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Income Taxes | 12 Months Ended
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Dec. 31, 2018
Income Taxes |
| 7. | Income Taxes
The components of income from operations before income taxes are as follows:
|  | For the Years Ended December 31, |
|  | 2018 |  |  | 2017 |  |  | 2016 |
|  | (Amounts in thousands) |
Domestic |  | $ | (73 | ) |  | $ | (6,709 | ) |  | $ | (4,882 | )
Foreign |  |  | 21,509 |  |  |  | 13,957 |  |  |  | 16,574 |
Income from operations before income taxes |  | $ | 21,436 |  |  | $ | 7,248 |  |  | $ | 11,692 |
The components of the income tax provision (benefit) from operations are as follows:
|  | For the Years Ended December 31, |
|  | 2018 |  |  | 2017 |  |  | 2016 |
|  | (Amounts in thousands) |
Current and deferred components of the tax provision (benefit) from operations: |  |  |  |  |  |  |  |  |  |  |  |
Current |  | $ | 4,354 |  |  | $ | 3,624 |  |  | $ | 4,077 |
Deferred |  |  | 465 |  |  |  | (24,729 | ) |  |  | (4,066 | )
Total |  | $ | 4,819 |  |  | $ | (21,105 | ) |  | $ | 11 |
Jurisdictional components of the tax provision (benefit) from operations: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | (393 | ) |  | $ | (24,012 | ) |  | $ | (3,809 | )
State |  |  | 718 |  |  |  | (438 | ) |  |  | (207 | )
Foreign |  |  | 4,494 |  |  |  | 3,345 |  |  |  | 4,027 |
Total |  | $ | 4,819 |  |  | $ | (21,105 | ) |  | $ | 11 |
During 2018, the Company utilized its remaining U.S. net operating loss carryforwards of $19.5 million. At December 31, 2018, the Company had federal business tax credit carryforwards of $2.9 million and state business tax credit carryforwards of $0.4 million available to reduce future domestic income taxes, if any. The business tax credits carryforwards will expire at various dates through December 2038. The net operating loss and business tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may be limited in the event of certain changes in the ownership interest of significant stockholders. The components of deferred income taxes are as follows:
|  | December 31, |
|  | 2018 |  |  | 2017 |
|  | (Amounts in thousands) |
Deferred tax assets: |  |  |  |  |  |  |  |
Temporary timing differences: |  |  |  |  |  |  |  |
Stock-based compensation expense |  | $ | 2,874 |  |  | $ | 1,662 |
Contingent consideration |  |  | 2,263 |  |  |  | 2,196 |
Other |  |  | 2,632 |  |  |  | 1,704 |
Total temporary timing differences |  |  | 7,769 |  |  |  | 5,562 |
Net operating loss carryforwards |  |  | — |  |  |  | 4,361 |
Tax business credits carryforwards |  |  | 2,004 |  |  |  | 1,265 |
Total deferred tax assets |  |  | 9,773 |  |  |  | 11,188 |
Less: Valuation allowance |  |  | (131 | ) |  |  | (6 | )
Net deferred tax assets |  |  | 9,642 |  |  |  | 11,182 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Goodwill |  |  | (1,076 | ) |  |  | (807 | )
Acquired intangible assets |  |  | (26,903 | ) |  |  | (32,359 | )
Conversion option on convertible notes |  |  | (2,394 | ) |  |  | (3,183 | )
Total deferred tax liabilities |  |  | (30,373 | ) |  |  | (36,349 | )
Total net deferred tax liabilities |  | $ | (20,731 | ) |  | $ | (25,167 | )
The net change in the total valuation allowance for the year ended December 31, 2018 was an increase of $0.1 million. The net change in the total valuation allowance for the year ended December 31, 2017 was a decrease of $10.0 million which included the changes below. During the first quarter of 2017 the Company adopted ASU 2016-09. ASU 2016-09 states that previously unrecognized excess tax benefits related to stock-based compensation should be recognized on a modified retrospective basis. As such, the Company increased its U.S. federal and state net operating loss carryovers by $5.1 million as of January 1, 2017 for previously unrecognized stock-based compensation excess tax benefits outstanding as of the beginning of the period. Because the Company maintained a full valuation allowance on its U.S. deferred tax assets at that date, the Company recorded a corresponding increase to the valuation allowance as of January 1, 2017. During the second quarter of 2017, the Company agreed to sell certain intellectual property to Repligen Sweden AB that allowed for the Company to utilize certain of its U.S. deferred