Income Taxes

9 Months Ended

Sep. 30, 2018

Note 10. Income Taxes

The Company recorded income tax expense of $372,000 and $56,000 for the three months ended September 30, 2018 and 2017, respectively, and $1,106,000 and $199,000 for the nine months ended September 30, 2018 and 2017, respectively. Income tax expense reflects the recording of federal and state income

taxes as well as the reduction of the Company’s overall valuation allowance due to continued amortization of certain of our indefinite-lived assets. The

effective tax rates were approximately (47.8)% and (15.6)% for the three months ended September 30, 2018 and 2017, respectively, and 100.9% and (27.8)% for the nine months ended September 30, 2018 and 2017, respectively. The effective rate differs from the federal statutory rate for each period, primarily due to state and local income taxes and changes to the valuation allowance.

JetPay Payments, TX is subject to and pays the Texas Margin Tax which is considered to be an income tax in accordance with the provisions of the Income Taxes Topic in FASB, ASC and the associated interpretations. There are no significant temporary differences associated with the Texas Margin Tax.

As of December 31, 2017, the Company had U.S. federal net operating loss carryovers (“NOLs”) of approximately $30.0 million and state NOLs of approximately $9.2 million available to offset future taxable income. These NOLs, if not utilized, expire at various times through 2036. In accordance with Section 382 of the Internal Revenue Code, deductibility of the Company’s NOLs may be subject to an annual limitation in the event of a change in control. The Company has conducted a Code Section 382 NOL study in 2018.

In December 2017, the federal government enacted numerous amendments to the Internal Revenue Code of 1986 pursuant to an act known by the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act will impact the Company’s income tax (benefit) from continuing operations in future periods. The Tax Act resulted in the following impacts to the Company: (i) the federal statutory income tax rate was reduced from 34% to 21% for 2018 and tax years following; and (ii) a one-time net expense of $3.4 million was recorded in the three months ended December 31, 2017 as a result of re-measuring our deferred tax balances at the new statutory rate. Upon completion of the Company’s 2017 U.S. income tax return in 2018, additional re-measurement adjustments may be identified to the recorded deferred tax liabilities and the one-time transition tax. Management will continue to assess the provision for income taxes as future guidance is issued, but do not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all of the information available, management believes that a total valuation allowance of approximately $6.8 million at September 30, 2018 is appropriate, representing the amount of its deferred income tax assets in excess of certain of the Company’s deferred income tax liabilities. The deferred tax liability related to goodwill that is amortizable for tax purposes (“Intangibles”) will not reverse until such time, if any, that the goodwill, which is considered to be an asset with an indefinite life for financial reporting purposes, becomes impaired or sold. Due to the uncertain timing of this reversal, the temporary difference cannot be considered as future taxable income for purposes of determining a valuation allowance. Therefore, the deferred tax liability related to tax deductible Intangibles cannot be considered when determining the ultimate realization of deferred tax assets.

JetPay Corp 10-Q