|12 Months Ended|
Dec. 31, 2018
|Income Tax Disclosure [Abstract]|
13. Income Taxes
In accordance with the authoritative guidance for income taxes under ASC 740, a deferred tax asset or liability is determined based on the difference between the financial statement and the tax basis of assets and liabilities as measured by the enacted tax rates, which will be in effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.
The Company recognizes the impact of a tax position in the consolidated financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. The Company’s practice is to recognize interest and/or penalties related to income tax matters as income tax expense. At December 31, 2018, there are no unrecognized tax benefits nor any significant accruals for interest related to unrecognized tax benefits or tax penalties.
The Company is subject to taxation and files income tax returns in the United States and various state jurisdictions. All tax years from inception to date are subject to examination by the U.S. and state tax authorities due to the carry-forward of unutilized net operating losses and research and development credits. Currently, no years are under examination.
A reconciliation of income tax expense (benefit) for the years ended December 31, 2018 and 2017 is as follows (in thousands):
Significant components of the Company’s deferred income taxes at December 31, 2018 and 2017 are shown below (in thousands):
Balances of deferred tax assets as of December 31, 2018 and 2017, include the following, respectively:
The impairment of certain indefinite lived intangibles generated an income tax benefit of $13,582,000 for the year ended December 31, 2018. After December 31, 2018, the Company does not expect any additional tax expense or tax benefit related to the fully impaired indefinite lived intangibles.
The Company has established a valuation allowance against net deferred tax assets due to the uncertainty that such assets will be realized. The Company periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred tax assets will be realizable, the valuation allowance will be reduced.
Certain amounts included in the Company’s gross deferred tax assets as of December 31, 2018, and specifically detailed under (i) – (iii) in the table above, are recoverable only if the Company generates taxable income in states that it no longer maintains operations, Georgia and California. Due to the Company’s present stage of development, the proximity of those states to Florida and Washington where offices are currently located, and the ongoing, existing and potential strategic business relationships within those states considered significant to the Company and its related parties, the Company does not believe recoverability of the Georgia or California deferred tax assets recognized to be more remote than its other federal and state deferred tax assets, nor require additional reserves, at this time. As such, those, and all of the Company’s deferred tax assets, have been reported at gross amounts within Note 13 hereto, and are subject to a full valuation allowance.
At December 31, 2018, the Company has federal and state net operating losses, or NOL, carryforwards of approximately $70,468,000 and $30,907,000, respectively. The federal NOL carryforwards begin to expire in 2026, and the state NOL carryforwards begin to expire in 2028. The federal loss generated in 2018 of $8,829,000 will carry forward indefinitely and be available to offset up to 80% of future taxable income each year.
At December 31, 2018, the Company had federal and state capital loss carryforwards of approximately $1,071,000 that expire in 2023.
At December 31, 2018, the Company also had federal and California research and development tax credit carryforwards of approximately $1,820,000 and $257,000, respectively. The federal research and development tax credit carryforwards begin to expire in 2028, and the California research and development tax credit carryforwards do not expire and can be carried forward indefinitely until utilized. The Company has not completed a formal research and development (“R&D”) tax credit study for any of the years the credits were generated. The IRC 41 credit may be subject to change if audited by the IRS. Any changes to the credit would also result in a change in the valuation allowance against the federal and state deferred tax asset associated with R&D tax credits.
The above NOL carryforwards and the research tax credit carryforwards may be subject to an annual limitation under Section 382 and 383 of the Internal Revenue Code of 1986, and similar state provisions if the Company experienced one or more ownership changes, which would limit the amount of NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 and 383, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percentage points over a three-year period. The Company has not completed an IRC Section 382/383 analysis. If a change in ownership were to have occurred, NOL and tax credits carryforwards could be eliminated or restricted. If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance.
In 2017, the Company adopted ASU 2016-09, Compensation - Stock Compensation. The Company has excess tax benefits for which a benefit could not previously be recognized of approximately $13,000. The balance of the unrecognized excess tax benefits has been reversed with the impact recorded to retained earnings including any change to the valuation allowance as a result of the adoption in 2017. Due to the full valuation allowance on the U.S. deferred tax assets, there is no impact to the financial statements as a result of this adoption.
A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate for the years ended December 31, 2018 and 2017 is as follows:
In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The 2017 Tax Act also provides for the acceleration of depreciation for certain assets placed in service after September 27, 2017, as well as prospective changes beginning in 2018, including additional limitations on executive compensation, on the deductibility of interest, and on capitalization of research and development expenditures.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the income tax effects of the 2017 Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the 2017 Tax Act enactment date for companies to complete the accounting relating to the 2017 Tax Act under Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”). In accordance with SAB 118, an entity must reflect the income tax effects of those aspects of the 2017 Tax Act for which the accounting under ASC 740 is complete. To the extent that an entity’s accounting for 2017 Tax Act related income tax effects is incomplete, but the entity is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements.
The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, as of December 31, 2017, the Company’s deferred tax assets and liabilities were remeasured to reflect the provisions of the 2017 Tax Act and reduction in the U.S. corporate income tax rate from the highest graduated tax of 35 percent to a 21 percent flat tax. The initial remeasurement of deferred tax liabilities that were related to indefinite-lived intangibles generated an income tax benefit of $6,587,000, as well as an additional $293,000 tax benefit as a result of projected NOLs expected to be generated in 2018 and beyond that have an indefinite life under the 2017 Tax Act, for a total tax benefit of $6,880,000 reflected in the 2017 consolidated statement of operations. In addition, as of December 31, 2017, the initial remeasurement of the deferred tax assets and liabilities that are not associated with indefinite-lived intangibles generated an income tax expense of approximately $8,282,000, which reduced the Company’s gross deferred tax assets, but was entirely offset by the Company’s full valuation allowance. The Company completed its evaluation of the potential impacts of the 2017 Tax Act on its 2018 consolidated financial statements and concluded to have no further impact as of December 31, 2018.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef