Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

NOTE 10. Income Taxes

The Company’s geographical breakdown of income before income taxes is as follows:

	Year Ended December 31,
	2019		2018		2017
	(in thousands)
Domestic	$	72,124	$	50,010	$	34,914
Foreign	7,859		5,458		4,464
Income before income taxes	$	79,983	$	55,468	$	39,378

The provision for (benefit from) income taxes consists of the following:

	Year Ended December 31,
	2019			2018			2017
	(in thousands)
Current
Federal	$	(90	)	$	(90	)	$	22
State	646			62			23
Foreign	3,000			1,988			1,471
Total current provision	3,556			1,960			1,516
Deferred
Federal	7,085			(3,449		)	(1,650		)
State	447			21			(996		)
Foreign	(441		)	(368		)	68
Total deferred (benefit) provision	7,091			(3,796		)	(2,578		)
Total provision for (benefit from) provision for income taxes	$	10,647		$	(1,836	)	$	(1,062	)

The reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:

	Year Ended December 31,
	2019		2018		2017
Federal statutory rate	21.0	%	21.0	%	35.0	%
State taxes	1.5		(1.9	)	(2.1	)
Stock-based compensation	(7.2	)	(20.4	)	(58.1	)
Foreign source income	0.1		(0.2	)	(0.2	)
Change in valuation allowance	1.1		4.4		2.8
Federal rate adjustment (due to 2017 Tax Act)	—		—		26.4
Federal and state research and development credit	(3.7	)	(6.7	)	(5.3	)
Other	0.4		0.5		(1.2	)
Provision for (benefit from) income taxes	13.2	%	(3.3	)%	(2.7	)%

On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted into law. The new legislation contains several key tax provisions that impact the Company, including the reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018. The new legislation also includes a variety of other changes, such as a one-time repatriation tax on accumulated foreign earnings (transition tax), acceleration of business asset expensing, and reduction in the amount of executive pay that could qualify as a tax deduction, among others. The Company recognized a provisional income tax expense of $10.4 million in the fourth quarter of 2017, from the re-measurement of certain deferred tax assets and liabilities as a result of the reduction of the federal tax rate, which was included as a component of the income tax provision on its consolidated statement of income. The Company completed its analysis of the impacts of the 2017 Tax Act in the fourth quarter of 2018 with no material change to its provisional estimate.

Deferred Income Taxes

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the Company’s deferred tax assets and liabilities are as follows:

	December 31,
	2019			2018
	(in thousands)
Deferred tax assets
Net operating loss carryforwards	$	1,325		$	11,250
Research and development credit carryforwards	20,182			16,901
Foreign tax credit carryforwards	2,586			2,209
Accrued liabilities	1,109			4,180
Deferred revenues	4,843			4,200
Lease Liability	13,187			—
Intangible assets	327			—
Stock-based compensation	5,942			6,975
Other	158			174
Gross deferred tax assets	49,659			45,889
Valuation allowance	(10,094		)	(9,100		)
Net deferred tax assets	39,565			36,789
Deferred tax liabilities
Fixed assets	(8,097		)	(8,160		)
ROU Asset	(10,496		)	—
Deferred commissions	(2,142		)	(1,458		)
Intangible assets	—			(784		)
Total deferred tax liabilities	(20,735		)	(10,402		)
Net deferred tax assets	$	18,830		$	26,387

The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods. The Company regularly assesses the ability to realize its deferred tax assets and establishes a valuation allowance if it is more-likely than-not that some portion, or all, of the deferred tax assets will not be realized. The Company weighs all available positive and negative evidence, including its earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Due to the weight of objectively verifiable negative evidence, it is more-likely-than-not that its California deferred tax assets will not be realized as of December 31, 2019. Additionally, due to a lack of sufficient future income of the appropriate character, certain U.S. federal and state deferred tax assets are not more-likely-than-not to be realized. Accordingly, the Company has recorded a valuation allowance of $10.1 million against such deferred tax assets. The valuation allowance increased by $1.0 million and $3.3 million during the years ended December 31, 2019 and 2018, respectively.

At December 31, 2019, the Company had federal and state net operating loss carryforwards of approximately $5.0 million and $2.1 million, respectively, available to reduce federal and state taxable income. Federal net operating losses do not expire but the net operating loss deduction is limited to 80% of taxable income. The state net operating losses begin to expire in 2030. Utilization of the Company’s net operating loss carryforwards may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss carryforwards before utilization. As of December 31, 2019, the Company had $14.6 million of federal and $13.2 million of state research and development credit carryforwards, respectively. Federal research and development credits begin to expire in 2022. State research and development credits do not expire. As of December 31, 2019, the Company had foreign tax credit carryforwards of $2.6 million which begin to expire in 2024.

The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands):

	Year Ended December 31,
		2019			2018			2017
Unrecognized tax benefits beginning balance		$	6,406		$	5,112		$	4,071
Gross increase for tax positions of prior years		—			279			66
Gross decrease for tax positions of prior years		(12		)	(227		)	—
Gross increase for tax positions of current year		1,384			1,399			1,101
Lapse of statute of limitations		—			(157		)	(126		)
Total unrecognized tax benefits		$	7,778		$	6,406		$	5,112

The unrecognized tax benefits, if recognized, would impact the income tax provision by $4.2 million, $3.5 million and $2.8 million as of December 31, 2019, 2018 and 2017, respectively. The remaining amount would be offset by the reversal of related deferred tax assets which are subject to a full valuation allowance. As of December 31, 2019, the Company does not believe that its estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months. The Company has elected to include interest and penalties as a component of income tax expense. The amounts were not material for 2019, 2018 and 2017.

The Company files income tax returns in the United States, including various state jurisdictions. The Company’s subsidiaries file tax returns in various foreign jurisdictions. The tax years 2001 through 2018 remain open to examination by the major taxing jurisdictions in which the Company is subject to tax. The Company is also currently subject to tax audits in various jurisdictions. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner inconsistent with its expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of resolution and/or closure of audits is not certain, the Company believes it is reasonably possible that its gross unrecognized tax benefits could increase or decrease in the next 12 months.

U.S. income tax has not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside the United States. A determination of the unrecognized deferred tax liability related to this basis difference is not practicable because of the complexities of the calculation.