Income Taxes

Each reporting period, we estimate the likelihood that we will be able to recover our deferred tax assets, which represent timing differences in the recognition of revenue and certain tax deductions for accounting and tax purposes. The realization of deferred tax assets is dependent, in part, upon future taxable income. In assessing the need for a valuation allowance, we consider all available evidence, including our historical profitability and projections of future taxable income. If, based on the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, we record a valuation allowance. Such valuation allowance is maintained on our deferred tax assets until sufficient positive evidence exists to support its reversal in future periods. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Significant judgment is required to determine if, and the extent to which, valuation allowances should be recorded against deferred tax assets.

During the three months ended March 31, 2016, there were several pieces of negative evidence that contributed to our conclusion that a valuation allowance was appropriate against all deferred tax assets that rely upon future taxable income for their realization. As a result of our assessment, we recorded a full valuation allowance during the three months ended March 31, 2016. The amount of the deferred tax assets considered realizable, however, could be adjusted in future periods if estimates of future taxable income during the carryforward period are increased, if objective negative evidence in the form of cumulative losses is no longer present and if additional weight may be given to subjective evidence such as our projections for growth. We continue to have a full valuation allowance as of September 30, 2018 and will continue to evaluate our valuation allowance in future periods for any change in circumstances that causes a change in judgment about the realizability of the deferred tax assets.

Tax Cuts and Jobs Act

On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was enacted. The Act makes significant changes to U.S. tax laws, including the following that are expected to be impactful to us: lower corporate tax rates; limitations on the amount of net operating losses that can be used to offset income beginning with our fiscal year ending September 30, 2019; the elimination of net operating loss carrybacks and the allowance of indefinite loss carryforwards; and the immediate expensing of short-lived capital investment, such as machinery and equipment.

As of December 31, 2017, we have adjusted our deferred tax liabilities and deferred tax assets, and the corresponding valuation allowance, for the expected impact of the provisions of the Act. As our net operating losses can now be carried forward indefinitely, our related deferred tax asset can be offset with the deferred tax liability related to goodwill, before a full valuation allowance was applied to the deferred tax asset. As a result, we released approximately $2.8 million of the existing valuation allowance during the three months ended December 31, 2017.

Section 382 Change in Ownership

Under Section 382 of the Internal Revenue Code (IRC), for income tax purposes only, we underwent a change in ownership as a result of a preferred stock issuance in June 2016. Under the IRC, a change in ownership occurs when a five percent shareholder, as measured by ownership value, increases their ownership in a loss corporation by more than 50 percentage points during the defined testing period; both common and preferred stock are included in the determination of ownership value. Since the purchaser of the preferred stock acquired ownership exceeding 50 percent of our total ownership value, this transaction qualified as a change in ownership under section 382 of the IRC only. Accordingly, certain deductions and losses will be subject to an annual Section 382 limitation. The limitation will affect the timing of when these deductions and losses can be used and may cause us to make income tax payments even if a pre-tax loss is recorded in future periods. The limitation may also cause the deductions and losses to expire unused.

The components of income tax expense (benefit) are as follows:



	Year Ended September 30,
	2018			2017		2016
Current expense (benefit)
United States federal	$	(125	)	$	4,153	$	(2,043	)
State	(78		)	1,244		285
Total current expense (benefit)	(203		)	5,397		(1,758		)
Deferred (benefit) expense
United States federal	(2,878		)	—		24,877
State	66			—		3,051
Total deferred (benefit) expense	(2,812		)	—		27,928
Total provision (benefit) for income taxes	$	(3,015	)	$	5,397	$	26,170

The income tax provision differs from the tax that would result from application of the blended statutory federal tax rate of 24.5% to pre-tax income for the year ended September 30, 2018 and 35.0% to pre-tax income for the years ended September 30, 2017 and September 30, 2016. The reasons for the differences are as follows:



	Year Ended September 30,
	2018			2017			2016
Income tax expense at statutory rate	$	(8,746	)	$	(956	)	$	(7,534	)
State income taxes, net of federal tax benefit	(12		)	302			(531		)
Change in federal statutory rate	12,645			—			51
Increase (decrease) in valuation allowance	(7,066		)	6,192			34,184
Other, net	164			(141		)	—
Total income tax expense (benefit)	$	(3,015	)	$	5,397		$	26,170

Beginning in December 2013, certain stock-based compensation awards granted to employees expired, which required a write-off of the related deferred tax asset through income tax expense as our pro forma windfall pool of available excess tax benefits was no longer sufficient to absorb the shortfall. As a result of the full valuation allowance recorded on our deferred tax assets during the three months ended March 31, 2016, any write-offs of deferred tax assets related to stock-based compensation will have no impact on income tax expense. In the year ended September 30, 2016, we wrote off $1.8 million of deferred tax assets related to stock-based compensation and reduced the corresponding valuation allowance by the same amount.

The components of the deferred tax assets (liabilities) recorded in the accompanying consolidated balance sheets were as follows:



	September 30,
	2018			2017
Gross deferred tax assets:
Deferred compensation	$	1,253		$	1,976
Reserves and accruals	4,794			5,017
Accrued tool sets	638			1,111
Deferred revenue	9,185			27,056
Deferred rent liability	189			455
Net operating losses and tax credit carryforwards	5,389			416
Depreciation and amortization of property and equipment	3,740			3,151
Charitable contribution carryovers	804			665
Deductions limited by Section 382	700			943
Valuation allowance	(23,112		)	(38,407		)
Total gross deferred tax assets	3,580			2,383
Gross deferred tax liabilities:
Amortization of goodwill and intangibles	(2,056		)	(3,141		)
Prepaid and other expenses deductible for tax	(1,853		)	(2,383		)
Total deferred tax liabilities, gross	(3,909		)	(5,524		)
Net deferred tax liabilities	$	(329	)	$	(3,141	)

The following table summarizes the activity for the valuation allowance for the year ended September 30:



	Balance at Beginning of Period		Additions (Reductions) to Income Tax Expense			Write-offs ⁽¹⁾			Balance at End of Period
2018	$	38,407	$	(5,555	)	$	(9,740	)	$	23,112
2017	$	32,828	$	6,192		$	(613	)	$	38,407
2016	$	401	$	34,184		$	(1,757	)	$	32,828

⁽¹⁾ Of this total, approximately $9.6 million relates to our adoption of ASC 606 as of October 1, 2017.

As of September 30, 2018, we had approximately $6.9 million in deferred tax assets related to charitable contribution carryforwards, deductions limited by Section 382, as well as net operating loss and credit carryforwards. These attributes will expire in the years 2019 through 2039.

We file income tax returns for federal purposes and in many states. Our tax filings remain subject to examination by applicable tax authorities for a certain length of time, generally three to four years, following the tax year to which these filings relate.