Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Note 3—Income Taxes

The following are the domestic and foreign components of the Company’s income before income taxes (in thousands):

	Year Ended   December 31,
	2019		2018		2017
Domestic	$	14,544	$	36,157	$	(16,583	)
Foreign	66,102		18,921		48,848
Income before income taxes	$	80,646	$	55,078	$	32,265

The income tax benefit is comprised of the following (in thousands):

	Year Ended   December 31,
	2019			2018			2017
Current:
Federal	$	(3,967	)	$	709		$	(6,397	)
State	1,053			(578		)	79
Foreign	352			600			476
Total current	(2,562		)	731			(5,842		)
Deferred:
Federal	(19,734		)	(3,343		)	(34,948		)
State	(1,564		)	3,496			(8,778		)
Foreign	8,612			(23,297		)	33
Total deferred	(12,686		)	(23,144		)	(43,693		)
Total income tax benefit	$	(15,248	)	$	(22,413	)	$	(49,535	)

For the years ended December 31, 2019, 2018 and 2017, the Company recorded a benefit for income taxes of $15.2 million, $22.4 million, and $49.5 million or an effective tax rate of (18.9)%, (40.7)% and (153.5)%, respectively.

A reconciliation of the income tax benefit at the U.S. federal statutory income tax rate to the Company’s total income tax benefit is as follows (in thousands):

	Year Ended   December 31,
	2019			2018			2017
Income tax provision at the federal statutory rate (a)	$	16,936		$	11,566		$	11,308
State and local income taxes net of federal benefit	973			3,839			(691		)
Foreign income tax rate differential	(5,454		)	(298		)	(11,878		)
Stock-based compensation	(16,281		)	(11,717		)	(12,584		)
Research and development credit	(9,864		)	(4,115		)	(1,098		)
U.S. tax reform (b)	(4,197		)	3,897			(31,063		)
Non-deductible expenses	1,784			(329		)	168
Uncertain tax positions	380			382			789
Change in valuation allowance (c)	—			(28,733		)	(4,673		)
Return to provision adjustment	500			3,293			167
Other	(25		)	(198		)	20
Total income tax benefit	$	(15,248	)	$	(22,413	)	$	(49,535	)

(a) The income tax provision at the U.S. federal statutory rate is computed using 21% in 2019 and 2018 and 35% in 2017. Refer to footnote (b) below.

(b) On December 22, 2017, the U.S. government enacted the TCJA, as described above, which includes significant changes to the taxation of business entities. These changes include, among others, (1) a permanent reduction to the corporate income tax rate, (2) Global Intangible Low-Taxed Income (“GILTI”), a new tax on worldwide income, and (3) Foreign Derived Intangible Income (“FDII”) a deduction provided with respect to certain foreign earned income. Effective January 1, 2018, the Company is subject to several provisions of the TCJA including computations under GILTI and FDII.

For the year ended December 31, 2017, primarily as a result of the permanent change in U.S. corporate income tax rate, the Company recognized a net income tax benefit of $31.1 million associated with the TCJA.

For the years ended December 31, 2019 and 2018, the Company has accounted for the impact of the new TCJA provisions, as well as any adjustments with respect to the re-measurement of its deferred taxes, as part of its income tax benefit using the currently available regulations and technical guidance on the interpretations of the TCJA. The Company has elected to account for GILTI as a period cost. The Company is not currently subject to the Base Erosion and Anti-Abuse Tax (“BEAT”) or Section 163(j) Interest Limitation. The Company will continue to monitor the forthcoming regulations and additional guidance of the GILTI, FDII, and BEAT provisions under the TCJA, which are complex and subject to continuing regulatory interpretation by the Internal Revenue Service (“IRS”).

(c) For the year ended December 31, 2018, the Company released valuation allowance recorded against deferred tax assets in certain foreign jurisdictions as it had achieved three years of cumulative pre-tax income.

Deferred income taxes reflect the net tax effect 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 (liabilities) are as follows (in thousands):

	As of December 31,
	2019			2018
Deferred tax assets:
Net operating loss carryforwards	$	19,599		$	13,347
Research and development credit carryforwards	13,133			7,567
Lease liability (a)	18,666			—
Stock-based compensation expense	7,642			6,623
Excess tax basis in intangible assets	3,572			12,109
Accrued bonus	4,065			1,049
Deferred rent (a)	—			529
Other deferred tax assets	3,944			1,858
Total deferred tax assets	70,621			43,082
Less: valuation allowance	883			1,673
Total net deferred tax asset	69,738			41,409
Deferred tax liabilities:
Excess book basis in intangible assets	(39,500		)	(362		)
Restructuring liability	(29,635		)	(33,730		)
Convertible debt	(22,839		)	(7,283		)
Right-of-use asset (a)	(17,596		)	—
Depreciation (a)	(10,328		)	(6,933		)
Other deferred tax liabilities	(80		)	(92		)
Total deferred tax liabilities	(119,978		)	(48,400		)
Net deferred tax liabilities	$	(50,240	)	$	(6,991	)

(a) As part of the Company’s adoption of ASC 842 beginning in 2019, the Company recorded adjustments to the GAAP basis of certain assets and liabilities and established other assets and liabilities (i.e., right-of-use asset and lease liability). The net adjustment was recorded as a retrospective adjustment to retained earnings. The adoption of ASC 842 does not change the Company’s tax basis in these assets and liabilities. However, as a result of the adoption, an adjustment was recorded to the historic deferred taxes,

through retained earnings, to account for the change in GAAP basis as well as establishing deferred taxes on the newly established right-of-use assets and lease liabilities.

