Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

9. Income Taxes

Income Tax Provision. The components of net income before income taxes are as follows (in thousands):

	2023			2022			2021
Domestic	$	72,769		$	53,251		$	98,261
Australia		854			(5,851	)		(3,429	)
India		10,008			9,517			5,873
Ireland		(236	)		(3,391	)		1,627
United Kingdom		2,029			2,533			(5,734	)
Foreign other		6,927			4,722			4,348
Total	$	92,351		$	60,781		$	100,946

The income tax provision consists of the following (in thousands):

	2023			2022			2021
Current:
Federal	$	34,438		$	30,012		$	17,012
State		8,230			6,517			5,835
Australia		(333	)		55			118
India		3,601			4,370			959
Ireland		336			273			561
United Kingdom		1,002			349			426
Foreign other		2,391			2,772			1,338
		49,665			44,348			26,249
Deferred:
Federal		(19,687	)		(21,962	)		2,294
State		(1,982	)		(3,073	)		344
Australia		(896	)		(890	)		(180	)
India		(1,231	)		(1,388	)		368
Ireland		(205	)		(341	)		(150	)
United Kingdom		(233	)		469			(558	)
Foreign other		674			(442	)		248
		(23,560	)		(27,627	)		2,366
Total income tax provision	$	26,105		$	16,721		$	28,615

The effective tax rates in the various foreign jurisdictions differ from the statutory rates due primarily to changes in valuation allowances on deferred tax assets, withholding taxes incurred, and the impact of foreign exchange recognition on certain intercompany loans.

The difference between our income tax provision computed at the statutory Federal income tax rate and our financial statement income tax provision is summarized as follows (in thousands):

	2023			2022			2021
Provision at Federal rate of 21%	$	19,394		$	12,764		$	21,199
State income taxes, net of Federal impact		4,485			2,079			4,882
Research and experimentation credits		(1,053	)		(1,560	)		(2,062	)
Stock award vesting		(554	)		(1,355	)		(538	)
Tax uncertainties		(289	)		(227	)		69
Section 162(m) compensation limitation		2,955			2,326			1,610
Foreign rate differential		987			571			592
Valuation allowance for deferred tax assets		(1,655	)		638			1,427
Withholding tax		2,728			1,948			2,305
Convertible debt premium		-			(1,017	)		-
Other		(893	)		554			(869	)
Total income tax provision	$	26,105		$	16,721		$	28,615

We have undistributed earnings of approximately $71 million from certain foreign subsidiaries. We intend to indefinitely reinvest these foreign earnings; therefore, a provision has not been made for foreign withholding taxes that might be payable upon remittance of such earnings. Determination of the amount of unrecognized deferred tax liability on unremitted foreign earnings is not practicable because of the complexities of the hypothetical calculation.

Deferred Income Taxes. Net deferred income tax assets as of December 31, 2023 and 2022 are as follows (in thousands):

	2023			2022
Deferred income tax assets	$	109,536		$	81,747
Deferred income tax liabilities		(25,351	)		(27,733	)
Valuation allowance		(26,453	)		(27,925	)
Net deferred income tax assets	$	57,732		$	26,089

The components of our net deferred income tax assets (liabilities) as of December 31, 2023 and 2022 are as follows (in thousands):

	2023			2022
Net deferred income tax assets (liabilities):
Accrued expenses and reserves	$	10,907		$	6,206
Stock-based compensation		5,643			5,321
Software		80			(855	)
Client contracts and related intangibles		(7,536	)		(9,577	)
Goodwill		(14,874	)		(13,424	)
Net operating loss carryforwards		25,379			27,820
Property and equipment		(2,941	)		(3,789	)
Deferred revenue		6,539			4,882
Debt financing		7,396			(88	)
Foreign exchange gain/loss		2,010			1,791
Operating lease right-of-use assets and lease liabilities		3,555			5,872
R&D		46,817			28,733
Unrecognized tax benefit		326			408
Credits and incentives		384			374
Other		500			340
Total net deferred income tax assets		84,185			54,014
Less: valuation allowance		(26,453	)		(27,925	)
Net deferred income tax assets	$	57,732		$	26,089

Beginning January 1, 2022, certain R&D expenditures are required to be capitalized in accordance with Section 174 of the Internal Revenue Code, as amended by the Tax Cuts and Jobs Act of 2017, and amortized over a 5-year period if incurred domestically or a 15-year period if incurred outside the U.S. Of the total R&D related deferred income tax assets as of December 31, 2023, $46.3 million is attributable to capitalized R&D (net of applicable amortization) with the remaining amount attributable to foreign and state R&D credits. The net deferred income tax asset for debt financing increased from 2022 to 2023 primarily due to the Capped Call Transactions, discussed in Note 5. The Capped Call Transactions are amortizable beginning in 2023 through 2028.

