|12 Months Ended|
Dec. 31, 2017
|Income Taxes [Abstract]|
NOTE 15. INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company is subject to income taxes in certain foreign jurisdictions which creates deferred tax assets and liabilities in these jurisdictions. The Company has netted these deferred tax assets and deferred tax liabilities by jurisdiction. Deferred income tax assets are reviewed for recoverability and valuation allowances are provided when it is more likely than not that a deferred tax asset is not realizable in the future.
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”). As a result of the Tax Act, the Company has recorded a discrete net tax benefit of $6,086 in the period ending December 31, 2017. The primary components are discussed throughout Note 15.
Reduction of U.S. federal corporate tax rate: The Tax Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. Consequently, the Company has revalued its deferred tax assets and liabilities and recorded a corresponding adjustment to deferred income tax benefit of $1,067 for the year ended December 31, 2017.
Alternative Minimum Tax (“AMT”): As a result of the Tax Act, the corporate AMT was repealed. In addition, taxpayers with AMT credit carryovers in excess of their regular tax liability may have the credits refunded over multiple years from 2018 to 2022. However, AMT transactions, including refunds, are subject to sequestration by the Office of Management Budget. As a result, the Company has reclassed its AMT credit carryforward to an other long-term asset and reduced the estimated refund to account for the effects of the sequester. This provisional adjustment resulted in additional tax benefit of $507 due to releasing previously valued AMT credits.
Transition Tax: The Transition Tax is a tax on previously untaxed accumulated and current earnings and profits of certain of the Company’s foreign subsidiaries. At the time of measurement, the foreign subsidiaries had an accumulated earnings and profits deficit, which resulted in no additional tax liability.
The SEC staff issued Staff Accounting Bulletin ("SAB") 118 which allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. The Company has two matters related to the Tax Act that were recorded as provisional under SAB 118. The first provisional matter relates to the Transition Tax and a dividend paid by Ember to Clarus. Under the Transition Tax, all activity should be added back to the accumulated earnings and profits of specified foreign corporations (“SFC”) in order to calculate the Transition Tax. However, the dividend from Ember created a de facto liquidation. The guidance is unclear as to whether a liquidating dividend should be added back to accumulating earnings and profits, or if, due to the de facto liquidation, the company did not exist as of the date of measurement. The Company has not added the dividend back to the Transition Tax calculation, and had it done so, it would have resulted in a tax benefit of approximately $2,500 due to offsetting accumulated earnings and profits deficits of other SFCs. With additional guidance from the IRS, this position could change and impact the overall tax provision.
The second provisional matter relates to the measurement of valuation allowance on net deferred tax assets that create future indefinite net operating losses, which can be offset by indefinite deferred tax liabilities and thus be considered as a source of future taxable income. In several states in which the Company operates, the states’ position is to conform to Federal tax legislation, however in practice no formal declaration is made by the states upon tax legislation changes. It is unclear at this time whether states have conformed to the Tax Act or adopted their own laws to address the federal changes. On a provisional basis, the Company has released federal valuation allowance of $4,512. If the Company had released the state valuation allowance, it would have resulted in an incremental tax benefit of approximately $400.
The Company’s foreign operations that are considered to be permanently reinvested have statutory tax rates of approximately 25%.
The Company recognizes interest expense and penalties related to income tax matters in income tax expense.
The Company releases residual tax effects in accumulated other comprehensive income through continuing operations as the underlying asset matures or expires.
Consolidated (loss) income from continuing operations before income taxes consists of the following:
The components of the provision (benefit) for income taxes attributable to continuing operations consist of the following:
The allocation of income tax expense (benefit) was as follows:
The following is a reconciliation of the statutory federal income tax rate to the effective rate reported in the Company’s financial statements:
Deferred income tax assets and liabilities are determined based on the difference between the financial reporting carrying amounts and tax bases of existing assets and liabilities and operating loss and tax credit carryforwards. Significant components of the Company’s existing deferred income tax assets and liabilities as of December 31, 2017 and 2016 are as follows:
As of December 31, 2017, the Company’s gross deferred tax asset was $50,732. The Company has recorded a valuation allowance of $45,811, resulting in a net deferred tax asset of $4,921, before deferred tax liabilities of $8,587. The Company has provided a valuation allowance against a portion of the deferred tax assets as of December 31, 2017, because the ultimate realization of those assets does not meet the more likely than not criteria. The majority of the Company’s deferred tax assets consist of net operating loss carryforwards for federal tax purposes. If a change in control were to occur, these could be limited under Section 382 of the Internal Revenue Code of 1986 (“Code”), as amended.
