Income Taxes

12 Months Ended

Dec. 31, 2019

Income taxes are accounted for under the asset and liability method. Under this method, deferred 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 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. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will 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 are expected to become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The Company includes interest accrued on the underpayment of income taxes in interest expense and penalties, if any, related to unrecognized tax benefits in general and administrative expenses. The Company recorded a valuation allowance against its U.S. deferred tax asset as it considered its cumulative loss in recent years as a significant piece of negative evidence. Since valuation allowances are evaluated on a jurisdiction by jurisdiction basis, we believe that the deferred tax assets related to LivePerson Australia, LivePerson UK, Kasamba Israel, LivePerson Japan and LivePerson LTD Israel are more likely than not to be realized as these jurisdictions have positive cumulative pre-tax book income after adjusting for permanent and onetime items. During the year ended December 31, 2019, there was an increase in the valuation recorded of $19.1 million.

Under Section 382 of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’), the Company’s use of its federal net operating loss (“NOL”) carryforwards may be limited if the Company experiences an ownership change, as defined in Section 382 of the Code. Such an annual limitation could result in the expiration of the NOL carryforwards before utilization. Corresponding provisions of state law may limit the Company’s ability to utilize NOL carryforwards for state tax purposes. As of December 31, 2019, the Company had approximately $203.5 million of federal NOL carryforwards available to offset future taxable income. Included in this amount is $5.1 million of federal NOL carryovers from the Company’s acquisition of Proficient. Approximately $41.2 million of these federal NOL carryforwards were generated in taxable years ending on or before December 31, 2017 and will expire in various years through 2037. Federal NOL carryforwards generated in taxable years ending after December 31, 2017, do not expire, but generally may only offset up to 80% of federal taxable income earned in a taxable year.

The domestic and foreign components of (loss) before provision for income taxes consist of the following (amounts in thousands):



	Year Ended December 31,
	2019			2018			2017
United States	$	(105,961	)	$	(38,078	)	$	(25,585	)
Israel	2,791			3,163			3,458
United Kingdom	5,377			3,690			2,087
Netherlands	(465		)	3,235			1,568
Australia	716			686			(1,979		)
Germany	3,854			2,900			2,424
Other ⁽¹⁾	462			230			337
	$	(93,226	)	$	(24,174	)	$	(17,690	)
⁽¹⁾ Includes Japan, Italy, Singapore, Canada, France, India and Spain

No additional provision has been made for U.S. income taxes on the undistributed earnings of its Israeli subsidiary, LivePerson Ltd. (formerly HumanClick Ltd.), as such earnings have been taxed in the U.S. and accumulated earnings of the Company’s other foreign subsidiaries are immaterial through December 31, 2019.

The provision for income taxes consists of the following (amounts in thousands):



	Year Ended December 31,
	2019			2018			2017
Current income taxes:
U.S. Federal	$	(452	)	$	(1,932	)	$	—
State and local	89			67			47
Foreign	4,415			3,032			2,852
Total current income taxes	4,052			1,167			2,899

Deferred income taxes:
U.S. Federal	126			(295		)	(1,289		)
State and local	135			(28		)	(1,144		)
Foreign	(1,468		)	14			35
Total deferred income taxes	(1,207		)	(309		)	(2,398		)
Total provision for income taxes	$	2,845		$	858		$	501

The difference between the total income taxes computed at the federal statutory rate and the provision for income taxes consists of the following:



	Year Ended December 31,
	2019		2018		2017
Federal statutory rate	21.00	%	21.00	%	34.00	%
State taxes, net of federal benefit	2.95	%	3.30	%	4.09	%
Non-deductible expenses – stock based compensation	1.82	%	4.73	%	(0.78	)%
Global Intangible Low Tax Income Inclusion	(2.29	)%	(7.99	)%	—	%
Non-deductible expenses – Other	(1.57	)%	(2.58	)%	(1.19	)%
Foreign taxes	(1.86	)%	(1.34	)%	(1.97	)%
Valuation allowance	(26.42	)%	(28.91	)%	26.12	%
Stock based compensation - excess tax benefit	6.18	%	6.10	%	—	%
Effect of new tax legislation	—	%	—	%	(56.84	)%
Other	(2.86	)%	2.09	%	(6.26	)%
Total provision	(3.05	)%	(3.60	)%	(2.83	)%

The effects of temporary differences and federal NOL carryforwards that give rise to significant portions of federal deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 are presented below (amounts in thousands):



	Year Ended December 31,
	2019			2018
Deferred tax assets:
Net operating loss carryforwards	$	49,423		$	18,083
Original Issue Discount	5,201			—
Interest	875			—
Operating lease liability	3,306			—
Accounts payable and accrued expenses	5,934			4,024
Non-cash compensation	4,195			9,597
Intangibles amortization	3,273			5,691
Allowance for doubtful accounts	419			315
Total deferred tax assets	72,626			37,710
Less valuation allowance	(48,451		)	(30,185		)
Deferred tax assets, net of valuation allowance	24,175			7,525
Deferred tax liabilities:
Property and equipment	(6,361		)	(3,736		)
Goodwill amortization and contingent earn-out adjustments	(3,430		)	(4,172		)
Convertible Notes Issuance	(11,055		)	—
Operating lease right of use asset	(2,504		)	—
Total deferred tax liabilities	(23,350		)	(7,908		)
Net deferred tax assets (liabilities)	$	825		$	(383	)