We regularly assess the likelihood of the future realization of our deferred income tax assets. To the extent we believe that it is more likely than not that a deferred income tax asset will not be realized, a valuation allowance is established. As of December 31, 2023, we believe we will generate sufficient taxable income in the future such that we will realize 100% of the benefit of our U.S. Federal deferred income tax assets, thus no valuation allowance has been established. As of December 31, 2023, we have net state and foreign deferred income tax assets (net of federal benefit related to state and foreign income tax jurisdictions) of $1.2 million and $35.9 million, respectively, and have established valuation allowances against those state and foreign income tax deferred income tax assets of $1.3 million and $25.1 million, respectively.

As of December 31, 2023 and 2022, we have an acquired U.S. Federal net operating loss (“NOL”) carryforward of approximately $8 million and $13 million, respectively, which will begin to expire in 2029 and can be utilized through 2033. The acquired U.S. Federal NOL carryforward is attributable to the pre-acquisition periods of acquired businesses. The annual utilization of this U.S. Federal NOL carryforward is limited pursuant to Section 382 of the Internal Revenue Code of 1986, as amended. In addition, as of December 31, 2023 and 2022, we have: (i) state NOL carryforwards of approximately $29 million and $42 million, respectively, which will expire beginning in 2024 with a portion of the losses available over an indefinite period of time; and (ii) foreign subsidiary NOL carryforwards of approximately $102 million and $104 million, respectively, which will expire beginning in 2031, with a portion of the losses available over an indefinite period of time.

2022 Inflation Reduction Act. In 2022, the U.S. Federal government enacted the Inflation Reduction Act (“IRA”). The IRA includes a 15% corporate alternative minimum tax effective in 2024 for certain large corporations, a one percent excise tax on net share repurchases after December 31, 2022, and several tax incentives to promote clean energy. We do not expect the provisions of the IRA to have a material impact on our financial results.

Pillar Two. Numerous foreign jurisdictions have enacted or are in the process of enacting legislation to adopt a minimum effective tax rate. Pillar Two, which was established by the Organization for Economic Co-operation and Development (OECD), generally provides for a 15 percent minimum effective tax rate for multinational enterprises in every jurisdiction in which they operate. The U.S. has not yet adopted Pillar Two, however, various other governments around the world have. We continue to monitor evolving tax legislation in the jurisdictions in which we operate.

Accounting for Uncertainty in Income Taxes. We are required to estimate our income tax liability in each jurisdiction in which we operate, including U.S. Federal, state, and foreign income tax jurisdictions. Various judgments and estimates are required in evaluating our tax positions and determining our provisions for income taxes. There are certain transactions and calculations for which the ultimate income tax determination may be uncertain. In addition, we may be subject to examination of our income tax returns by various foreign, federal, state, or local tax authorities, which could result in adverse outcomes. For these reasons, we establish a liability associated with unrecognized tax benefits based on estimates of whether additional taxes and interest may be due. This liability is adjusted based upon changing facts and circumstances, such as the closing of a tax audit, the expiration of a statute of limitations or the refinement of an estimate.

A reconciliation of the beginning and ending balances of our liability for unrecognized tax benefits is as follows (in thousands):

	2023			2022			2021
Balance, beginning of year	$	2,562		$	2,929		$	1,393
Additions related to prior acquisitions		-			2			1,508
Lapse of statute of limitations		(409	)		5			(151	)
Additions for tax positions of prior years		100			8			36
Reductions for tax positions of prior years		(395	)		(382	)		(62	)
Additions for tax positions of current year		-			-			205
Balance, end of year	$	1,858		$	2,562		$	2,929

We recognize interest and penalties associated with our liability for unrecognized tax benefits as a component of income tax expense in our Income Statements. In addition to the $1.9 million, $2.6 million, and $2.9 million of liability for unrecognized tax benefits as of December 31, 2023, 2022, and 2021, we had $0.9 million, $0.6 million, and $0.7 million, respectively of income tax-related accrued interest, net of any federal benefit of deduction. If recognized, the $1.9 million of unrecognized tax benefits as of December 31, 2023, would favorably impact our effective tax rate in future periods.

We file income tax returns in the U.S. Federal jurisdiction, various U.S. state and local jurisdictions, and many foreign jurisdictions. The U.S., U.K., India, and Australia are the primary taxing jurisdictions in which we operate. The years open for audit vary depending on the taxing jurisdiction. We estimate that it is reasonably possible that the amount of gross unrecognized tax benefits will decrease by up to $0.7 million over the next twelve months due to completion of tax audits and the expiration of statute of limitations.