|12 Months Ended|
Dec. 31, 2018
|Income Tax Disclosure [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.
We have retained full valuation allowances of $6.9 million and 4.7 million against the deferred tax assets of our United States (as of December 31, 2018) Australian, Canadian, U.K. (only Legacy Education Alliance International Limited), Hong Kong, and South Africa subsidiaries as of December 31, 2018 and December 31, 2017, 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.
In the fourth quarter of 2018, we determined that a $1.9 million valuation allowance against U.S.deferred taxes was required. The company assessed the weight of all available positive and negative evidence and determined it was not more likely than not that future earnings will be sufficient to realize the deferred tax assets in the U.S.
As of December 31, 2018 and 2017, we had approximately $8.4 million and $0.0 million of federal net operating loss carryforwards, approximately $25.0 million and $22.8 million of foreign net operating loss carryforwards, and approximately $14.3 million and $6.0 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, 2018 and 2017, we increased the valuation allowance by $2.2 million and $0.2 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):
We recorded an income tax expense of $.5 million and $2.0 million for the year ended December 31, 2018 and 2017, respectively.
Our effective tax rate was (14.8)% and 31.6% for the year ended December 31, 2018 and 2017. Our effective tax rate differed from the U.S. statutory corporate tax rate of 21% and 35%, for the same periods, 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, 2018 and 2017 was $0.4 million and $(0.3) million, respectively, and was fully offset by a corresponding decrease at December 31, 2018 and an increase at December 31, 2017 in the valuation allowance with the exception of $0.02 million and $(0.2) million for Elite Legacy Education UK Limited for the years ended December 31, 2018 and 2017, 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, 2018 and 2017 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, 2018 and 2017. 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 $0.04 million at December 31, 2018 and 2017, 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, 2018 and 2017, 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, 2018 and 2017, are as follows:
We do not expect any significant changes to unrecognized tax benefits in the next year.
The Company estimates $0.09 million and $1.2 million, of the unrecognized tax benefits, if recognized, would impact the effective tax rate at December 31, 2018 and 2017, respectively. At December 31, 2018 a substantial portion of our liability for uncertain tax benefits is recorded as a reduction of net operating losses and tax credit carryforwards.
The Internal Revenue Service completed its examination of the corporation’s federal income tax returns for the years 2013-2015 resulting in no changes.
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, 2015, and the years subsequent to 2015 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, 2018, we recognized income tax expense of $0.163 million related to the remeasurement of our deferred tax balance.
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://fasb.org/us-gaap/role/ref/legacyRef