Income Taxes

9 Months Ended

Sep. 30, 2021

Income Tax Disclosure [Abstract]

Income Taxes

12. Income Taxes

The Company used the Annual Effective Tax Rate ("ETR") approach of ASC 740-270, Interim Reporting, to calculate its 2021 interim tax provision.

Income tax was an expense of $0.1 million and $1.4 million for the three months ended September 30, 2021 and 2020, respectively. The income tax expense recorded for the three months ended September 30, 2021 primarily relates to the projected expense as calculated under ASC 740 for tax paying entities. Additionally, the tax benefits associated with losses generated by INNOVATE Corp.'s U.S. consolidated income tax return and certain other businesses have been reduced by a full valuation allowance as we do not believe it is more-likely-than-not that the losses will be utilized prior to expiration. The income tax expense recorded for the three months ended September 30, 2020 primarily relates to the projected expense as calculated under ASC 740 for tax paying entities. Additionally, the tax benefits associated with losses generated by INNOVATE Corp.'s U.S. consolidated income tax return and certain other businesses have been reduced by a full valuation allowance as we do not believe it is more-likely-than-not that the losses will be utilized prior to expiration.

Income tax was an expense of $3.8 million and $3.7 million for the nine months ended September 30, 2021 and 2020, respectively. The income tax expense recorded for the nine months ended September 30, 2021 primarily relates to the projected expense as calculated under ASC 740 for tax paying entities. Additionally, the tax benefits associated with losses generated by INNOVATE Corp.'s U.S. consolidated income tax return and certain other businesses have been reduced by a full valuation allowance as we do not believe it is more-likely-than-not that the losses will be utilized prior to expiration. The income tax expense recorded for the nine months ended September 30, 2020 primarily relates to tax expense incurred in China from the partial sale of HMN and projected expense as calculated under ASC 740 for tax paying entities which was mostly offset by a tax benefit from the carryback of net operating losses at the Insurance segment as a result of the enactment of the CARES Act.

Net Operating Losses

At December 31, 2020, the Company had gross U.S. net operating loss carryforwards available to reduce future taxable income in the amount of $170.3 million, of which a portion is subject to annual limitation under IRC Sec. 382. Based on estimates as of September 30, 2021, the Company expects that approximately $101.5 million of the gross U.S. net operating loss carryforwards would be available to offset taxable income in 2021. This estimate may change based on changes to the quarterly forecasts and actual results reported on the 2020 U.S. tax return.

Additionally, at December 31, 2020, the Company had $112.6 million of gross U.S. net operating loss carryforwards from its subsidiaries that do not qualify to be included in INNOVATE Corp.'s U.S. consolidated income tax return. This balance includes $29.3 million from ANG which was sold during the first quarter of 2021.

Unrecognized Tax Benefits

The Company follows the provision of ASC 740-10, Income Taxes, which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return. The Company is subject to challenge from various taxing authorities relative to certain tax planning strategies, including certain intercompany transactions as well as regulatory taxes.

The Company did not have any unrecognized tax benefits as of December 31, 2020 related to uncertain tax positions that would impact the effective income tax rate if recognized. The Company has reduced the net operating loss carryforward by $69.6 million for uncertain tax positions based on our interpretation of tax laws and regulations that are subject to varied interpretation by the IRS.

Examinations

The Company conducts business globally, and as a result, the Company or one or more of its subsidiaries files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. The open tax years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, character, timing or inclusion of revenue and expenses or the applicability of income tax credits for the relevant tax period. Given the nature of tax audits there is a risk that disputes may arise. Tax years 2002 - 2020 remain open for examination.

CARES Act Payroll Tax Deferral

Tax payment deferrals provided for under the CARES Act resulted in liabilities for deferred payroll tax payments. The Company elected to defer approximately $11.0 million of its employer payroll tax obligation as of September 30, 2021. The Company is required to remit 50 percent of the deferred tax balance on or before December 31, 2021 and the remaining 50 percent on or before December 31, 2022, resulting in $5.5 million included in Accrued liabilities and $5.5 million included in Other liabilities. We continue to monitor any effects that may result from the CARES Act.