|12 Months Ended|
Dec. 31, 2017
|Income Taxes [Abstract]|
Note 8—Income Taxes
We recognize deferred tax assets and liabilities, at enacted income tax rates, based on the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. We include any effects of changes in income tax rates or tax laws in the provision for income taxes in the period of enactment. When it is more likely than not that a portion or all of a deferred tax asset will not be realized in the future, we provide a corresponding valuation allowance against the deferred tax asset. In the year ended December 31, 2015, we recorded a full valuation allowance against all net deferred tax assets because there was not sufficient evidence to conclude that we would more likely than not realize those assets prior to expiration. In the fourth quarter of 2016, we determined that valuation allowances against U.S. and U.K. (Elite Legacy Education UK Limited only) deferred taxes were no longer required. Release of these valuation allowances resulted in $2.4 million of tax benefit. The company assessed the weight of all available positive and negative evidence and determined it was more likely than not that future earnings will be sufficient to realize the deferred tax assets in the U.S. and U.K. (Elite Legacy Education UK Limited only). In arriving at the conclusion that we had achieved sustained profitability in the U.S. and U.K. (Elite Legacy Education UK Limited only), we considered the following positive evidence: we were in a cumulative three-year historical income position, we had income in 2016 and projections of book income for the years 2017-2020.
We have retained full valuation allowances of $4.7 million and 4.5 million against the deferred tax assets of our Australian, Canadian, U.K. (only Legacy Education Alliance International Limited), Hong Kong, and South Africa subsidiaries as of December 31, 2017 and December 31, 2016, respectively. The most significant negative factor that was considered in determining whether a valuation allowance was required is a cumulative recent history of losses in all jurisdictions for the entities mentioned above.
As of December 31, 2017 and 2016, we had approximately $0.0 million and $2.3 million of federal net operating loss carryforwards, approximately $22.8 million and $22.5 million of foreign net operating loss carryforwards, and approximately $6.0 million and $8.7 million of state net operating loss carryforwards, respectively. The foreign loss carryforwards begin to expire in 2027 and the state net operating loss carryforwards begin to expire in 2024.
Our sources of income (loss) and income tax provision (benefit) are as follows (in thousands):
During the years ended December 31, 2017 and 2016, we increased the valuation allowance by $0.2 million and decreased it by $2.7 million, respectively.
The difference between the tax provision at the statutory federal income tax rate and the tax provision attributable to income (loss) from continuing operations before income taxes is as follows (in thousands):
During the fourth quarter ended December 31, 2016, we determined that valuation allowances against U.S. and U.K. (Elite Legacy Education UK Limited only) deferred taxes were no longer required. Release of these valuation allowances resulted in $2.4 million of tax benefit, which decreased our effective tax rate by 83.1 %, that was offset by tax on current period book income and other permanent and timing differences resulting in an income tax benefit of $0.9 million for the year ended December 31, 2016.
We recorded an income tax expense of $2.0 million for the year ended December 31, 2017 from the tax on current period income and other permanent and timing differences.
Our effective tax rate was 31.6% for the year ended December 31, 2017. Our effective tax rate differed from the U.S. statutory corporate tax rate of 35% primarily because of the mix of pre-tax income or loss earned in certain jurisdictions, the change in our valuation allowance and the remeasurement of our deferred tax balances from the Tax Cuts and Job Act that was enacted on December 22, 2017.
Deferred income tax assets and liabilities reflect the net tax effects of (i) temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts for income tax purposes and (ii) operating loss carryforwards. The tax effects of significant components of our deferred tax assets and liabilities are as follows (in thousands):
Deferred tax expense related to the foreign currency translation adjustment for the years ended December 31, 2017 and 2016 was $(0.3) million and $0.7 million, respectively, and was fully offset by a corresponding increase at December 31, 2017 and a decrease at December 31, 2016 in the valuation allowance with the exception of $(0.2) million and $0.1 million for Elite Legacy Education UK Limited for the years ended December 31, 2017 and 2016, respectively, whose valuation allowance was released effective December 31, 2016. These amounts (except for Elite Legacy Education UK Limited), which net to zero, are reported in other comprehensive income. The deferred tax assets presented above for net operating losses and credits have been reduced by liabilities for unrecognized tax benefits.
The Company does not expect to repatriate earnings from its foreign subsidiaries because the cumulative earnings and profits of the foreign subsidiaries as of December 31, 2017 and 2016 are negative. Accordingly, no U.S. federal or state income taxes have been provided thereon.
The liability pertaining to uncertain tax positions was $1.6 million at December 31, 2017 and 2016. In accordance with GAAP, we recorded expense that increased the total liability pertaining to uncertain tax positions which was more than offset by a decrease in the total liability attributable to foreign currency fluctuations and tax rate adjustments. A significant portion of the liability pertaining to uncertain tax positions is recorded as a reduction of the value of net operating loss carryovers.
We include interest and penalties in the liability for uncertain tax positions. Accrued interest and penalties on uncertain tax positions were approximately $0.1 million at December 31, 2017 and 2016, and is included in other liabilities in the accompanying Consolidated Balance Sheets. If applicable, we recognize interest and penalties related to uncertain tax positions as tax expense.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:
The total liability for unrecognized tax benefits at December 31, 2017 and 2016, is netted against deferred tax assets related to net operating loss carryforwards in the Consolidated Balance Sheets. The total liability for unrecognized tax benefits at December 31, 2017 and 2016, are as follows:
We do not expect any significant changes to unrecognized tax benefits in the next year.
The Company estimates $1.2 million and $0.1 million, of the unrecognized tax benefits, if recognized, would impact the effective tax rate at December 31, 2017 and 2016, respectively. At December 31, 2016 a substantial portion of our liability for uncertain tax benefits is recorded as a reduction of net operating losses and tax credit carryforwards.
The Company was notified by the Internal Revenue Service that its federal income tax returns for the years 2013-2015 were selected for examination. The Company believes its provision for income taxes is adequate; however any assessment would affect the Company’s results of operations and possibly cash flows.
The Canadian Revenue Agency completed its examination of the corporation’s 2014-2016 goods and services tax (GST) and harmonized sales tax (HST) returns. All issues have been settled.
Our federal income tax returns have been examined and reported upon by the Internal Revenue Service through December 31, 2012, and the years subsequent to 2012 are subject to examination. Our state tax returns for years ranging from 2010 and 2011 are still open and subject to examination. In addition, our Canadian tax returns and United Kingdom tax returns for all years after 2011 are subject to examination.
The Tax Cuts and Jobs Act (The Act,) was enacted on December 22, 2017 making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a reduction in the US federal corporate tax rate from 35% to 21%, requiring companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creating new taxes on certain foreign sourced earnings. As of December 31, 2017, we have not completed our assessment of the accounting impact of the tax effects on the Company due to the Act; however, we have made a reasonable estimate of the effects on our existing deferred tax balances. We recognized a provisional estimate of $0.1 million of tax expense related to the remeasurement of our deferred tax balance. We will continue to refine our estimate as additional analysis is completed and additional guidance is issued, however we don’t expect a significant net impact on our underlying financial statements as we have cumulative losses in our foreign subsidiaries.
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.
Reference 1: http://www.xbrl.org/2003/role/presentationRef