The Company has not recorded deferred income taxes and withholding taxes with respect to undistributed earnings from its non-U.S. subsidiaries as such earnings are intended to be reinvested indefinitely. The amount of undistributed earnings of non-U.S. subsidiaries at December 31, 2019, as well as the related deferred income tax, if any, is not material.

As of December 31, 2019, the Company had the following operating loss and tax credit carryforwards available to offset taxable income in future years:

	December 31, 2019		Expiration Period
U.S. Federal net operating loss carryforwards	$	30,403	2035-Unlimited
U.S. Federal credit carryforwards	13,054		2035-2039
U.S. State net operating loss carryforwards	21,150		2027-2039
U.S. State credit carryforwards	184		2020-2024
Non-U.S. net operating loss carryforwards	91,440		Unlimited

Utilization of the net operating losses (“NOLs”) is dependent on generating sufficient taxable income from our operations in each of the respective jurisdictions to which the NOLs relate, while taking into account tax filing methodologies and limitations and/or restrictions on our ability to use them. The Company’s U.S. federal NOLs were acquired as part of the acquisition of Reverb and are subject to limitations as promulgated under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). Section 382 of the Code limits the amount of NOLs that we can use on an annual basis to offset consolidated U.S. taxable income. The NOLs are also subject to review by relevant tax authorities in the jurisdictions to which they relate. The NOL deferred tax asset balance additionally includes losses in certain foreign jurisdictions that are currently subject to a valuation allowance.

The Company assesses the likelihood of its ability to realize the benefit of its deferred tax assets in each jurisdiction by evaluating all relevant positive and negative evidence at each reporting date. To the extent the Company determines that some or all of its deferred tax assets are not more likely than not to be realized, it establishes a valuation allowance.

For the year ended December 31, 2018, the Company achieved three years of cumulative pre-tax income in certain of its foreign jurisdictions, management determined that sufficient positive evidence existed as of December 31, 2018, to conclude that was more likely than not that deferred tax assets of $23.4 million will be utilized in those jurisdictions.

The following table summarizes the valuation allowance activity for the periods indicated (in thousands):

	Year Ended   December 31,
	2019			2018			2017
Balance as of the beginning of period	$	1,673		$	32,455		$	13,839
Additions charged to expense	504			—			16,743
Deletions credited to expense	(4		)	(28,733		)	—
Currency translation and other balance sheet activity	(1,290		)	(2,049		)	1,873
Balance as of the end of period	$	883		$	1,673		$	32,455

Unrecognized tax benefits

The following table summarizes the unrecognized tax benefit activity for the periods indicated (in thousands):

	As of December 31,
	2019			2018			2017
Balance as of the beginning of period	$	18,819		$	17,013		$	23,574
Additions based on tax positions related to the current year	1,847			921			732
Additions for tax positions of prior years	3,620			946			118
Reductions for tax provisions of prior years	(2,423		)	(61		)	(7,411		)
Lapse of Statute of Limitation	(184		)	—			—
Additions recorded through goodwill as part of business combination	1,334			—			—
Settlements	(3,080		)	—			—
Balance as of the end of period	$	19,933		$	18,819		$	17,013

The amount of unrecognized tax benefits included on the Consolidated Balance Sheets as of December 31, 2019, 2018, and 2017 are $19.9 million, $18.8 million, and $17.0 million, respectively. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $19.4 million at December 31, 2019.

We recognize interest and/or penalties related to uncertain tax positions in income tax expense. For the years ended 2019 and 2018, $(0.1) million and $0.3 million, respectively, was included in income tax (benefit)/expense for interest and penalties. The amount of interest and penalties accrued as of December 31, 2019 and 2018 was approximately $0.2 million and $0.5 million, respectively.

The total amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing audits and/or the expiration of applicable statutes of limitations. The outcomes and timing of such events are highly uncertain and a reasonable estimate of the range of gross unrecognized tax benefits, excluding interest and penalties, that could potentially be reduced during the next 12 months cannot be made.

The Company is subject to taxation in the United States, New York, and various other states and foreign jurisdictions. As of December 31, 2019, tax year 2014 and later remain open to examination.

The Company is under examination, or may be subject to examination, by the IRS for calendar year 2014 and thereafter. These examinations may result in proposed adjustments to the Company’s income tax liability or tax attributes with respect to years under examination as well as subsequent periods.

The provision for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which the Company operates. Future changes in applicable laws, projected levels of taxable income and tax planning could change the effective tax rate and tax balances recorded by the Company. In addition, tax authorities periodically review income tax returns filed by the Company and can raise issues regarding its filing positions, timing and amount of income and deductions, and the allocation of income among the jurisdictions in which the Company operates. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenue authority with respect to that return. Any adjustments as a result of any examination may result in additional taxes or penalties against the Company. If the ultimate result of these audits differ from original or adjusted estimates, they could have a material impact on the Company’s tax provision.