Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

13. INCOME TAXES

Pretax income for the years ended December 31, 2022, 2021 and 2020 was $134.3 million, $149.1 million and $146.7 million, respectively.

The provision for income taxes for the years ended December 31, 2022, 2021 and 2020 consists of the following (dollars in thousands):

	For the Year Ended December 31,
	2022			2021		2020
Current provision
Federal	$	33,166		$	19,143	$	-
State and local		5,913			4,956		2,110
Total current provision		39,079			24,099		2,110
Deferred (benefit) provision
Federal		(3,767	)		13,389		15,425
State and local		3,090			1,942		4,941
Total deferred (benefit) provision		(677	)		15,331		20,366
Total provision for income taxes	$	38,402		$	39,430	$	22,476

A reconciliation of the statutory U.S. federal income tax rate to our effective income tax rate for the years ended December 31, 2022, 2021 and 2020 is as follows:

	For the Year Ended December 31,
	2022				2021				2020
Statutory U.S. federal income tax rate		21.0		%		21.0		%		21.0		%
State and local income taxes		2.7				2.6				2.7
Stock-based compensation		0.6				1.0				(0.3	)
Capital loss		2.3				(2.1	)			-
Valuation allowance		(0.6	)			2.1				(10.9	)
Tax credits		(0.3	)			(0.3	)			(0.1	)
Other		2.9				2.1				2.9
Effective income tax rate		28.6		%		26.4		%		15.3		%

The effective tax rate for the year ended December 31, 2022 includes a $0.8 million unfavorable adjustment associated with the tax effect of stock-based compensation, which increased the effective rate by 0.6%. The 2022 effective rate also reflects the establishment of a full valuation allowance of $1.4 million with respect to select combined state net operating losses that are anticipated to go unused based on current expectations and $0.9 million related to the expected non-deductibility of reductions in the carrying value of our equity investment, which collectively increased the effective rate by 1.7%. During 2022, the Company re-evaluated the character of the loss incurred on the elimination of a wholly-owned subsidiary during the prior year and re-categorized this transaction in its 2021 tax returns as an ordinary loss attributable to the stock of a worthless subsidiary. As a result of our assessment, the $3.1 million deferred tax asset and offsetting valuation allowance with respect to the capital loss carryforward was eliminated, which had an offsetting impact on the effective tax rate of 2.3%.

The effective tax rate for the year ended December 31, 2021 includes a $1.6 million unfavorable adjustment associated with the tax effect of stock-based compensation, which increased the effective tax rate by 1.0%. The 2021 effective tax rate also reflects a $0.5 million favorable adjustment related to federal and state credits claimed for the 2020 tax return and anticipated for the 2021 tax year, which decreased the effective tax rate by 0.3% and a $3.1 million favorable adjustment associated with a capital loss incurred for tax purposes on the elimination of a wholly-owned subsidiary, which decreased the effective tax rate by 2.1%. Since utilization of the capital loss is not anticipated, a valuation allowance of $3.1 million was established against the full amount of the deferred tax balance for the capital loss carryforward, which increased the effective tax rate by 2.1%.

The effective tax rate for the year ended December 31, 2020 includes a $16.0 million favorable adjustment related to the release of a valuation allowance maintained against the portion of the foreign tax credit carryforward supported by an overall domestic loss (“ODL”) account balance, which decreased the effective tax rate by 10.9%. The 2020 effective tax rate also reflects a $0.4 million favorable adjustment associated with the tax effect of stock-based compensation, which decreased the effective tax rate by 0.3%.

A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits as of December 31, 2022, 2021 and 2020 is as follows (dollars in thousands):

	2022			2021			2020
Gross unrecognized tax benefits, beginning of the year	$	15,951		$	11,794		$	9,859
Additions for tax positions of prior years		4,290			941			-
Additions for tax positions related to the current year		5,584			4,250			2,954
Reductions for tax positions of prior years		-			-			(51	)
Reductions due to lapse of applicable statute of limitations		(1,167	)		(1,034	)		(968	)
Subtotal		24,658			15,951			11,794
Interest and penalties		2,451			2,020			1,919
Total gross unrecognized tax benefits, end of the year	$	27,109		$	17,971		$	13,713

The total amount of net unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future periods was $22.2 million and $14.2 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, our short and long-term reserves, recorded within current accrued income taxes and other non-current liabilities, respectively, related to FASB’s interpretation No. 48 of ASC Topic 740-10, Accounting for Uncertainty in Income Taxes or (“FIN 48”), were $5.7 million and $19.0 million, respectively. We record interest and penalties related to unrecognized tax benefits within provision for income taxes on our consolidated statements of income. The total amount of accrued interest and penalties resulting from such unrecognized tax benefits was $2.5 million and $2.0 million as of the years ended December 31, 2022 and 2021, respectively. For the years ended December 31, 2022, 2021 and 2020, we recognized less than $0.4 million of expense, less than $0.1 million of expense and less than $0.1 million of expense, respectively, related to interest and penalties from unrecognized tax benefits in our consolidated results of operations.

Perdoceo and its subsidiaries file income tax returns in the U.S. and in various state and local jurisdictions and are routinely examined by tax authorities in these jurisdictions. As of December 31, 2022, Perdoceo had been examined by the Internal Revenue Service through our tax year ending December 31, 2014. Due to the expiration of various statutes of limitations, it is reasonably possible that Perdoceo’s gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $6.3 million.

Deferred income tax assets and liabilities result primarily from temporary differences in the recognition of various expenses for tax and financial statement purposes, and from the recognition of the tax benefits of net operating loss and tax credit carry forwards. Components of deferred income tax assets and liabilities as of December 31, 2022 and 2021 are as follows (dollars in thousands):

	December 31,
	2022			2021
Deferred income tax assets:
Accrued occupancy	$	8,232		$	11,012
Foreign tax credits		7,229			16,958
Valuation allowance foreign tax credits		(7,229	)		(16,958	)
Compensation and employee benefits		9,399			6,371
Tax net operating loss carry forwards		17,530			17,832
Valuation allowance		(13,159	)		(12,090	)
Allowance for doubtful accounts		6,444			5,721
Accrued settlements and legal		159			199
Accrued restructuring and severance		539			343
Equity method for investments		881			401
Equity method for investments valuation allowance		(881	)		-
Available for sale short-term investments		1,267			-
Available for sale short-term investments valuation allowance		(1,267	)		-
Capital loss		-			3,130
Capital loss valuation allowance		-			(3,130	)
Capitalized research and development		2,896			-
Amortization		-			3,486
Depreciation		1,060			851
Other		1,492			1,587
Total deferred income tax assets		34,592			35,713
Deferred income tax liabilities:
Amortization		1,420			-
Right of use asset, net		6,199			9,244
Other		2,360			1,355
Total deferred income tax liabilities		9,979			10,599
Net deferred income tax assets	$	24,613		$	25,114