We have income tax NOL carryforwards related to federal and Australian income tax carryforwards of $203.5 million and $5.3 million respectively. The Australian NOLs can be carried forward indefinitely. $162.3 million of the federal NOLs can be carried forward indefinitely. $6.0 million of the federal NOLs will expire between 2023 and 2026, and $34.9 million will expire between 2036 and 2037.

ASC Topic 740-10 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with other provisions contained within this guidance. This topic prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized

upon ultimate audit settlement. The Company had unrecognized tax benefits of $2 million and $1.9 million as of December 31, 2019 and 2018, respectively. Accrued interest and penalties included in the Company's liability related to unrecognized tax benefits were immaterial at December 31, 2019 and 2018.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	Year Ended December 31,
	2019			2018
Unrecognized tax benefits balance at January 1	$	1,921		$	4,924
Gross increase for tax positions of prior years	—			—
Gross increase for tax positions of current years	584			405
Decrease due to expiration of statue	(452		)	(445		)
Decrease due to settlement	—			(2,963		)
Gross unrecognized tax benefits at December 31	$	2,053		$	1,921

The tax years subject to examination by major tax jurisdictions include the years 2015 and forward for U.S states and New York City, the years 2016 and forward for U.S. Federal, and the years 2015 and forward for certain foreign jurisdictions. The decrease of $0.5 million was related to expiration of the statute of limitations.

Tax Reform

The Tax Cuts and Jobs Act makes broad and complex changes to the U.S. federal tax laws that affect fiscal 2017, including, but not limited to requiring a one-time repatriation tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years (the ‘‘Repatriation Tax’’). The Tax Cuts and Jobs Act also establishes new tax laws that will affect 2018 and later years, including, but not limited to, a reduction of the U.S. federal corporate income tax rate from a maximum of 34% to a flat rate of 21%, a general elimination of U.S. federal income taxes on certain dividends from foreign subsidiaries and a new provision designed to tax global intangible low-taxed income (‘‘GILTI’’).

The legislation reduced the U.S. corporate tax rate from the current rate of 35% to 21% for tax years beginning after December 31, 2017. Under the Tax Cuts and Jobs Act, the Company’s $32.8 million in federal NOL carryforwards generated as of December 31, 2017 will continue to be carried forward for 20 years following their incurrence and are expected to be available to fully offset taxable income earned in future tax years. Federal net operating losses generated after 2017 will be carried forward indefinitely, but generally may only offset up to 80% of taxable income earned in a tax year. In the quarter ending December 31, 2017, the Company revalued its deferred tax assets and liabilities due to these changes, including (a) revaluing the Company’s federal net deferred tax assets before valuation allowance using the 21% tax rate, resulting in a decreased federal deferred tax provision of $10.1 million; (b) revaluing the Company’s federal valuation allowance using the 21% tax rate, including the impact of tax planning strategies, resulting in a federal deferred tax benefit to continuing operations of $12.6 million; (c) recognizing a federal deferred tax benefit of $2.0 million for 80% of indefinite lived deferred tax liabilities, which are anticipated to be available as a source of taxable income upon reversal of deferred tax assets that would also have indefinite lives; and (d) recognizing a $1.2 million state deferred tax provision unaffected by the changes in the Tax Cuts and Jobs Act. The new legislation requires the Company to pay federal income tax on the unremitted earnings of its foreign subsidiaries though December 31, 2017. Pursuant to SAB 118, the Company estimated the tax on unremitted earnings is zero due to an overall accumulated deficit in earnings and profits. As of the fourth quarter of 2018, the Company has finalized the preparation and analysis of the required information and has not changed from the estimate.

The Tax Cuts and Jobs Act creates a new requirement that certain income earned by a foreign subsidiary must be included in the federal taxable income of the U.S. shareholder. This income (called Global Intangible Low-Taxed Income, or GILTI) is defined as the excess of a foreign subsidiaries income over a nominal return on fixed assets. The Company expects to be subject to this inclusion in future years. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either accounting for the effects of the GILTI inclusion as a current period expense, when incurred, or factoring such amounts into the Company’s measurement of its deferred taxes. The Company has elected to treat the effects of this provision as a period cost, and therefore, has not considered the impacts of GILTI on its deferred tax liabilities at December 31, 2019.

The Company’s consolidated financial statements do not provide for any related tax liability on amounts that may be repatriated from foreign operations as the Company intends for these earnings to be indefinitely reinvested in operations outside the U.S. Accordingly, no deferred taxes have been provided for the basis difference in the foreign subsidiaries.