Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes

Income Taxes

11. Income Taxes

Provision for Income Taxes

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

	December 31,
	2020		2019		2018
Current tax provision—
Federal	$	36,556	$	33,281	$	22,728
State and Puerto Rico		12,798		8,388		8,589
Total current		49,354		41,669		31,317
Deferred tax provision (benefit)—
Federal		(5,483)		(3,750)		4,347
State and Puerto Rico		(2,470)		(501)		109
Total deferred		(7,953)		(4,251)		4,456
Provision for income taxes	$	41,401	$	37,418	$	35,773

The provision for income taxes for the years ended December 31, 2020, 2019 and 2018 resulted in effective tax rates on continuing operations of 21.6%, 24.7% and 24.1%, respectively. The reasons for the differences between these effective tax rates and the federal statutory rates are as follows (in thousands):

	December 31,
	2020			2019			2018
Federal statutory rate of—		21	%		21	%		21	%
Income taxes at the federal statutory rate	$	40,223		$	31,866		$	31,222
Increases (decreases) resulting from—
Net state income taxes		8,406			6,644			7,470
Valuation allowances		(254)			(279)			(2,852)
Net unrecognized tax benefits		18,557			7,338			(15)
Nondeductible expenses		2,470			2,180			1,926
R&D tax credit		(26,133)			(4,569)			(2,726)
179D deduction		(1,062)			(5,126)			—
Net operating loss carryforwards		—			—			2,225
Stock-based compensation deductions		(426)			(714)			(1,293)
Other		(380)			78			(184)
Provision for income taxes	$	41,401		$	37,418		$	35,773

Our provision for income taxes was reduced by $2.8 million in the first quarter of 2018 due to a reduction 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 (the “R&D tax credit”) and recorded a $4.6 million tax benefit that was fully offset by an addition to unrecognized tax benefits. We previously filed an amended federal return for 2014 to claim the R&D tax credit during 2018 and recorded a $2.7 million tax benefit that was also fully offset by an addition to unrecognized tax benefits. These $7.3 million of tax benefits were fully offset by additions to 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 credit claimed 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.

During the third quarter of 2020, the IRS completed its examination of our amended federal returns for 2014 and 2015 and issued a Revenue Agent Report (“RAR”) allowing the $8.9 million of refund claims in full. Subsequently, the Joint Committee on Taxation (the “JCT”) reviewed and approved the refund claims. As a result, our provision for income taxes was reduced by $8.3 million due to a reduction in unrecognized tax benefits of which $1.0 million related to the 179D deduction.

In early October 2020, we filed amended federal returns for 2016, 2017 and 2018 to claim the R&D tax credit and 179D deduction and recorded tax benefits of $6.1 million, $8.5 million and $11.9 million, respectively. The $26.5 million of tax benefits have been offset by additions to unrecognized tax benefits of $26.4 million due to the uncertainty of the outcome of future IRS examinations. The R&D tax credit and 179D deduction for 2016, 2017 and 2018, therefore, had no material impact on our effective tax rate for the year ended December 31, 2020. At this time, we cannot reasonably estimate the R&D tax credit for years after 2018 or 179D deduction for years after 2017.

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,
	2020		2019
Deferred tax assets—
Accounts receivable and allowance for credit losses	$	2,186	$	1,660
Stock-based compensation		2,791		2,561
Accrued liabilities and expenses		39,761		25,569
Lease liabilities		22,768		20,873
Net operating loss carryforwards		12,127		2,750
Intangible assets		—		7,988
Other		627		525
Subtotal		80,260		61,926
Valuation allowances		(514)		(369)
Total deferred tax assets		79,746		61,557
Deferred tax liabilities—
Property and equipment		(13,877)		(11,286)
Lease right-of-use asset		(22,715)		(20,873)
Long-term contracts		(609)		(876)
Intangible assets		(242)		—
Goodwill		(11,615)		(6,020)
Other		(2,626)		(2,004)
Total deferred tax liabilities		(51,684)		(41,059)
Net deferred tax assets	$	28,062	$	20,498

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

	December 31,
	2020		2019
Deferred tax assets	$	29,401	$	21,923
Deferred tax liabilities	$	1,339	$	1,425

As of December 31, 2020, we had $9.4 million of deferred tax assets related to $44.9 million of federal NOL carryforwards as a result of the TAS acquisition. If not used, such carryforwards will begin to expire in 2031. We also had $2.7 million of deferred tax assets related to $46.2 million of state NOL carryforwards, including carryforwards acquired from TAS. The state NOL carryforwards will expire in varying amounts between the years 2021 and 2040. Valuation allowances of $0.5 million have been recorded against certain of the state NOL carryforwards. The $2.2 million of deferred tax assets 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 of our subsidiaries.

Pursuant to Section 382 of the Code, utilization of our federal NOL carryforwards is subject to annual limitations due to the ownership change in TAS. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period.

We regularly update our assessment of the realizability of our deferred tax assets, in particular, those related to state NOL carryforwards. A return to profitability in our subsidiaries with valuation allowances would result in a release of a portion of the valuation allowances 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,
	2020		2019		2018
Balance at beginning of year	$	10,199	$	2,966	$	8,929
Additions based on tax positions related to current year		—		—		—
Additions based on tax positions related to prior years		26,858		7,473		2,726
Reductions for tax positions related to prior years		—		(240)		(8,689)
Reductions for settlements with tax authorities		(8,301)		—		—
Balance at end of year	$	28,756	$	10,199	$	2,966

As of December 31, 2020, 2019 and 2018, we had $28.8 million, $10.2 million and $3.0 million, respectively, of unrecognized tax benefits, which if recognized in future periods, would impact our effective tax rates. We also had accrued zero, zero and $0.6 million for potential interest and penalties related to the unrecognized tax benefits as of December 31, 2020, 2019 and 2018, respectively. We recognize potential interest and penalties related to unrecognized tax benefits in our provision for income taxes.

We are subject to taxation in the United States and various state jurisdictions. During 2019, the IRS commenced an examination of our amended federal returns for 2014 and 2015. The IRS completed its examination and issued an RAR allowing our refund claims in full, which was reviewed and approved by the JCT during the third quarter of 2020. As a result, our unrecognized tax benefits were reduced by $8.3 million. In late January 2021, we received notification from the IRS that our federal returns for 2017 and 2018 were selected for examination. The completion of this IRS examination could impact our future results of operations and financial condition.

State income tax returns are generally subject to examination for a period of three to four years after filing the returns. However, the state impact of any federal audit adjustments and/or 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 2016 tax year forward. As of December 31, 2020, we did not have any state audits underway that would have a material impact on our financial position or results of operations.

We believe it is reasonably possible that a reduction of up to $28.8 million in unrecognized tax benefits could occur within the next twelve months. Any reduction in our unrecognized tax benefits, due to the future recognition of those tax benefits, would affect our effective tax rates.