INCOME TAXES

12 Months Ended

Dec. 31, 2023

INCOME TAXES

INCOME TAXES

8. INCOME TAXES

Benefit from (provision for) income taxes the years ended December 31, 2023 and 2022 consisted of the following (in thousands):

	Years Ended December 31,
	2023		2022
Income before provision for (benefit from) income taxes	42,915		26,965
Provision for (benefit from) income taxes	8,939		(3,699	)
Effective tax rate	20.8	%	13.7	%

Provision for income taxes for the year ended December 31, 2023 resulted primarily from estimated domestic and foreign taxes included in the calculation of the effective tax rate. Benefit from income taxes for the year ended December 31, 2022, resulted primarily from estimated domestic and foreign taxes included in the calculation of the effective tax rate. We provided no valuation allowance for federal assets and continue to maintain full valuation allowance for state and certain foreign deferred tax assets in the United States and Canada.

The components of our income before benefit from (provision for) income taxes were as follows (in thousands):

	Years Ended December 31,
	2023		2022
Domestic	$	30,458	$	14,552
Foreign	12,457		12,413
Total	$	42,915	$	26,965

The benefit from (provision for) income taxes consisted of the following (in thousands):

	Years Ended December 31,
	2023		2022
Current:
U.S. federal	$	3,554	$	458
States and local	236		74
Foreign	1,621		871
Total current	5,411		1,403
Deferred:
U.S. federal	2,921		(5,694		)
States and local	—		—
Foreign	607		592
Total deferred	3,528		(5,102		)
Total benefit from (provision for) income taxes	$	8,939	$	(3,699	)

Deferred tax assets and liabilities are recognized for the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, tax losses, and credit carryforwards.

Significant components of the net deferred tax assets and liabilities consisted of (in thousands):

	December 31,
	2023			2022
Deferred tax assets:
Net operating loss carryforwards	$	4,785		$	5,391
State income taxes	50			15
Deferred revenue	2,769			3,498
Research and development and other credits	3,701			3,757
Reserve and accruals recognized in different periods	(563		)	1,692
Capitalized research and development expenses	2,850			3,019
Depreciation and amortization	587			1,802
Lease liability	7			104
Total deferred tax assets	14,186			19,278
Valuation allowance	(10,837		)	(12,341		)
Net deferred tax assets	3,349			6,937
Deferred tax liabilities:
Right of use lease assets	(6		)	(67		)
Total deferred tax liabilities	(6		)	(67		)
Net deferred taxes	$	3,343		$	6,870

We account for deferred taxes under ASC 740 which requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the ASC 740 more-likely-than-not realization (“MLTN”) threshold criterion. This assessment considers matters such as future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. The evaluation of the recoverability of the deferred tax assets requires that we weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. As of December 31, 2023, based on our assessment of the realizability of our deferred tax assets, we provided no valuation allowance for certain federal assets, whose future realization is more likely than not and continue to maintain full valuation allowance for state and certain foreign deferred tax assets in the United States and Canada, whose future realization is not more likely than not to be realized. As of December 31, 2022, based on our assessment of the realizability of our deferred tax assets, we put partial valuation allowance for certain federal assets, whose future realization is not more likely than not and continue to maintain full valuation allowance for state and certain foreign deferred tax assets in the United States and Canada.

As of December 31, 2023 the net operating loss carryforwards for state income tax purposes were approximately $53.0 million, respectively. The state net operating losses begin to expire in 2029. The federal net operating losses for tax years after 2017 can be carried forward indefinitely. We have no net operating loss carryforward from foreign jurisdictions. As of December 31, 2023 we had federal and state tax credit carryforwards of approximately $2.0 million and $2.5 million, respectively, available to offset future tax liabilities. The federal credit carryforwards will expire between 2023 and 2039 and the California tax credits will carryforward indefinitely. In addition, as of December 31, 2023 we have Canadian research and development credit carryforwards of $1.7 million, which will expire at various dates through 2040. These operating losses and credit carryforwards have not been reviewed by the relevant tax authorities and could be subject to adjustment upon examinations.

Section 382 of the Internal Revenue Code (“IRC Section 382”) imposes limitations on a corporation’s ability to utilize its net operating losses and credit carryforwards if it experiences an “ownership change” as defined by IRC Section 382. Utilization of a portion of our federal net operating loss carryforward was limited in accordance with IRC Section 382, due to an ownership change that occurred during 1999. This limitation has fully lapsed as of December 31, 2010.

The reconciliation of federal statutory income tax rate to our effective tax rate was as follows (in thousands): 

	Years Ended December 31,
	2023		2022
Federal statutory rate	21.0	%	21.0	%
Foreign withholding	0.7	%	0.3	%
Stock-based compensation expense	(0.7)	%	0.3	%
Foreign rate differential	(2.1)	%	(2.3)	%
Prior year true-up items	—	%	(0.9)	%
Tax reserves	4.0	%	5.3	%
FTC	(6.0)	%	1.4	%
Other	0.6	%	0.7	%
State taxes, net of federal benefit	0.2	%	0.2	%
Global intangible low-taxed income	3.8	%	6.4	%
Nondeductible officers compensation	2.8	%	1.1	%
Valuation allowance	(3.5)	%	(47.2)	%
Effective tax rate	20.8	%	(13.7)	%

The undistributed earnings of our foreign subsidiaries are considered to be indefinitely reinvested and accordingly, no provision for applicable income taxes has been provided thereon. Upon distribution of those earnings, we are subject to withholding taxes payable to various foreign countries. As of December 31, 2023, any foreign withholding taxes on the undistributed earnings of our foreign subsidiaries were immaterial.

We maintain liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the best information available, including changes in tax regulations, the outcome of relevant court cases, and other information.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):

	Years Ended December 31,
	2023	2022
Balance at beginning of year	7,093	7,569
Gross increases for tax positions of prior years	—	647
Gross decreases for federal tax rate change for tax positions of prior years	125	(2,170	)
Gross increases for tax positions of current year	272	1,146
Lapse of statute of limitations	—	(99	)
Balance at end of year	7,490	7,093

The unrecognized tax benefits relate primarily to federal and state research and development credits, intercompany profit on the transfer of certain IP rights to one of our foreign subsidiaries as part of our tax reorganization completed in 2015 and withholding tax reserve. Based on our assessment of the development in the Samsung case in October 2021, we continue to accrue $0.3 million liability for 2023.

We account for interest and penalties related to uncertain tax positions as a component of income tax expense. As of December 31, 2022, we accrued $0.2 million interest or penalties related to uncertain tax positions. As of December 31, 2023, the total amount of unrecognized tax benefits that would affect our effective tax rate, if recognized, was $4.9 million.

Because we have net operating loss and credit carryforwards, there are open statutes of limitations in which federal, state and foreign taxing authorities may examine our tax returns for all years from 2008 through the current period.