|12 Months Ended|
Dec. 31, 2018
|Income Tax Disclosure [Abstract]|
Prior year amounts have been restated to reflect the correction of an error discussed in Note 3, “Restatement of Previously Issued Consolidated Financial Statements.”
The U.S. Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017. The Tax Act makes broad complex changes to the U.S. tax code including, but not limited to, reduction of the U.S. federal corporate tax rate from 35% to 21%, requiring reversing U.S. federal non-NOL deferred tax assets to become an NOL carryforward with an indefinite carryforward period, requiring companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creating new taxes on certain foreign sourced earnings and additional limitations on the deductibility of interest.
The SEC issued Staff Accounting Bulletin No. 118 (SAB 118) in December, 2017, to provide guidance on accounting for the effects of the Tax Act. SAB 118 provides for a measurement period of up to one year from the Tax Act enactment date for companies to complete their assessment of and accounting for those effects of the Tax Act. Under SAB 118, a company must first reflect the income tax effects of the Tax Act for which the accounting is complete in the period of the date of enactment. To the extent the accounting for other income tax effects is incomplete, but a reasonable estimate can be determined, companies must record a provisional estimate to be included in their financial statements. The measurement period ended during the fourth quarter of 2018 and we completed our accounting for the effects of the Tax Act and did not make material adjustments to the amounts recorded in 2018. However, we did adjust for the restatement for the income tax accounting errors in 2017 as described in Note 3, “Restatement of Previously Issued Consolidated Financial Statements.”
In 2017 (as restated), the Company recorded tax benefits related to the enactment-date effects of the Tax Act that included adjusting deferred tax assets and liabilities for the change in tax rates of $3.2 million and recognizing the effects of U.S. federal non-NOL deferred tax assets that convert to indefinite lived thereby allowing for indefinite lived U.S. federal deferred tax liabilities available to use as a source of future taxable income of $3.2 million. These enactment-date changes resulted in the Company’s negative effective tax rate in 2017 of (289)%.
For the period ending December 31, 2017 the Company had no liabilities associated with the one-time tax on accumulated foreign earnings provision of the Tax Act due to the accumulated net loss position of the foreign subsidiary.
Beginning in 2018, the Tax Act provides a 100% deduction for dividends received from 10-percent owned foreign corporations by U.S. corporate shareholders, subject to a one-year holding period. Although dividend income is now exempt from U.S. federal tax in the hands of the U.S. corporate shareholders, companies must still apply the guidance of ASC 740-30-25-18 to account for the tax consequences of outside basis differences and other tax impacts of their investments in non-U.S. subsidiaries. Upon completion of the Company’s analysis it was determined that the recording of a deferred tax liability on the outside basis difference of the foreign subsidiary was not required as of December 31, 2018 due to the existence of accumulated losses. The Company has asserted that it will permanently reinvest any future earnings from the foreign subsidiary back into its operations.
The Act subjects a US shareholder to tax on GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income (GILTI), states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company has elected to account for GILTI in the year the tax is incurred. The Company has determined that it has no tax expense related to GILTI in 2018.
The Tax Act allows for the indefinite carryforward of NOL arising in a taxable year ending after December 31, 2017, which would be considered an indefinite lived asset. The amendments limit the future usage of such NOL deductions to 80 percent of taxable income in a single year, and disallow the carryback of NOLs to prior years with taxable income. The Company did not generate any NOL in the tax year ended December 31, 2018.
As of December 31, 2018, the Company had existing NOL carryforwards arising from tax years prior to 2018 for U.S. federal income tax purposes of $33.8 million, which are available to offset future taxable income, if any, expiring in 2021 through 2037. Utilization of U.S. net operating losses for tax years ending on or before December 31, 2017 is subject to substantial annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.
At December 31, 2018, the Company had net deferred tax assets before valuation allowance of $34.0 million. The deferred tax assets are primarily composed of federal, state and foreign tax NOL carryforwards. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a valuation allowance has been established to offset certain of its net deferred tax assets. Additionally, the future utilization of the Company’s NOL carryforwards to offset future taxable income is subject to a substantial annual limitation as a result of IRC Section 382 changes that have occurred. Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance.
The Company has indefinite-lived intangible assets consisting of trademarks and goodwill. These intangible assets are not amortized for financial reporting purposes. However, these assets are tax deductible, and therefore amortized over 15 years for tax purposes. As such, deferred income tax expense and a deferred tax liability arise as a result of the tax-deductibility of these assets. The resulting deferred tax liability, which is expected to continue to increase over time, will have an indefinite life, resulting in what is referred to as a “naked tax credit.” This deferred tax liability could remain on the Company’s balance sheet permanently unless there is an impairment of the related assets (for financial reporting purposes), or the business to which those assets relate were to be disposed of. Due to the fact that the aforementioned deferred tax liability could have an indefinite life, these U.S. federal deferred tax liabilities are being utilized as a future source of taxable income against its U.S. federal non-NOL deferred tax assets that will reverse into net operating losses with an unlimited carryforward period, as allowed by the Tax Act.
The Company has also evaluated its income tax positions under FASB ASC 740-10 as of December 31, 2018 and the Company believes that it has no material uncertain tax positions and therefore has no uncertain tax position reserves and does not expect to provide for any such reserves. The Company does not believe that the unrecognized tax benefits will change within 12 months of this reporting date. It is the Company’s policy that any assessed penalties and interest on uncertain tax positions would be charged to income tax expense.
The Company files a consolidated federal income tax return for its U.S. entities, along with returns for its subsidiaries, which are filed with various state, local and foreign jurisdictions.
Epsilor-EFL’s tax rate was 24% for 2018, 24% for 2017 and 25% for 2016. Beginning in 2018, dividends paid from the profits of Epsilor-EFL are no longer subject to tax in the hands of their recipient. Management has indicated that it has no intention of declaring a dividend, and that any future earnings from the operations of Epsilor-EFL will continue to be permanently reinvested into those operations. Due to these assertions, the Company has not recorded a deferred tax liability on the outside basis difference of its foreign subsidiary as of December 31, 2018.
The Israeli government has established certain development zones so as to incentivize business development and export activities. Companies that reside in this zone and meet certain criteria are subject to a favorable tax rates. Epsilor-EFL is located in an approved development zone, however, currently does not meet the criteria established by the government to obtain the tax incentives.
As of December 31, 2018, the Company has tax loss carryforwards, generated by the predecessor of Epsilor-EFL, of $90.1 million, which is available indefinitely to offset future taxable income. Due to the 2009 merger of EFL-Epsilor, the utilization of the tax loss carryforward is subject to annual limitations.
Deferred income taxes reflect tax credit carryforwards and the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the bases of the assets and liabilities used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows:
The Company provided valuation allowances for the deferred tax assets resulting from tax loss carryforwards and foreign temporary differences. At present, management currently believes that it is more likely than not that the deferred tax assets related to the operating loss carryforwards and foreign temporary differences will not be realized. However, as a result of the Tax Act legislation, the Company recorded a partial release of the valuation allowance associated with certain U.S. federal non-NOL deferred tax assets. For the year ended December 31, 2017, the Company recorded a valuation allowance release of $3.2 million.
f.A reconciliation between the theoretical tax expense, assuming all income is taxed at the U.S. federal statutory tax rate applicable to income of the Company, and the actual tax expense as reported in the Statements of Operations and Comprehensive Income is as follows:
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