Income Taxes

9 Months Ended

Sep. 30, 2023

Income Tax Disclosure [Abstract]

Income Taxes

NOTE 9 – INCOME TAXES

The Company is subject to federal income tax as well as taxes in various state, local, and foreign jurisdictions. Tax statutes and regulations within each jurisdiction are subject to interpretation and require the application of significant judgment. The Company’s 2019 through 2021 tax years remain subject to examination by the Internal Revenue Service for federal tax purposes. Certain significant state, local, and foreign tax returns also remain open under the applicable statutes of limitations and, as such, are subject to examination for the tax years from 2018 to 2021.

The Company’s effective tax rate for the three months ended September 30, 2023 and 2022 was 1.4% and 11.7%, respectively, and 9.4% and 23.2% for the nine months ended September 30, 2023 and 2022, respectively.

A reconciliation of the Company’s statutory rate to the effective tax rate for the three and nine months ended September 30, 2023 and 2022 is as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Taxes at statutory rate		21.0	%		21.0	%		21.0	%		21.0	%
State taxes, net of federal benefit		5.8	%		5.6	%		5.8	%		5.6	%
Executive compensation		1.4	%		1.5	%		1.4	%		1.5	%
Corporate-owned life insurance		(0.2	%)		1.1	%		(0.2	%)		1.1	%
Other permanent differences		0.4	%		1.0	%		0.3	%		0.7	%
Prior year tax adjustments		(27.1	%)		0.3	%		(10.8	%)		(0.3	%)
Uncertain tax position		19.1	%		—			6.9	%		—
Worthless stock		(20.2	%)		(17.7	%)		(7.3	%)		(5.5	%)
Capital loss		—			—			(6.7	%)		—
Valuation allowance		3.1	%		0.7	%		1.9	%		1.0	%
Equity-based compensation		(0.6	%)		(1.3	%)		(1.6	%)		(1.4	%)
Tax credits		(1.3	%)		(0.5	%)		(1.3	%)		(0.5	%)
Taxes at effective rate		1.4	%		11.7	%		9.4	%		23.2	%

The Company restructured the ownership of its Canadian entities for tax purposes during the second quarter of 2023, resulting in a 6.7% decrease in the Company’s effective income tax rate for the nine months ended 2023 compared to 2022.

The Company liquidated one of its UK subsidiaries as part of the winddown of its commercial marketing business during the third quarter of 2023, resulting in a reduction in the Company’s effective income tax rate of 20.2% and 7.3% for the three and nine months ended September 30, 2023, respectively.

On December 20, 2017, the U.S. Congress passed the Tax Cuts and Job Act of 2017 (the “TCJA”) which was signed into law on December 22, 2017 and was generally effective beginning January 1, 2018. The TCJA changed the provision for deduction of allowable research and development costs under the IRC. Effective for tax years beginning after January 1, 2022, research and development costs are required to be capitalized and amortized over a period of five years for domestic and fifteen years for foreign research and development for income tax purposes. As a result of the capitalization, the Company recognized an increase of $9.9 million in deferred tax asset for both the three and nine months ended September 30, 2023, respectively.

During the third quarter ended September 30, 2023, the Company recorded return-to-provision adjustments in connection with the filing of its 2022 U.S. federal tax return. The adjustments were primarily driven by increase in tax credits associated with qualifying research activities.

As of September 30, 2023 and December 31, 2022, the Company’s unrecognized tax benefits and the related accrued interest totaled $26.8 million and $0.2 million, respectively, which include $4.7 million and $0.1 million, respectively, of tax positions that, if recognized, would impact the effective rate. The unrecognized tax benefits and the related accrued interest are included as part of other long-term liabilities on the Company’s consolidated balance sheets.

The components and a reconciliation of unrecognized tax benefits are as follows:

	September 30, 2023		December 31, 2022
Transfer pricing	$	145	$	145
Section 41 tax credit		4,595		—
Section 174 expense capitalization		21,416		—
Total unrecognized tax benefits liabilities	$	26,156	$	145

Unrecognized tax benefits at January 1, 2022	$	450
Decrease attributable to tax positions taken during the prior period		(305	)
Unrecognized tax benefits at December 31, 2022		145
Increase attributable to tax positions taken during the current period		26,011
Unrecognized tax benefits at September 30, 2023	$	26,156