Phunware, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2020

Income TaxesDeferred income taxes are recognized for the tax consequences in future years for differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the combination of the tax payable for the year and the change during the year in deferred tax assets and liabilities.

For the years ended December 31, 2020 and 2019, we had net losses before income taxes of $22,197 and $12,866, respectively. Net losses relating to U.S. operations for were $22,194 and $12,766, respectively.

The difference between income taxes expected at the U.S. federal statutory income tax rate of 21% and the reported income tax expense (benefit) are summarized as follows:


	Year Ended December 31,
	2020			2019
Income tax at statutory rate	$	(4,661)		$	(2,703)
Valuation allowance	4,408			2,948
State income tax, net of federal benefit	(330)			(606)
Business tax credit net of reserves	—			—
Non-deductible expenses	585			365
Foreign income taxes at different rate	—			1
Income tax expense	$	2		$	5
Effective tax rate	(0.01)		%	(0.04)		%

The provision expense for income taxes consists of the following:


	Year Ended December 31,
	2020		2019
Current:
Federal	$	—	$	—
State	2		5
Foreign	—		—
Total current	2		5
Deferred:
Federal	—		—
State	—		—
Foreign	—		—
Total deferred	—		—
Total	$	2	$	5

The components of net deferred income taxes consist of the following:


	December 31,
	2020		2019
Deferred tax assets:
Net operating loss	$	30,705	$	26,285
Reserves and accruals	3,739		3,842
Tax credits	1,193		1,463
Gross deferred tax assets	35,637		31,590

Less valuation allowance	(35,100)		(31,349)
Total deferred tax assets	537		241

Deferred tax liabilities:
Amortization of acquired intangibles	(537)		(241)
Total deferred tax liabilities	(537)		(241)
Net deferred tax liabilities	$	—	$	—

As of December 31, 2020, we had net operating loss carryforwards of $126,303 and $60,929 for federal and state income tax purposes, respectively. The federal net operating losses of $85,674 which were generated in tax years beginning before January 1, 2018, will begin to expire in 2030 if not utilized. The balance of the net operating losses, $40,629 do not expire. The state net operating losses expire at various times depending on the state with a majority beginning to expire in 2030 if not utilized.

As of December 31, 2020, we had R&D credit carryforwards of approximately $1,482 and $1,145 for federal and state income tax purposes, respectively. The federal and Texas R&D credits will begin to expire in 2034, unless previously utilized. California R&D credits carry forward indefinitely.

Utilization of the net operating losses ("NOL") and tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code (IRC) of 1986, as amended (the "Code"), as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized annually to offset future taxable income. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than fifty (50) percentage points of the outstanding stock of a company by certain stockholders.

As of December 31, 2020, we had not yet completed its analysis of the deferred tax assets for its NOL and tax credits. The future utilization of our net operating loss to offset future taxable income may be subject to an annual limitation under IRC Section 382 as a result of ownership changes that may have occurred previously or that could occur in the future. We have not yet determined whether such an ownership change has occurred. In order to make this determination, we will need to complete an analysis regarding the limitation of the net operating loss.

We have established a full valuation allowance for our deferred tax assets due to uncertainties that preclude us from determining that it is more likely than not that we will be able to generate sufficient taxable income to realize such assets. We monitor positive and negative factors that may arise in the future as we assess the need for a valuation allowance against our deferred tax assets. As of December 31, 2020 and 2019, we have a valuation allowance of $35,100 and $31,349, respectively, against our deferred tax assets.

The technical merits of a tax position derive from both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate resolution with a taxing authority.

Uncertain tax positions are evaluated based upon the facts and circumstances that exist at each reporting period. Subsequent changes in judgment based upon new information may lead to changes in recognition, de-recognition, and measurement. Adjustments may result, for example, upon resolution of an issue with the taxing authorities, or expiration of a statute of limitations barring an assessment for an issue.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:


	December 31,
	2020		2019
Unrecognized tax benefits, beginning of period	$	1,531	$	1,516
Tax positions taken in prior periods:
Gross increases	69		—
Gross decreases	(297)		—

Tax positions taken in current period:
Gross increases	11		15
Settlements	—		—

Lapse of statute of limitations	—		—

Unrecognized tax benefits, end of period	$	1,314	$	1,531

Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. We have no accrual for interest and penalties on the consolidated balance sheets and has not recognized interest and/or penalties in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2020 and 2019.

We are subject to taxation in the United States and various state jurisdictions. Our tax years from inception are subject to examination by the United States and state taxing authorities due to the carryforward of unutilized NOLs.

On January 22, 2018, the FASB released guidance on the accounting for tax on the Global Intangible Low-Taxed Income (“GILTI”) provisions of H.R. 1, "The Tax Cuts and Jobs Act" signed into law in 2017 (the "Tax Act"). Under U.S. GAAP, the Company is allowed to make an accounting policy election of either (1) treating taxes due on the future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred, or the period cost method, or (2) factoring such amounts into the Company's measurement of its deferred taxes, or the deferred method. The Company has selected the period cost method as its accounting policy with respect to the potential GILTI tax obligations.

We have ownership interest in controlled foreign corporations. During 2020, we analyzed the potential impact of the Global Intangible Low-Taxed Income and the Base Erosion and Anti-Abuse Tax provisions of the Tax Cuts and Jobs Act signed into law in 2017. Based on the foreign subsidiaries' tax position, we will not incur any impact relating to these two provisions.

The CARES Act was enacted in the United States on March 27, 2020. The CARES Act includes several U.S. income tax provisions related to, among other things, net operating loss carrybacks, alternative minimum tax credits, modifications to the net interest deduction limitations, and technical amendments regarding the income tax depreciation of qualified improvement property placed in service after December 31, 2017. The CARES Act does not have a material impact on our financial results for the year ended December 31, 2020.

The Consolidated Appropriations Act, 2021 (the"Act") was enacted in the United States on December 27, 2020. The Act enhances and expands certain provisions of the CARES Act. The Act does not have a material impact on our financial results for the year ended December 31, 2020.