tax assets. Accordingly, the Company reduced its valuation allowance on its U.S. deferred tax assets by $9.2 million. Additionally, in conjunction with the Spectrum Acquisition, the Company determined that its U.S. deferred tax assets were more likely than not to be realized after considering deferred tax liabilities related to the acquired intangible assets. Accordingly, the Company reduced its valuation allowance on its U.S. deferred tax assets by $5.9 million. The valuation allowance decreased by $8.5 million for the year ended December 31, 2016. As of December 31, 2018, the Company believes that realization of its deferred tax assets related to capital loss carryovers and certain foreign tax credits are not more likely than not, and the Company continues to maintain its valuation allowance against those U.S. deferred tax assets. The reconciliation of the federal statutory rate to the effective income tax rate for the years ended December 31, 2018, 2017 and 2016 is as follows:
|  | For the Years Ended December 31, |
|  | 2018 |  |  | 2017 |  |  | 2016 |
|  | Amount |  |  | % |  |  | Amount |  |  | % |  |  | Amount |  |  | % |
|  | (Amounts in thousands, except percentages) |
Income before income taxes |  | $ | 21,436 |  |  |  |  |  |  | $ | 7,248 |  |  |  |  |  |  | $ | 11,692 |  |  |  |  |
Expected tax at statutory rate |  |  | 4,502 |  |  |  | 21.0 | % |  |  | 2,537 |  |  |  | 35.0 | % |  |  | 3,975 |  |  |  | 34.0 | %
Adjustments due to: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Difference between U.S. and foreign tax |  |  | 345 |  |  |  | 1.6 | % |  |  | (1,797 | ) |  |  | (24.8 | %) |  |  | (2,031 | ) |  |  | (17.4 | %)
State income and franchise tax |  |  | (146 | ) |  |  | (0.7 | %) |  |  | (307 | ) |  |  | (4.2 | %) |  |  | (326 | ) |  |  | (2.8 | %)
Business tax credits |  |  | (1,523 | ) |  |  | (7.1 | %) |  |  | (708 | ) |  |  | (9.8 | %) |  |  | (236 | ) |  |  | (2.0 | %)
Permanent differences: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Stock-based compensation expense |  |  | (1,213 | ) |  |  | (5.7 | %) |  |  | (946 | ) |  |  | (13.1 | %) |  |  | 31 |  |  |  | 0.3 | %
Transaction costs |  |  | — |  |  |  | 0.0 | % |  |  | 1,232 |  |  |  | 17.0 | % |  |  | 156 |  |  |  | 1.3 | %
U.S. taxation of foreign earnings |  |  | 2,190 |  |  |  | 10.2 | % |  |  | — |  |  |  | 0.0 | % |  |  | — |  |  |  | 0.0 | %
Executive compensation |  |  | 367 |  |  |  | 1.7 | % |  |  | 265 |  |  |  | 3.7 | % |  |  | — |  |  |  | 0.0 | %
Other |  |  | 97 |  |  |  | 0.5 | % |  |  | 205 |  |  |  | 2.8 | % |  |  | 380 |  |  |  | 3.3 | %
Change in U.S. federal tax rates |  |  | — |  |  |  | 0.0 | % |  |  | (12,839 | ) |  |  | (177.1 | %) |  |  | — |  |  |  | 0.0 | %
Change in U.S. state tax rates |  |  | 748 |  |  |  | 3.5 | % |  |  | (151 | ) |  |  | (2.1 | %) |  |  | — |  |  |  | 0.0 | %
Change in Netherlands tax rate |  |  | (388 | ) |  |  | (1.8 | %) |  |  | — |  |  |  | 0.0 | % |  |  | — |  |  |  | 0.0 | %
Transition tax |  |  | (1,338 | ) |  |  | (6.2 | %) |  |  | 3,266 |  |  |  | 45.1 | % |  |  | — |  |  |  | 0.0 | %
Uncertain tax provisions |  |  | 1,021 |  |  |  | 4.8 | % |  |  | 241 |  |  |  | 3.3 | % |  |  | — |  |  |  | 0.0 | %
Change in valuation allowance |  |  | 125 |  |  |  | 0.6 | % |  |  | (12,164 | ) |  |  | (167.8 | %) |  |  | (1,981 | ) |  |  | (16.9 | %)
Return to provision adjustments |  |  | 33 |  |  |  | 0.2 | % |  |  | (161 | ) |  |  | (2.2 | %) |  |  | — |  |  |  | 0.0 | %
Other |  |  | (1 | ) |  |  | (0.1 | %) |  |  | 222 |  |  |  | 3.0 |  |  |  | 43 |  |  |  | 0.4 | %
Income tax provision (benefit) |  | $ | 4,819 |  |  |  | 22.5 | % |  | $ | (21,105 | ) |  |  | (291.2 | %) |  | $ | 11 |  |  |  | 0.1 | %
The Company’s tax returns are subject to examination by federal, state and international taxing authorities for the following periods:
Jurisdiction |  | Fiscal Years Subject to Examination |
United States – federal and state |  |  | 2015-2018 |
Sweden |  |  | 2012-2018 |
Germany |  |  | 2017-2018 |
Netherlands |  |  | 2012-2018 |
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:
|  | For the Years Ended December 31, |
|  | 2018 |  |  | 2017 |
|  | (Amounts in thousands) |
Balance of gross unrecognized tax benefits, beginning of period |  | $ | 1,806 |  |  | $ | 1,407 |
