Income Taxes

12 Months Ended

Dec. 31, 2019

Note 16: Income Taxes

Income (loss) before income taxes consisted of the following (in thousands):



	Years Ended December 31,
	2019			2018		2017
United States	$	(18,088	)	$	51,385	$	3,293
Foreign	1,182			495		193
Income (loss) before income taxes	$	(16,906	)	$	51,880	$	3,486

Income tax expense (benefit) consisted of the following (in thousands):



	Years Ended December 31,
	2019			2018			2017
Current:
U.S. federal	$	(732	)	$	(42	)	$	123
State	2,901			3,230			962
Foreign	333			157			122
Total current expense	2,502			3,345			1,207
Deferred:
U.S. federal	(62,580		)	(3,035		)	(26,012		)
State	(4,970		)	37			(1,022		)
Foreign	(6		)	(36		)	(63		)
Total deferred benefit	(67,556		)	(3,034		)	(27,097		)
Income tax expense (benefit)	$	(65,054	)	$	311		$	(25,890	)

Income tax expense (benefit) differed from the amount calculated by applying the statutory federal income tax rate of 21% for 2019 and 2018, and 35% for 2017, as follows (in thousands):



	Years Ended December 31,
	2019			2018			2017
Income tax expense (benefit) at the statutory federal income tax rate	$	(3,550	)	$	10,895		$	1,220
Non-deductible compensation	1,933			2,796			283
Non-deductible acquisition-related transaction costs	1,359			—			—
State income taxes, net of federal benefit	(1,897		)	2,014			582
Uncertain tax positions and audit settlements	(1,227		)	473			(321		)
Research and development credit	—			(552		)	—
Excess tax benefits of stock-based compensation	(4,100		)	(6,851		)	(11,558		)
Valuation allowances	(56,881		)	(8,537		)	4,974
Tax legislation impact	—			—			(21,430		)
Other	(691		)	73			360
Income tax expense (benefit)	$	(65,054	)	$	311		$	(25,890	)

The primary difference between the statutory tax rate and the annual effective tax rate was the valuation allowance release, as discussed further below. Other differences between the statutory rate and the annual effective tax rate are related to excess tax benefits (windfalls) for stock compensation, uncertain tax positions, and state taxes, partially offset by non-deductible compensation and non-deductible acquisition-related transaction costs.

The tax effect of temporary differences and net operating loss carryforwards that gave rise to our deferred tax assets and liabilities were as follows (in thousands):



	December 31,
	2019			2018
Deferred tax assets:
Net operating loss and credit carryforwards	$	84,684		$	97,154
Capital loss	22,948			23,008
Accrued compensation	6,686			5,526
Stock-based compensation	4,986			3,971
Deferred revenue	4,042			3,700
Lease liability	2,133			—
Other, net	3,833			2,143
Total gross deferred tax assets	129,312			135,502
Valuation allowance	(43,824		)	(100,705		)
Deferred tax assets, net of valuation allowance	85,488			34,797
Deferred tax liabilities:
Amortization	(69,668		)	(72,563		)
Depreciation	(2,521		)	(1,572		)
Right-of-use assets	(2,382		)	—
Other, net	(920		)	(1,056		)
Total gross deferred tax liabilities	(75,491		)	(75,191		)
Net deferred tax assets (liabilities)	$	9,997		$	(40,394	)

At December 31, 2019, we evaluated the need for a valuation allowance for certain deferred tax assets based upon our assessment of whether it is more likely than not that we will generate sufficient future taxable income necessary to realize the deferred tax benefits. We maintain a valuation allowance against our deferred tax assets that are capital in nature to the extent that it is more likely than not that the related deferred tax benefit will not be realized. We also have a deferred tax asset related to the net operating losses (“NOLs”) that we believe is more likely than not to expire before utilization. In 2019, we released $56.9 million of the valuation allowance because we believe this portion of net operating losses is more likely than not to be realized. Additionally, we are no longer in a three-year cumulative loss position. If in the future we determine that any additional portion of the deferred tax assets is more likely than not to be realized, the tax benefit relating to any reversal of the valuation allowance on deferred tax assets as of December 31, 2019 will be recognized as a reduction of income tax expense. Conversely, if we determine that it is more likely than not that our deferred tax assets will not be utilized, we would record additional tax expense.

The changes in the valuation allowance for deferred tax assets are shown below (in thousands):



	Years Ended December 31,
	2019			2018			2017
Balance at beginning of year	$	100,705		$	109,242		$	226,813
Decrease in valuation allowance—future year utilization	(45,651		)	—			—
Increase (decrease) in valuation allowance—current year utilization	(10,943		)	(8,597		)	4,875
Decrease in valuation allowance—change in federal income tax rate	—			—			(72,482		)
Decrease in valuation allowance—adoption of ASU 2016-09	—			—			(50,203		)
Increase (decrease) in valuation allowance—other	(287		)	60			239
Balance at end of year	$	43,824		$	100,705		$	109,242

As of December 31, 2019, our U.S. federal and state net operating loss carryforwards for income tax purposes were $391.9 million and $26.9 million, respectively, which primarily related to excess tax benefits for stock-based compensation. If not utilized, our federal net operating loss carryforwards will expire between 2020 and 2037, with the majority of them expiring between 2020 and 2024. Additionally, changes in ownership, as defined by Section 382 of the Internal Revenue Code, may limit the amount of net operating loss carryforwards used in any one year.

A reconciliation of the unrecognized tax benefit balances is as follows (in thousands):



	Years Ended December 31,
	2019			2018			2017
Balance at beginning of year	$	22,590		$	22,625		$	22,919
Gross increases for tax positions of prior years	—			516			93
Gross decreases for tax positions of prior years	(99		)	—			(31		)
Gross increases for tax positions of current year	60			—			—
Purchase accounting for 1st Global Acquisition	442			—			—
Settlements with taxing authorities	(563		)	—			(66		)
Statute of limitations expirations	(2,947		)	(551		)	(290		)
Balance at end of year	$	19,483		$	22,590		$	22,625

The total amount of unrecognized tax benefits that could affect our effective tax rate if recognized was $6.3 million and $4.7 million as of December 31, 2019 and 2018, respectively. The remaining $13.2 million and $17.9 million was not recognized on the consolidated balance sheets as of December 31, 2019 and 2018, respectively, and if recognized, would create a deferred tax asset subject to a valuation allowance. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and Canada. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2015, although NOL carryforwards and tax credit carryforwards from any year are subject to examination and adjustment for at least three years following the year in which they are fully utilized. As of December 31, 2019, no significant adjustments have been proposed relative to our tax positions.

For the year ended December 31, 2019, we reversed $0.4 million of interest and penalties related to uncertain tax positions. For the years ended December 31, 2018 and 2017, we recognized $0.4 million and $0.2 million of interest and penalties related to uncertain tax positions, respectively. We had $1.4 million and $1.5 million accrued for interest and penalties as of December 31, 2019 and 2018, respectively.