INCOME TAXES

12 Months Ended

Dec. 31, 2020

INCOME TAXES

INCOME TAXES

11. INCOME TAXES

On August 6, 2018, ANI Canada acquired all the issued and outstanding equity interests of WellSpring in a non-taxable transaction (Note 2). Following the consummation of the transaction, WellSpring was merged into ANI Canada. For U.S. Federal and state income tax purposes, ANI Canada is not part of ANI’s consolidated group; rather, ANI Canada is subject to income taxes only in Canada and solely based on its stand-alone operations. The foreign current and foreign deferred provisions (benefits) below represent ANI Canada’s tax provision (benefit) from the Canadian taxing jurisdictions.

We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not 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. We consider the projected future taxable income and tax planning strategies in making this assessment.

As part of purchase accounting, the Company established net deferred tax assets relating to differences in the book bases (determined based on fair value purchase accounting) and tax bases (determined based on the carryover nature of the nontaxable transaction) of ANI Canada’s assets and liabilities of approximately $1.9 million, offset by a full valuation allowance due to our determination that it was more likely than not that all of the deferred tax assets would not be realized. During 2019, we adopted an intercompany transfer pricing policy that uses the “comparable profits method” for pricing intercompany services between ANI Pharmaceuticals, Inc. and ANI Canada. For U.S. and Canadian tax purposes, the policy was adopted in conjunction with the acquisition date of August 6, 2018. As a result of the newly adopted transfer pricing policy, our assessment of the amount of ANI Canada’s deferred tax assets that are more likely than not to be realized changed and, as a result, during 2019, we released the remaining net valuation allowance related to ANI Canada’s deferred tax assets.

As of December 31, 2020 and 2019, our consolidated valuation allowance was $0.3 million, related solely to deferred tax assets for net operating loss carryforwards in certain U.S. state jurisdictions.

Our total provision for income taxes consists of the following for the years ended December 31, 2020, 2019, and 2018:

(in thousands)	2020		2019		2018
Current income tax provision:
Federal	$	9,232	$	4,985	$	7,985
State		559		1,212		1,751
Total		9,791		6,197		9,736
Deferred income tax (benefit)/provision:
Federal		(14,125)		(6,274)		(4,630)
State		744		(2,027)		(556)
Foreign		345		1,000		(214)
Total		(13,036)		(7,301)		(5,400)
Change in valuation allowance		(169)		(1,833)		221
Total (benefit)/provision for income taxes	$	(3,414)	$	(2,937)	$	4,557

The difference between our expected income tax provision from applying U.S. Federal statutory tax rates to the pre-tax income and actual income tax provision relates primarily to the effect of the following:

	As of December 31,
	2020		2019		2018
US Federal statutory rate	21.0	%	21.0	%	21.0	%
State taxes, net of Federal benefit	1.9	%	3.2	%	2.4	%
Foreign taxes	(0.1)	%	0.4	%	26.5	%
Change in valuation allowance	0.7	%	(58.1)	%	(26.5)	%
Stock-based compensation	(2.5)	%	(6.7)	%	(1.8)	%
Non-deductible costs	(3.5)	%	9.1	%	—	%
Change in state apportionment factors, state and foreign rates	(7.3)	%	(28.1)	%	—	%
Research and experimentation and charitable credits	0.9	%	(33.5)	%	—	%
Transfer pricing and other	2.0	%	(0.2)	%	1.1	%
Effective income tax rate	13.1	%	(93.0)	%	22.7	%

Deferred income taxes reflect the net tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes. Our deferred income tax assets and liabilities consisted of the following:

	As of December 31,
(in thousands)	2020		2019
Deferred tax assets:
Accruals and advances	$	7,174	$	8,586
Stock-based compensation		4,277		3,750
Accruals for chargebacks and returns		13,831		7,603
Inventory		6,101		4,720
Intangible asset		21,911		14,923
Net operating loss carryforwards		4,090		4,767
Other		2,171		1,459
Total deferred tax assets	$	59,555	$	45,808
Deferred tax liabilities:
Depreciation	$	(5,913)	$	(6,029)
Intangible assets		(11)		(13)
Other		(1,664)		(1,008)
Total deferred tax liabilities	$	(7,588)	$	(7,050)
Valuation allowance		(263)		(432)
Deferred tax assets, net of deferred tax liabilities and valuation allowance	$	51,704	$	38,326

As of December 31, 2020, we had U.S. federal net operating loss carryforwards of approximately $10.5 million, all of which arose as a result of the 2013 merger with BioSante Pharmaceuticals, Inc. and, if not used, expire in annual increments through 2033. The utilization of the net operating loss carryforwards are limited in future years as prescribed by Section 382 of the U.S. Internal Revenue Code; our current annual limitation of the federal net operating loss is approximately $0.8 million per year. Additionally, as of December 31, 2020 we have total net operating losses in Canada of $6.5 million that begin expiring in 2035.

We are subject to income taxes in numerous jurisdictions in the U.S. and in Canada. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. We establish liabilities for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These liabilities are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these liabilities in light of changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of changes to the liability that is considered appropriate. We identified no material uncertain income tax positions as of December 31, 2020 and 2019.

We are subject to income tax audits in all jurisdictions for which we file tax returns. Tax audits by their nature are often complex and can require several years to complete. All of our income tax returns remain subject to examination by tax authorities due to the availability of net operating loss carryforwards.