In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and net operating loss and credit carryforwards expire. The estimates and judgments associated with the Company’s valuation allowance on deferred tax assets are considered critical due to the amount of deferred tax assets recorded by the Company on its consolidated balance sheet and the judgment required in determining the Company’s future taxable income. The need for a valuation allowance is reassessed at each reporting period. During the year ended December 31, 2015, the Company recorded an increase to its valuation allowance of $48,858. Certain events and circumstances as explained below transpired during the third quarter of the year ended December 31, 2015, which caused the Company to conclude that the realization of some portion of its deferred tax assets does not satisfy the more-likely-than-not threshold. The POC Disposition removed a substantial portion of the Company’s projected future taxable income. Additionally, during the year ended December 31, 2015, the Company made the decision to scale back its apparel initiative and announced a realignment of resources. The totality of these events and circumstances impedes management’s ability to forecast future long-term taxable income to the extent that it does not meet the more-likely-than-not threshold.
For tax years beginning after December 31, 2017, net operating losses generated will be carried forward indefinitely, thus creating an indefinite deferred tax asset. Due to these changes in the Tax Act, management scheduled out the reversal of deferred tax assets and liabilities to determine the amount of future net operating loss carryforwards with an indefinite reversal period created and realized from future taxable income from a more-likely-than-not threshold. Based on this analysis, management determined $4,512 of valuation allowance should be released. The indefinite deferred tax asset can only offset 80% of future taxable income which is indefinite lived deferred tax liabilities. This analysis was performed before the federal rate change.
The net change in the valuation allowance for deferred income tax assets was ($21,851), $3,176, and $48,858 during the years ended December 31, 2017, 2016, and 2015, respectively. A roll forward of our valuation allowance for deferred income tax assets for the years ended December 31, 2017, 2016, and 2015 is as follows:
As of December 31, 2017, the Company had net operating loss, research and experimentation credit and alternative minimum tax credit carryforwards for U.S. federal income tax purposes of $156,598, $3,452 and $0, respectively. The Company believes its U.S. Federal net operating loss (“NOL”) will substantially offset its future U.S. Federal income taxes. The majority of the Company’s pre-tax income is currently earned and expected to be earned in the U.S., or taxed in the U.S. as Subpart F. income and will be offset with the NOL.
NOLs available to offset taxable income, subject to compliance with Section 382 of the Code, begin to expire based upon the following schedule:
In Q1 2017, the Company adopted ASU 2016-09 which eliminates the APIC pool retroactively. As a result, the Company recorded a deferred tax asset totaling $92 and a cumulative effect of adopting the new accounting principle to retained earnings. Since the Company was in a full valuation position, a corresponding valuation allowance was also recorded totaling $92 and an offsetting cumulative effect was also recorded to retained earnings. Accordingly, there was no net effect to retained earnings as a result of adopting ASU 2016-09.
Tax positions are recognized in the financial statements when it is more-likely-than-not that the position will be sustained upon examination by the tax authorities. The Company conducts its business globally. As a result, the Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions, and are subject to examination for the open tax years in the U.S. federal and state jurisdictions of 2013-2017 and in the foreign jurisdictions of 2005-2017. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.
A reconciliation of the beginning and ending amount of total unrecognized tax benefits for the years ended December 31, 2017 and 2016 and are follows:
Included in the balance of total unrecognized tax benefits at December 31, 2017 and 2016, are potential benefits of $476 and $1,135, respectively, that if recognized, would affect the effective rate, subject to impact of valuation allowance, on income from continuing operations. Unrecognized tax benefits that reduce a net operating loss, similar tax loss or tax credit carryforward are presented as a reduction to deferred income taxes. As a result, the Company classified $356 and $327 of its unrecognized tax benefit as a reduction to deferred tax assets as of December 31, 2017 and 2016, respectively.
Interest and penalty expense recognized related to uncertain tax positions amounted to $13, $183, and $2 during the years ending December 31, 2017, 2016, and 2015, respectively. Total accrued interest and penalties as of December 31, 2017 and 2016 were $6 and $185, respectively, and were included in accounts payable and accrued liabilities.
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://www.xbrl.org/2003/role/presentationRef