Income Taxes

12 Months Ended

Dec. 31, 2022

Income Taxes

Income Taxes

11. Income Taxes

Provision (Benefit) for Income Taxes

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

	December 31,
	2022		2021		2020
Current tax provision—
Federal	$	58,040	$	31,283	$	36,556
State		26,376		8,741		12,798
Total current		84,416		40,024		49,354
Deferred tax provision (benefit)—
Federal		(80,130)		6,197		(5,483)
State		(14,375)		705		(2,470)
Total deferred		(94,505)		6,902		(7,953)
Provision (benefit) for income taxes	$	(10,089)	$	46,926	$	41,401

The provision (benefit) for income taxes for the years ended December 31, 2022, 2021 and 2020 resulted in effective tax rates on continuing operations of (4.3%), 24.7% and 21.6%, respectively. The reasons for the differences between these effective tax rates and the federal statutory rates are as follows (in thousands, except percentages):

	December 31,
	2022			2021			2020
Federal statutory rate of—		21	%		21	%		21	%
Income taxes at the federal statutory rate	$	49,530		$	39,958		$	40,223
Increases (decreases) resulting from—
Net state income taxes		9,376			7,340			8,406
Valuation allowances		(95)			(39)			(254)
Net unrecognized tax benefits		(17,922)			640			18,557
Nondeductible expenses		4,045			2,381			2,470
R&D tax credit		(51,398)			—			(26,133)
179D deduction		(964)			(1,207)			(1,062)
Stock-based compensation deductions		(872)			(2,210)			(426)
Other		(1,789)			63			(380)
Provision (benefit) for income taxes	$	(10,089)		$	46,926		$	41,401

During the third quarter of 2020, the Internal Revenue Service (the “IRS”) completed their 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 decreased by $8.3 million due to a reduction in unrecognized tax benefits.

In early October 2020, we filed amended federal returns for 2016, 2017 and 2018 primarily to claim the credit for increasing research activities (the “R&D tax credit”) requesting refunds of $9.8 million, $9.5 million and $11.9 million, respectively. The $31.2 million of refunds requested was offset by an increase in unrecognized tax benefits of $28.8 million due to the uncertainty of the outcome of an IRS examination. Because of the increase in unrecognized tax benefits, the refunds requested for 2016, 2017 and 2018 had no material impact on our effective tax rates in the 2020 and 2021 calendar years.

Following an IRS survey of the previously filed refund claims for the 2016, 2017 and 2018 tax years, the JCT approved such refunds in late January 2022. As a result, our benefit for income taxes in the first quarter of 2022 included a $28.8 million reduction in unrecognized tax benefits plus approximately $1.6 million of net interest income on the refunds.

Our benefit for income taxes in the first quarter of 2022 was further increased by $26.8 million for the expected refunds due to our intention to claim the R&D tax credit for the 2019, 2020 and 2021 tax years. In the third quarter of 2022, we claimed the R&D tax credit on our originally filed 2021 federal return and recognized an additional $1.7 million benefit for the 2019, 2020 and 2021 tax years. Additionally, in February 2023, we filed amended federal returns for 2019 and 2020 requesting refunds primarily from claiming the R&D tax credit.

The Inflation Reduction Act was enacted on August 16, 2022. This law, among other provisions, provides a corporate alternative minimum tax on adjusted financial statement income over $1 billion, which is effective for tax years beginning after December 31, 2022, and a 1% excise tax on net corporate stock repurchases after December 31, 2022. We currently believe these provisions will be immaterial to our overall financial results, financial position and cash flows.

Deferred Tax Assets (Liabilities)

Significant components of the deferred tax assets and deferred tax liabilities as reflected on the Consolidated Balance Sheets are as follows (in thousands):

	Year Ended
	December 31,
	2022		2021
Deferred tax assets—
Accounts receivable and allowance for credit losses	$	2,530	$	1,878
Stock-based compensation		3,809		3,392
Accrued liabilities and expenses		34,179		36,255
Lease liabilities		32,048		27,944
Net operating loss carryforwards		5,361		10,379
Intangible assets		9,204		3,851
Research and experimental expenditures		106,002		—
Other		539		758
Subtotal		193,672		84,457
Valuation allowances		(379)		(475)
Total deferred tax assets		193,293		83,982
Deferred tax liabilities—
Property and equipment		(18,882)		(15,534)
Lease right-of-use asset		(32,025)		(27,905)
Long-term contracts		(1,870)		(964)
Goodwill		(23,288)		(17,321)
Other		(1,563)		(1,098)
Total deferred tax liabilities		(77,628)		(62,822)
Net deferred tax assets	$	115,665	$	21,160

The deferred tax assets and deferred tax liabilities reflected above are included in the Consolidated Balance Sheets as follows (in thousands):

	December 31,
	2022		2021
Deferred tax assets	$	115,665	$	22,905
Deferred tax liabilities	$	—	$	1,745

As of December 31, 2022, our deferred tax assets were primarily attributable to research and experimental (“R&E”) expenditures, accrued liabilities and expenses, intangible assets and net operating loss (“NOL”) carryforwards. Beginning in 2022, R&E expenditures must be capitalized and amortized pursuant to the Tax Cuts and Jobs Act (2017). Of the $5.4 million deferred tax asset for NOL carryforwards, $4.8 million is related to $23.1 million of federal NOL carryforwards from the TAS Energy Inc. (“TAS”) acquisition. If not used, such carryforwards will begin to expire in 2032.

Pursuant to Section 382 of the Internal Revenue 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.

Our management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of the existing deferred tax assets. The most significant piece of objective evidence evaluated was three years of cumulative pretax income in the federal jurisdiction. Management determined there is sufficient positive evidence to conclude it is more likely than not our deferred tax assets are virtually all realizable.

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,
	2022		2021		2020
Balance at beginning of year	$	29,452	$	28,756	$	10,199
Additions based on tax positions related to current year		3,420		207		—
Additions based on tax positions related to prior years		7,427		489		26,858
Reductions for tax positions related to prior years		(13)		—		—
Reductions for settlements with taxing authorities		(28,756)		—		(8,301)
Balance at end of year	$	11,530	$	29,452	$	28,756

As of December 31, 2022, 2021 and 2020, we had $11.5 million, $29.5 million and $28.8 million, respectively, of unrecognized tax benefits, which if recognized in future periods, would impact our effective tax rates. We also accrued $0.3 million for potential interest and penalties related to the unrecognized tax benefits as of December 31, 2022. We recognize potential interest and penalties related to unrecognized tax benefits in our provision for income taxes.

We are subject to taxation in the federal and various state jurisdictions. For the years ended December 31, 2022 and 2020, our unrecognized tax benefits were reduced by $28.8 million and $8.3 million, respectively, due to favorable settlements with the IRS for the 2014 through 2018 tax years. As of December 31, 2022, we remain open to IRS examination for the 2019 tax year forward.

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. As of December 31, 2022, we generally remain open to examination by various state taxing authorities for the 2018 tax year forward.

We believe it is reasonably possible that a reduction of up to $5.3 million in unrecognized tax benefits could occur within the next twelve months. Any reductions in our unrecognized tax benefits, due to the future recognition of those tax benefits, would affect our effective tax rates.