of the Company’s tax-deductible goodwill amortization as an available source of income to realize deferred tax assets due to the NOL provisions of the Tax Act.

The following is a reconciliation of the total amounts of unrecognized tax benefits (in thousands):



	Year Ended December 31,
	2017			2016		2015
Unrecognized tax benefit, beginning of year	$	3		$	3	$	46
Additions based on current year tax positions				—		—
Additions for prior years’ tax positions	1			—		—
Settlements with tax authorities	(7		)	—		(13		)
Reductions for prior years’ tax positions				—		(30		)
Unrecognized tax benefit, end of year	$	(3	)	$	3	$	3

The Company’s policy is to recognize interest and penalties related to uncertain tax positions, if any, in the income tax provision. At December 31, 2017, no interest and penalties related to uncertain tax positions have been accrued. The Company does not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months.

The Company is subject to United States federal and state taxation. Due to the presence of net operating loss carryforwards, all income tax years remain open for examination by the IRS and various state taxing authorities. During 2017, the Company settled an income tax examination for the 2013 and 2014 tax years, for an immaterial assessment. The Company is not currently under IRS or state tax examination.