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in the current period |  |  | 1,062 |  |  |  | 199 |
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in the prior period |  |  | — |  |  |  | 679 |
Gross amounts of decrease due to release |  |  | (16 | ) |  |  | (479 | )
Balance of gross unrecognized tax benefits, end of period |  | $ | 2,852 |  |  | $ | 1,806 |
Included in the balance of unrecognized tax benefits as of December 31, 2018 are $2.9 million of tax benefits that, if recognized, would affect the effective tax rate. As of December 31, 2018, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $72.4 million. Because $58.0 million of such earnings have previously been subject to the one-time transition tax on foreign earnings required by the 2017 Tax Act, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign and state taxes. At December 31, 2018, we have not provided for taxes on outside basis differences of our foreign subsidiaries, as we have the ability and intent to indefinitely reinvest the undistributed earnings of our foreign subsidiaries, and there are no needs for such earnings in the United States that would contradict our plan to indefinitely reinvest. ASU 2016-16,“Intra-Entity Transfers of Assets Other Than Inventory,” requires the income tax consequences of intra-entity transfers of assets other than inventory to be recognized when the intra-entity transfer occurs rather than deferring recognition of income tax consequences until the transfer was made with an outside party. The Company adopted the provisions of this ASU in the first quarter of 2018. The adoption resulted in a decrease of $5.7 million to other assets, a decrease of $5.0 million to deferred tax assets and a decrease of $0.7 million to accumulated deficit at January 1, 2018. On December 22, 2017, President Trump signed into law H.R. 1/Public Law No. 115-97, the tax legislation commonly known as the Tax Cuts and Jobs Act (the “2017 Tax Act”). The Act made significant changes to federal tax law, including, but not limited to, a reduction in the federal income tax rate from 35% to 21%, taxation of certain global intangible low-taxed income, allowing for immediate expensing of qualified assets, stricter limits on deductions for interest and certain executive compensation, and a one-time transition tax on previously deferred earnings of certain foreign subsidiaries. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when 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 H.R.1. The Company recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. During 2018, final adjustments noted below have been made to the provisional amounts recorded during 2017, and the Company has now completed its accounting for various tax impacts of the Act. The Act lowered the Company’s U.S. statutory federal tax rate from 35% to 21% effective January 1, 2018. The Company recorded a tax benefit of $12.8 million in the year ended December 31, 2017 for the reduction in its US deferred tax assets and liabilities resulting from the rate change. The accounting for this item is complete and no adjustments were made to this amount during 2018. The Act included a one-time deemed repatriation transition tax whereby entities that are shareholders of a specified foreign corporation must include in gross income the undistributed and previously untaxed post-1986 earnings and profits of the specified foreign corporation. Our provisional amount recorded at December 31, 2017 increased our tax provision by $3.3 million. As of December 31, 2018, the accounting for this item is complete. For the three months ended December 31, 2018, the Company recorded a tax benefit of $1.3 million, as a result of refining our calculations of post-1986 earnings and profits for our foreign subsidiaries. The Company is subject to a territorial tax system under the Act, in which the Company is required to provide for tax on Global Intangible Low-Taxed Income (“GILTI”) earned by certain foreign subsidiaries. The Company has adopted an accounting policy to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense.

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- Definition 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. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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