|12 Months Ended|
Dec. 31, 2017
|Income Tax Disclosure [Abstract]|
The domestic and foreign components of income (loss) before income taxes were as follows:
Our income tax expense (benefit) consisted of the following components:
The reconciliation of our income tax expense (benefit) computed at the U.S. federal statutory tax rate to the actual income tax expense (benefit) is as follows:
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of our assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:
As a result of our adoption of ASU 2016-09, on January 1, 2017 we recorded a deferred tax asset of $43.8 million, net of a $0.3 million valuation allowance, with a corresponding increase to retained earnings. The deferred tax asset consisted of excess stock-based compensation deductions that arose but were not recognized in prior years. See additional discussion of our adoption of ASU 2016-09 in Note 2.
The acquisition of the stock of PEX Software Ltd and its subsidiary PEX Australia Ltd in October 2017 resulted in an additional net deferred tax liability of approximately $0.1 million.
The acquisition of the stock of an On-Site subsidiary, in connection with the acquisition of certain discrete assets of On-Site Manager, Inc. in September 2017, resulted in additional deferred tax liabilities of $1.2 million, primarily related to intangibles.
The acquisition of the stock of NWP in March 2016 resulted in an additional net deferred tax asset of $11.2 million. This net asset includes approximately $9.6 million related to additional deferred tax assets from federal NOLs and $0.3 million related to state NOLs; $3.3 million related to property, equipment, and software; inventory and accrued expenses; and $2.0 million of deferred tax liability related to intangibles.
The acquisition of the stock of AssetEye in May 2016 resulted in additional deferred tax liabilities of $0.9 million related to intangibles. The company had no federal or state NOL carryovers related to the AssetEye acquisition.
On December 22, 2017, the Tax Reform Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. As a result of the Tax Reform Act, we recorded $25.1 million of additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted, to reduce the carrying value of our net deferred tax assets to reflect the lower U.S. federal corporate tax rate. We also recognized tax expense of $2.2 million as a result of the deemed repatriation of foreign earnings.
Also on December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of US GAAP in situations where 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 SAB 118, we have determined that the $25.1 million of deferred tax expense recorded in connection with the remeasurement of our net deferred tax assets and the $2.2 million of tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings are provisional amounts and are reasonable estimates at December 31, 2017. Additional work is necessary for a more detailed analysis of our deferred tax assets and liabilities and our historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense during 2018 when the analysis is complete.
Because of the deemed repatriation discussed above, all of our estimated foreign earnings have been subjected to U.S. federal income tax. Under the Tax Reform Act, the U.S. is moving away from a worldwide tax system and closer to a territorial tax system for foreign corporation earnings to the extent those earnings are neither Subpart F income, nor subject to a new minimum tax called the global intangible low-taxed income (“GILTI”). Foreign earnings generated after December 31, 2017, that are distributed to RealPage, Inc. as a dividend would receive a 100% dividends received deduction for federal income tax purposes, provided the Subpart F income and GILTI rules do not apply.
We periodically evaluate the realizability of our deferred tax assets. If we determine that it is more likely than not that all or a portion of such assets are not realizable, we provide a valuation allowance against the assets. The determination of the level of valuation allowance, if any, required at any time is based on a forecast of future taxable income that includes many judgments and assumptions. Accordingly, it is at least reasonably possible that future changes in one or more assumptions may lead to a change in judgment regarding the level of valuation allowance required in future periods. We had no valuation allowance at December 31, 2016. In 2017, we recognized a $0.3 million valuation allowance against our state NOLs in connection with the adoption of ASU 2016-09, as discussed above, and recorded an additional valuation allowance of $0.2 million against the NOLs of one of our foreign subsidiaries.
