Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Reconciliations of the statutory U.S. federal income tax rates to our effective tax rate for continuing operations follow:

 

Years ended December 31,	2021		2020		2019
Statutory rate	21.0	%	21.0	%	21.0	%
State tax, net of federal benefit	3.1		2.9		3.9
Business tax credits	(0.8)		(2.2)		(3.5)
Reverse federal impact of indemnification adjustments	0.1		0.2		0.3
Unrecognized tax benefits, U.S. federal and state, net of federal benefit	0.4		0.7		(0.1)
Other, net	0.9		1.1		0.7
Effective tax rate	24.7	%	23.7	%	22.3	%

The effective tax rate varies from the statutory U.S. federal rate of 21 percent primarily due to the impact of state taxes, net of federal benefit, for the year ended December 31, 2021; and due to business tax credits and the impact of state taxes, net of federal benefit, for the year ended December 31, 2020 and 2019, respectively.

Income tax expense consists of:

 

As of December 31, (dollars in thousands)	2021		2020		2019
Current provision (benefit):
Federal	$	259,536	$	172,153	$	150,800
State	64,843		28,387		24,378
Total current provision (benefit)	324,379		200,540		175,178
Deferred provision (benefit):
Federal	47,240		58,003		(8,240)
State	8,132		14,773		(1,474)
Total deferred provision (benefit)	55,372		72,776		(9,714)
Provision for income tax expense	$	379,751	$	273,316	$	165,464

The tax effect of temporary differences that give rise to deferred tax assets and liabilities is summarized below.

As of December 31, (dollars in thousands)	2021		2020
Deferred tax assets:
Loan reserves	$	300,538	$	356,296
Stock-based compensation plans	10,174		10,914
Deferred revenue	1,318		1,441
Operating loss carryovers	394		83
Accrued expenses not currently deductible	14,307		13,139
Net unrealized losses	—		9,047
Unrecorded tax benefits	11,016		6,997
Other	1,097		1,003
Total deferred tax assets	338,844		398,920
Deferred tax liabilities:
Fixed assets	10,131		11,098
Acquired intangible assets	8,710		7,767
Market value adjustments on student loans, investments and derivatives	33		5,651
Net unrealized gains	6,459		—
Federal deferred for state receivable	1,921		7,456
Student loan premiums and discounts, net	12,396		11,336
Other	363		307
Total deferred tax liabilities	40,013		43,615
Net deferred tax assets	$	298,831	$	355,305

Included in operating loss carryovers are state net operating losses of $286 million and $277 million as of December 31, 2021 and 2020, respectively. The Company has recorded a valuation allowance against these net operating losses of $285 million and $277 million, respectively. Also included in operating loss carryovers is a capital loss of $16 million and $16 million as of December 31, 2021 and 2020, respectively. The Company has recorded a full valuation allowance against this capital loss. The valuation allowance is primarily attributable to deferred tax assets for state net operating losses and capital losses that management believes is more likely than not to expire prior to being realized.

The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income of the appropriate character (i.e., capital or ordinary) during the period in which the temporary differences become deductible. Management considers, among other things, the scheduled reversals of deferred tax liabilities and the history of positive taxable income in evaluating the realizability of the deferred tax assets. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize our deferred tax assets (other than state net operating loss and capital loss carryovers as outlined above).

As of December 31, 2021, the state net operating loss carryforwards will begin to expire in 2029 and the capital losses in 2025.

Accounting for Uncertainty in Income Taxes

The following table summarizes changes in unrecognized tax benefits:

 

As of December 31, (dollars in thousands)	2021		2020		2019
Unrecognized tax benefits at beginning of year	$	63,134	$	53,509	$	52,159
Increases resulting from tax positions taken during a prior period	1,496		12,723		12,333
Decreases resulting from tax positions taken during a prior period	(1,481)		(817)		(851)
Increases resulting from tax positions taken during the current period	20,743		7,815		4,572
Decreases related to settlements with taxing authorities	(3,682)		(148)		(8,670)
Increases related to settlements with taxing authorities	96		—		—
Reductions related to the lapse of statute of limitations	(4,978)		(9,948)		(6,034)
Unrecognized tax benefits at end of year	$	75,328	$	63,134	$	53,509

As of December 31, 2021, the gross unrecognized tax benefits are $75 million. Included in the $75 million are $65 million of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate. As a part of the Spin-Off, the Company recorded a liability related to uncertain tax positions for which it is indemnified by Navient. See Note 2, “Significant Accounting Policies — Income Taxes,” for additional details.

Tax-related interest and penalty expense is reported as a component of income tax expense. As of December 31, 2021, 2020, and 2019, the total amount of income tax-related accrued interest and penalties, net of related benefit, recognized in the consolidated balance sheets was $10 million, $11 million, and $12 million, respectively.

For the years ended December 31, 2021, 2020, and 2019, the total amount of income tax-related accrued interest, net of related tax benefit, recognized in the consolidated statements of income was $(1) million, $(1) million, and $(1) million, respectively.

The Company or one of its subsidiaries files income tax returns at the U.S. federal level and in most U.S. states. U.S. federal income tax returns filed for years 2014 and prior are no longer subject to examination. Various combinations of subsidiaries, tax years, and jurisdictions remain open for review, subject to statute of limitations periods (typically three to four prior years). The Company’s federal income tax returns for the years ended December 31, 2015, December 31, 2016, and December 31, 2017 are currently under audit by the Internal Revenue Service. We do not expect the resolution of open audits to have a material impact on our unrecognized tax benefits.

It is reasonably possible that the uncertain tax position reserve may decrease by as much as $6 million during the next 12 months due to the expiration of statutes of limitations, some of which related to indemnified tax liabilities. The reduction in the uncertain tax position reserve would be reflected as a tax benefit. We recorded a tax indemnification receivable from Navient for the indemnified tax liabilities which are included in the uncertain tax position reserve. A portion of the tax benefit will be offset by an expense related to the write-down of the indemnification receivable.