Income Taxes

The Tax Cuts and Jobs Act, or the Tax Act, was signed into law on December 22, 2017. This legislation made significant changes in U.S. tax law, including a reduction in the corporate tax rate, changes to net operating loss carryforwards and carrybacks and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate income tax rate from 35% to 21%. As a result of the enacted Tax Act, we were required to revalue deferred tax assets and liabilities at the rate in effect when the deferred tax balances are scheduled to reverse. This revaluation resulted in an additional $8.8 million of income tax expense and a corresponding reduction in the deferred tax asset which was recorded during the year ended December 31, 2017.

Additionally, on December 22, 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, or SAB 118, to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. Specifically, SAB 118 provides a measurement period for companies to evaluate the impacts of the Tax Act on their financial statements. We completed the accounting for the tax effects of the Tax Act during the three months ended September 30, 2018 and decreased our provisional estimate from $8.8 million to $8.7 million.

The components of our income tax expense are as follows (in thousands):



	Year Ended December 31,
	2018			2017			2016
Current
Federal	$	741		$	584		$	7,227
State	653			(88		)	1,829
Foreign	263			6			—
Total Current	1,657			502			9,056
Deferred
Federal	(8,821		)	3,837			(4,283		)
State	(2,643		)	(1,368		)	(546		)
Foreign	(18		)	19			—
Total Deferred	(11,482		)	2,488			(4,829		)
Total	$	(9,825	)	$	2,990		$	4,227

The difference between the income tax expense at the federal statutory rate and income tax expense in the consolidated statements of operations is as follows:



	Year Ended December 31,
	2018		2017		2016
Federal statutory rate	21.0	%	35.0	%	35.0	%
State income tax expense, net of federal benefits	(3.4	)	0.1		4.9
Nondeductible meals and entertainment	2.1		0.6		1.6
Nondeductible employee fringe benefits	1.3		—		—
Research and development tax credits	(48.7	)	(16.1	)	(10.8	)
Tax windfall benefits	(55.7	)	(36.5	)	—
Change in tax rate due to tax reform	—		27.8		—
Change in tax rate	(1.4	)	(0.6	)	(0.1	)
Other	0.8		(1.0	)	(1.2	)
Effective rate	(84.0	)%	9.3	%	29.4	%

The components of our net deferred tax assets (liabilities) are as follows (in thousands):



	December 31,
	2018			2017
Deferred tax assets, non-current
Provision for doubtful accounts	$	576		$	714
Provision for notes receivable	829			—
Accrued expenses	9,588			2,362
Deferred revenue	2,226			2,455
Deferred rent	3,334			3,384
Stock-based compensation	6,064			3,613
Acquisition costs	3,092			3,310
Subsidiary unit compensation	138			1,413
Equity investments	119			116
Net operating losses	1,210			1,357
Tax credits	5,140			2,546
Intangible assets and prepaid patent licenses	758			156
Other	158			160
Total deferred tax assets, non-current	33,232			21,586
Deferred tax liabilities, non-current
Intangible assets and prepaid patent licenses	(12		)	(74		)
Depreciation	(3,393		)	(2,917		)
Sales commissions	(704		)	—
Contingent liability	(172		)	(171		)
Total deferred tax liabilities, non-current	(4,281		)	(3,162		)
Net deferred tax assets, non-current	$	28,951		$	18,424

A reconciliation of the beginning and ending amounts of unrecognized tax benefits (without related interest expense) is as follows (in thousands):



	Year Ended December 31,
	2018			2017			2016
Beginning balance	$	1,973		$	681		$	506
Additions based on tax positions of the current year	857			718			197
Additions based on tax positions of prior year	147			373			79
Additions resulting from acquisitions	—			277			—
Decreases due to lapse of applicable statute of limitations	(176		)	(76		)	—
Decreases related to settlements of prior year tax positions	—			—			(101		)
Ending balance	$	2,801		$	1,973		$	681

Our effective income tax rates were (84.0)%, 9.3% and 29.4% for the years ended December 31, 2018, 2017 and 2016, respectively. Our effective tax rates were below the statutory rate primarily due to the tax windfall benefits from employee stock-based payment transactions and research and development tax credits claimed, partially offset by the impact of non-deductible meal and entertainment expenses. For the year ended December 31, 2018, state taxes also contributed to an effective tax rate that was below the statutory rate.

We recognize a valuation allowance if, based on the weight of available evidence, both positive and negative, it is more likely than not that some portion, or all, of net deferred tax assets will not be realized. Based on our historical and expected future taxable earnings, we believe it is more likely than not that we will realize all of the benefit of the existing deferred tax assets as of December 31, 2018 and 2017. Accordingly, we have not recorded a valuation allowance as of December 31, 2018 and 2017.

We apply guidance for uncertainty in income taxes that requires the application of a more likely than not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, this guidance permits us to recognize a tax benefit measured at the largest amount of the tax benefit that, in our judgment, is more likely than not to be realized upon settlement. We recorded unrecognized tax benefits of $0.8 million, $1.0 million and $0.2 million for research and development tax credits claimed during the years ended December 31, 2018, 2017 and 2016, respectively. We also recorded an unrecognized tax benefit of $0.3 million within our Canadian subsidiary related to an existing net operating loss acquired as part of the Acquisition in 2017.

As of December 31, 2018 and 2017, we accrued $0.1 million and less than $0.1 million of total interest related to unrecognized tax benefits, respectively. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.

We are not aware of any events that make it reasonably possible that there would be a significant change in our unrecognized tax benefits over the next twelve months. Our cumulative liability for uncertain tax positions was $2.8 million and $2.0 million as of December 31, 2018 and 2017, respectively, and if recognized, would reduce our income tax expense and the effective tax rate.

We file income tax returns in the United States and Canada. We are no longer subject to U.S. income tax examinations for years prior to 2015, with the exception that operating loss carryforwards generated prior to 2015 may be subject to tax audit adjustment. We are generally no longer subject to state and local income tax examinations by tax authorities for years prior to 2015.

As of December 31, 2018, we had federal net operating loss carryforwards of $5.3 million, which are scheduled to begin to expire in 2030, As of December 31, 2018, we had state net operating loss carryforwards of $2.0 million, which are scheduled to begin to expire in 2027. As of December 31, 2018, we had federal research and development tax credit carryforwards of $4.3 million, which are scheduled to begin to expire in 2037. As of December 31, 2018, we had state research and development tax credit carryforwards of $3.2 million, which are scheduled to begin to expire in 2021.The federal net operating loss carryforward arose in connection with the 2013 acquisition of EnergyHub. Utilization of net operating loss carryforwards may be subject to annual limitations due to ownership change limitations as provided by the Internal Revenue Code of 1986, as amended.