Income Taxes

12 Months Ended

Dec. 31, 2019

Income Taxes

Income Taxes

9. Income Taxes

Provision for Income Taxes

Our provision for income taxes relating to continuing operations consists of the following (in thousands):

	December 31,
	2019		2018		2017
Current tax provision—
Federal	$	33,281	$	22,728	$	35,434
State and Puerto Rico		8,388		8,589		6,054
Total current		41,669		31,317		41,488
Deferred tax provision (benefit)—
Federal		(3,750)		4,347		5,391
State and Puerto Rico		(501)		109		(1,213)
Total deferred		(4,251)		4,456		4,178
Provision for income taxes	$	37,418	$	35,773	$	45,666

The provision for income taxes for the years ended December 31, 2019, 2018 and 2017 resulted in effective tax rates on continuing operations of 24.7%, 24.1% and 45.2%, respectively. The reasons for the differences between these effective tax rates and the federal statutory rates are as follows (in thousands):

	December 31,
	2019			2018			2017
Federal statutory rate of—		21	%		21	%		35	%
Income taxes at the federal statutory rate	$	31,866		$	31,222		$	35,328
Increases (decreases) resulting from—
Net state income taxes		6,644			7,470			2,838
Valuation allowances		(279)			(2,852)			91
Net unrecognized tax benefits		7,338			(15)			153
Nondeductible expenses		2,180			1,926			1,134
R&D tax credits		(4,569)			(2,726)			—
179D deduction		(5,126)			—			—
Net operating loss carryforwards		—			2,225			—
Stock-based compensation deductions		(714)			(1,293)			(1,320)
Domestic production activities deduction		—			—			(2,112)
Corporate tax rate reduction to 21%		—			—			9,478
Other		78			(184)			76
Provision for income taxes	$	37,418		$	35,773		$	45,666

As of December 31, 2017, we recorded provisional amounts for the impact of the Tax Cuts and Jobs Act. An expense of $9.5 million was recorded in the fourth quarter of 2017 for the remeasurement of our net deferred tax assets based on the rates at which they are expected to reverse in the future (generally 21%). At December 31, 2018, we completed our accounting for the impact of the Tax Cuts and Jobs Act, and no further adjustments were made.

Our provision for income taxes was reduced by $2.8 million in the first quarter of 2018 due to a decrease in unrecognized tax benefits from the filing of a federal income tax automatic accounting method change application.

In the third quarter of 2019, we filed an amended federal return for 2015 to claim the credit for increasing research activities (“R&D tax credits”) and recorded a $4.6 million tax benefit that was fully offset by an increase in unrecognized tax benefits. We previously filed an amended federal return for 2014 to claim R&D tax credits during 2018 and recorded a $2.7 million tax benefit that was also fully offset by an increase in unrecognized tax benefits. These tax benefits were fully offset by increases in unrecognized tax benefits due to the uncertainty of the outcome from examinations opened by the Internal Revenue Service (the “IRS”). As a result, the R&D tax credits claimed have had no impact on our effective tax rates.

During 2018, we dissolved our Puerto Rican subsidiary and thus wrote-off the remaining $2.2 million of net operating loss (“NOL”) carryforwards and related valuation allowance. The dissolution of our Puerto Rican subsidiary did not have an impact on our 2018 effective tax rate.

For the year ended December 31, 2019, our provision for income taxes was reduced by $2.2 million due to benefits from the filing, and expected filing, of amended returns to claim the energy efficient commercial buildings deduction (the “179D deduction”) allocated to us.

Deferred Tax Assets (Liabilities)

Significant components of the deferred tax assets and deferred tax liabilities as reflected on the balance sheets are as follows (in thousands):

	Year Ended
	December 31,
	2019		2018
Deferred tax assets—
Accounts receivable and allowance for doubtful accounts	$	1,660	$	1,445
Stock-based compensation		2,561		2,538
Accrued liabilities and expenses		25,569		19,449
Lease liabilities		20,873		—
Net operating loss carryforwards		2,750		3,242
Intangible assets		7,988		5,071
Other		525		550
Subtotal		61,926		32,295
Valuation allowances		(369)		(648)
Total deferred tax assets		61,557		31,647
Deferred tax liabilities—
Property and equipment		(11,286)		(10,488)
Lease right-of-use asset		(20,873)		—
Long-term contracts		(876)		(688)
Goodwill		(6,020)		(3,864)
Other		(2,004)		(360)
Total deferred tax liabilities		(41,059)		(15,400)
Net deferred tax assets	$	20,498	$	16,247

The deferred tax assets and liabilities reflected above are included in the consolidated balance sheets as follows (in thousands):

	December 31,
	2019		2018
Deferred tax assets	$	21,923	$	17,634
Deferred tax liabilities	$	1,425	$	1,387

As of December 31, 2019, we had $2.8 million of future tax benefits related to $47.0 million of available state NOL carryforwards, which expire in varying amounts between the years 2021 and 2039. Valuation allowances of $0.4 million have been recorded against certain of the state NOL carryforwards. The $2.4 million deferred tax asset for state NOL carryforwards, net of valuation allowances, reflects our conclusion that it is more-likely-than-not these assets will be realized based upon expected future earnings in certain subsidiaries.

We update our assessment of the realizability of deferred tax assets relating to state NOL carryforwards annually. A return to profitability in our subsidiaries with valuation allowances would result in a release of a portion of the valuation allowance relating to realizable deferred tax assets. A sustained period of profitability could cause a change in our judgment of any remaining deferred tax assets. If that were to occur, then it is likely that we would reverse some or all of the remaining valuation allowances.

Liabilities for Uncertain Tax Positions

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding accrued interest and penalties, is as follows (in thousands):

	Year Ended
	December 31,
	2019		2018		2017
Balance at beginning of year	$	2,966	$	8,929	$	240
Additions based on tax positions related to current year		—		—		8,689
Additions based on tax positions related to prior years		7,473		2,726		—
Reductions for tax positions related to prior years		(240)		(8,689)		—
Reductions for settlements with tax authorities		—		—		—
Balance at end of year	$	10,199	$	2,966	$	8,929

As of December 31, 2019, 2018 and 2017, we had $10.2 million, $3.0 million and $8.9 million, respectively, of unrecognized tax benefits, which if recognized in future periods, would impact our effective tax rate. We also had accrued zero, $0.6 million and $0.7 million for potential interest and penalties related to the unrecognized tax benefits as of December 31, 2019, 2018 and 2017, respectively. We recognize potential interest and penalties related to unrecognized tax benefits in our provision for income taxes.

We believe it is reasonably possible that a decrease of up to $10.2 million in unrecognized tax benefits could occur within the next twelve months. Any decrease in our unrecognized tax benefits, due to the future recognition of those tax benefits, would affect our effective tax rate.

We are subject to taxation in the United States and various state jurisdictions. In the fourth quarter of 2017, we received a ‘no change letter’ from the IRS upon completion of its examination of the 2015 tax year. During 2019, the IRS commenced an examination of our amended federal returns for 2014 and 2015. The completion of the IRS examination could impact our results of operations and financial condition.

State income tax returns are generally subject to examination for a period of three to five years after filing the returns. However, the state impact of any federal audit adjustments and amendments remains subject to examination by various states for up to one year after formal notification to the states. We generally remain open to examination by various state tax authorities for the 2011 tax year forward. As of December 31, 2019, we did not have any state audits underway that would have a material impact on our financial position or results of operations.