Our tax-effected federal, state, and international NOL carryforwards of $36.2 million, $3.9 million, and $0.2 million, respectively, and our combined federal and state tax credits of $1.8 million comprise a major component of our deferred tax assets. If not used, the underlying gross federal NOLs totaling $172.5 million will begin to expire in 2024 and the underlying state NOLs totaling $60.2 million will begin to expire in 2018, with approximately $19.1 million expiring in the next five years. Approximately $0.1 million of our credits expire in 2026, and the balance has no expiration date. Approximately $1.3 million of our tax credits will be fully realizable by 2021.
Net operating losses that we have generated are not currently subject to the Section 382 limitation; however, $30.4 million of net operating losses generated by our subsidiaries prior to our acquisition of them are subject to the Section 382 limitation. The limitation on these pre-acquisition net operating loss carryforwards will fully expire in 2035. A cumulative change in ownership among material shareholders, as defined in Section 382 of the Internal Revenue Code, during a three year period also may limit utilization of the federal net operating loss carryforwards.
As a result of our adoption of ASU 2016-09, we began to account for all excess tax benefits and deficits arising from current period stock transactions as part of our income tax provision effective January 1, 2017. During the year ended December 31, 2017, our tax provision was reduced by approximately $19.1 million as a result of excess stock compensation deductions from the vesting of restricted stock and the exercise of stock options during the year. Prior to the adoption of ASU 2016-09, we used the “with-and-without” method, as described in ASC 740, for purposes of determining when excess tax benefits had been realized. In 2016 and 2015, we recognized excess stock compensation benefits from NOLs of $3.1 million and $0.4 million, respectively, and these benefits were recognized as additions to paid-in capital and, thus, did not benefit our tax provision for those years.
Our subsidiary in Hyderabad, India benefited from a tax holiday granted under the Software Technology Parks of India program that began upon commencement of business operations in 2008 and continued through March 31, 2011. During this holiday period, we were required to pay a minimum alternative tax which was available to reduce our post-holiday tax liability. Effective July 8, 2013, this subsidiary began to benefit from a tax holiday under the Special Economic Zone program. This benefit was initially granted for a five years period and applies to a portion of our operations in this location. The expiration of this tax holiday will increase our effective income tax rate. As a result of this tax holiday, the Company realized tax savings of $0.4 million, $0.2 million, and $0.4 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Our subsidiary in Manila, Philippines has benefited from Philippines income tax holiday incentives pursuant to registration with the Philippine Economic Zone Authority (“PEZA”). We have four PEZA projects that have their own income tax holiday. The tax holiday of one of the projects expired on November 30, 2016. The remaining projects, if not renewed, will expire in 2018 and 2019. Tax savings realized under the Philippine tax holiday incentives were $0.2 million, $0.4 million, and $0.3 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Uncertain Tax Positions
At December 31, 2017 and 2016, we had no unrecognized tax benefits. Our policy is to include interest and penalties related to unrecognized income tax benefits in income tax expense, and as of December 31, 2017 and 2016, there were no accrued interest and penalties.
We file consolidated and separate tax returns in the U.S. federal jurisdiction and five foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations for years before 2014 and are no longer subject to state and local income tax examinations by tax authorities for years before 2013; however, net operating losses from all years continue to be subject to examinations and adjustments for at least three years following the year in which the attributes are used.
Our subsidiary, RealPage India Private Limited (“RealPage India”), is currently undergoing an income tax examination for the fiscal years beginning April 1, 2011, April 1, 2012, and April 1, 2013. The India income tax authorities have assessed RealPage India additional tax and interest of $0.9 million as a result of these examinations. We believe the assessments are incorrect and have appealed the decisions to the India Commissioner of Income Tax. RealPage India is also under audit for the financial year beginning April 1, 2014, but no assessment has been made at this time.
In July 2015, the Company filed amended 2012 and 2013 income tax returns for selected states to correct certain items that were improperly deducted, as determined by the Company subsequent to the initial filings. The primary effect of the amended returns was an immaterial increase in our current state income tax liability and a reduction of our state net operating loss deferred tax asset, net of federal benefit, of approximately $0.6 million.
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