Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes

Income Taxes

Note 7. Income Taxes

For the years ended December 31, 2020 and 2019, Income before provision for income taxes, includes the following components (amounts in thousands):

	2020		2019
Domestic income	$	8,112	$	21,695
Foreign loss		(1,258)		(13,080)
Income before provision for income taxes	$	6,854	$	8,615

For the years ended December 31, 2020 and 2019, income tax expense is comprised of the following (amounts in thousands):

	2020		2019
Current income tax expense	$	7,405	$	8,493
Deferred income tax		1,587		3,593
Income tax expense	$	8,992	$	12,086

Current tax expense for the years ended December 31, 2020 and 2019, includes foreign withholding tax of $1.3 million and $1.4 million, respectively.

For the years ended December 31, 2020 and 2019, the reconciliation of income tax expense computed at the U.S. federal statutory rates to income tax expense is (amounts in thousands):

	2020		2019
Income tax expense at federal statutory rate-US Only	$	1,439	$	1,810
Income tax expense at federal statutory rate-Foreign Only		4,402		3,637
Permanent items		1,325		184
Return to provision true-ups -Current/Deferred		(2,042)		301
Foreign rate differential		(1,117)		(2,284)
Foreign tax credits		(5,693)		(5,501)
Foreign valuation allowance		4,615		10,007
Change in FTC valuation allowance		543		3,785
Revaluation of Puerto Rico deferred taxes		84		(1,361)
Foreign withholding taxes		1,283		1,449
Deferred foreign tax credit offset		29		(421)
State taxes and state rate change		2,073		480
Foreign rate tax change		2,051		—
Income tax expense	$	8,992	$	12,086

The effective tax rate for the years ended December 31, 2020 and 2019, excluding our share of the operating results from our equity investment in Canal 1 and return to provision adjustments, was 31% and 30%, respectively.

The 2017 Tax Cuts and Jobs Act (“Jobs Act”) was enacted on December 22, 2017. The Jobs Act revised the U.S. corporate income tax by lowering the statutory corporate tax rate from 35% to 21% in 2018. The Company generates income in higher tax rate foreign locations, which result in foreign tax credits. The lower federal corporate tax rate reduces the likelihood or our utilization of foreign tax credits created by income taxes paid in Puerto Rico and Latin America, resulting in a valuation allowance. Additionally, the Company evaluated the potential interest limitation established under the tax act and determined that no limitation would affect the 2020 provision for income taxes.

For the year ended December 31, 2020, the items that significantly affect the differences between the tax provision calculated at the statutory federal income tax rate, are the continued impact of the Tax Act, which impacted the valuation allowance on foreign tax credits, limitations on the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, the tax impact of state filings and filings in Puerto Rico related to prior years. The Company has evaluated the impact related the state filings and tax incentives in Puerto Rico which resulted in a net tax beneficial position. The impact of the Company’s state filings related to prior years is a net tax payable of $1.0 million. The impact of the tax incentives in Puerto Rico is a net refund benefit of $3.0 million related to Puerto Rico tax returns in prior years. During 2020, the Company accounted for the reduction in the Colombia tax rate related to its deferred tax assets. However, as these deferred tax assets have a full valuation allowance there was no effect on the provision expense.

For the year ended December 31, 2019, the items that significantly affect the differences between the tax provision calculated at the statutory federal income tax rate, are the continued impact of the Tax Act that reduced the federal tax rate to 21%, resulting in a valuation allowance on foreign tax credit carryforwards generated in 2019 of $3.8 million and the loss on the Company’s equity investment in Canal 1, which created a deferred tax asset, requiring an additional $10 million valuation allowance. In 2019, the Company qualified for Puerto Rico tax incentive in connection with local programming, and as a result, the company revalued certain deferred tax assets and liabilities, resulting in a net reduction of deferred tax liabilities of $1.4 million. Additionally, the increase in deferred tax liabilities in Puerto Rico increased the offsetting deferred tax asset in the U.S.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities calculated for financial reporting purposes and the amounts calculated for preparing its income tax returns in accordance with tax regulations and the net tax effects of operating loss and tax credits carried forward. Net deferred tax liabilities consist of the following components as of December 31, 2020 and 2019 (amounts in thousands):

	2020		2019
Deferred tax assets:
Allowances for doubtful accounts	$	1,078	$	776
Deferred branch tax benefit		11,645		11,813
Deferred revenue		114		109
NOL credit and other carryovers		290		274
Fixed assets		140		94
Accrued expenses		1,353		1,455
Foreign tax credit		19,040		18,497
Stock compensation		3,594		3,634
Pension		449		360
Interest rate swap		510		178
Intangibles		1,335		1,354
Equity method losses		26,996		21,976
Other deferred tax assets		4		38
Less: Foreign income valuation allowance		(27,186)		(22,570)
Less: Foreign tax credit valuation allowance		(19,040)		(18,497)
Total deferred tax assets		20,322		19,491
Deferred tax liabilities:
Prepaid expenses		(535)		(504)
Intangibles		(15,506)		(15,496)
Property and equipment		(7,992)		(8,225)
Amortization expense		(15,595)		(13,389)
Total deferred tax liabilities		(39,628)		(37,614)
	$	(19,306)	$	(18,123)

The deferred tax amounts mentioned above have been classified on the accompanying Consolidated Balance Sheets as of December 31, 2020 and 2019 as follows (amounts in thousands):

	2020		2019
Non-current assets	$	—	$	1,208
Non-current liabilities	$	19,306	$	19,331

At December 31, 2020 and 2019, the Company has foreign tax credit carryforwards for U.S. federal purposes and foreign minimum credits totaling $19.0 million and $18.5 million, respectively, which expire during the years 2021 through 2030. In addition, the impact of foreign tax credits and related valuation allowance had an impact on the tax rate. These tax credits were generated on revenues earned by our networks in Puerto Rico, and Latin America. The realization of deferred tax assets depends on the generation of sufficient taxable income of the appropriate character and in the appropriate taxing jurisdiction during the future periods in which the related temporary differences become deductible. A valuation allowance is provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized. As the Jobs Act significantly reduced the U.S. tax rate to 21%, the Company anticipates generating excess foreign tax credits and would not be able to use its historic foreign tax credits before they expire. As a result, in 2020 and in 2019, the Company recorded a valuation allowance against our foreign tax credits of $19.0 million and $18.5 million, respectively. In addition, the Canal 1 operations incurred losses in 2020 and 2019, and the Company concluded that it is more likely than not to use the created deferred tax assets and recorded a valuation allowance of $27.2 million and $22.6 million against the balance at December 31, 2020 and 2019, respectively. The Company has foreign net operating losses carryforwards related to its Canal 1 investment totaling $0.9 million and $0.8 million, at December 31, 2020 and 2019, respectively, which expire beginning in 2030.

Upon audit, taxing authorities may prohibit the realization of all or part of an uncertain tax position. The Company regularly assesses the outcome of potential examinations in each of the tax jurisdictions when determining the adequacy of the amount of unrecognized tax benefit recorded. The Company recognizes interest and penalties related to uncertain tax positions, if any, in income tax expense. As of December 31, 2020, the Company recorded a gross uncertain tax position reserve of $0.1 million related to state tax filings. As of December 31, 2019, the Company did not have any uncertain tax position reserves.