Income Taxes

12 Months Ended

Dec. 31, 2023

Income Taxes

Income Taxes

12. Income Taxes

The Company provides for income taxes using an asset and liability approach, under which deferred income taxes are provided for based upon enacted tax laws and rates applicable to periods in which the taxes become payable.

For financial reporting purposes, income/ (loss) before income taxes includes the following components:

	Year Ended December 31,
	2023		2022
United States	$	(118,894)	$	(422,136)
Foreign		3,329		10,754
	$	(115,565)	$	(411,382)

The provision for federal, state, and foreign income taxes consists of the following:

	Year Ended December 31,
	2023		2022
Federal
Current	$	—	$	—
Deferred		666		(1,597)
State
Current		1,161		636
Deferred		(154)		(123)
Foreign
Current		8,755		3,416
Deferred		(1,560)		1,867
Income Tax Expense	$	8,868	$	4,199

The differences between income taxes expected by applying the U.S. federal statutory tax rate of 21% and the amount of income taxes provided for are as follows:

	Year Ended December 31,
	2023		2022
Tax at statutory rate	$	(24,268)	$	(86,390)
Add (deduct)
State income taxes		(11,056)		(8,520)
Foreign income taxes		1,459		1,290
Nondeductible goodwill impairment		3,465		34,967
Cancellation of debt income		—		6,429
Permanent differences		145		1,061
Litigation settlement		—		—
Changes in valuation allowance		90,334		75,210
Unremitted earnings		1,218		891
GILTI Inclusion		567		639
Expiration and reduction of tax attributes		(53,265)		(30,103)
Uncertain tax positions		4,051		—
Debt related basis differences		—		10,994
Other		(3,782)		(2,269)
Income Tax Expense	$	8,868	$	4,199

The Tax Cuts and Jobs Act (“TCJA”) was signed by the President of the United States and enacted into law on December 22, 2017. This overhaul of the US tax law made a number of substantial changes, including the reduction of the corporate tax rate from 35% to 21%, establishing a dividends received deduction for dividends paid by foreign subsidiaries to the US, elimination or limitation of certain deductions (interest, domestic production activities and

executive compensation), imposing a mandatory tax on previously unrepatriated earnings accumulated offshore since 1986 and establishing global minimum income tax and base erosion tax provisions related to offshore activities and affiliated party payments.

The TCJA subjects a US shareholder to tax on Global Intangible Low-taxed Income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for GILTI, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company has elected the accounting policy to recognize the tax expense related to GILTI in the year the tax is incurred as a period expense. At December 31 2023, the Company has GILTI inclusion of $2.7 million related to current-year operations.

On July 20, 2020, the U.S. Treasury and the Internal Revenue Service issued Final Regulations which will allow an annual election to exclude from the U.S. tax return certain GILTI amounts when the taxes paid by a foreign affiliate exceed 18.9% (90% of U.S. statutory rate of 21%) of the GILTI amount for that foreign affiliate (the “high-tax exception”). These regulations are effective for the 2023 taxable year with an election to apply to any taxable year beginning after 2017. In many of the countries in which the Company operates there are differences between local tax rules used to determine the tax base and the U.S. tax principles used to determine GILTI. Therefore, while many of the countries have a statutory tax rate above the 18.9% threshold, separate affiliates may not meet the 18.9% threshold each year and, as such, may not qualify for this exclusion. The Company plans to make the high-tax exception election for the 2023 tax year resulting in a GILTI inclusion of $2.7 million for the 2023 tax year. Additionally, the Company made the high-tax exception election for 2022 on its 2022 tax returns.

Beginning in 2018, the TCJA also subjects a U.S. shareholder of a controlled foreign corporation to current tax on certain payments from corporations subject to US tax to related foreign persons, also referred to as base erosion and anti-abuse tax ("BEAT"). The BEAT provisions in the Tax Reform Act eliminates the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum tax if greater than regular tax. The Company has recorded no tax liability related to BEAT for the year ended December 31, 2023 and 2022.

The components of deferred income tax liabilities and assets are as follows:

	Year Ended December 31,
	2023		2022
Deferred income tax liabilities:
Book over tax basis of intangible assets and fixed assets	$	(31,760)	$	(44,632)
Unremitted foreign earnings		(9,505)		(8,154)
Operating lease and finance lease right-of-use assets		(6,171)		(7,883)
Other, net		(1,595)		(2,005)
Total deferred income tax liabilities	$	(49,031)	$	(62,674)
Deferred income tax assets:
Allowance for credit losses and receivable adjustments	$	2,437	$	2,018
Inventory		3,127		3,141
Accrued liabilities		14,505		16,536
Net operating loss and tax credit carryforwards		34,222		156,180
Tax deductible goodwill		1,674		2,534
Disallowed interest deduction		184,006		146,923
Operating lease and finance lease liabilities		6,621		7,981
Sec 174 Costs		1,862		—
Debt and credit facilities		177,636		5,237
Other, net		10,983		17,595
Total deferred income tax assets	$	437,073	$	358,145
Valuation allowance		(396,691)		(305,168)
Total net deferred income tax assets (liabilities)	$	(8,649)	$	(9,697)

Gross deferred tax assets are reduced by valuation allowances to the extent the Company determines it is not more-likely-than-not the deferred tax assets are expected to be realized. At December 31, 2023, the Company recognized $396.7 million of valuation allowances against gross deferred tax assets primarily related to net operating loss and tax credit carryforwards. Of this amount, approximately $3.8 million of the total valuation allowance relates to state limitations on the utilization of net operating loss carryforwards due to numerous changes in ownership. Approximately $151.9 million and $21.8 million of the total valuation allowance relates to U.S. federal and state disallowed interest deduction pursuant to the TCJA. The remaining $219.3 million of the valuation allowance relates to non-limited U.S. and non-U.S. net operating losses, capital losses, and tax credits that are not expected to be realizable.

The net change during the year in the total valuation allowance was an increase of $91.5 million primarily related to the debt transaction which generated increases for tax original issuance discount partially offset by a decrease for eliminated net operating losses.

Under the debt buy-back program a substantial amount of the Company’s debt was extinguished. Absent an exception, a debtor recognizes cancelation of debt income (“CODI”) upon discharge of its outstanding indebtedness for an amount of consideration that is less than the outstanding debt. The Internal Revenue Code of 1986, as amended, (the Code), provides that a debtor may exclude CODI from taxable income to the extent the entity is insolvent, but must reduce certain of its tax attributes by the amount of CODI. The Company determined that the level of its insolvency at July 12, 2023 was below the indicated amount of CODI resulting from the debt exchange. For the year ended December 31, 2023 the amount of CODI was $780.0 million, of which $54.0 Million was included in the current year taxable income and $726.0 million was excluded from taxable income, resulting in the elimination of $624.0 million gross federal and state net operating losses. For the year ended December 31, 2022 the Company excluded $8.7 million of CODI from taxable income and reduced the gross U.S. federal net operating loss by the corresponding amount.

Included in deferred tax assets are foreign and state net operating loss carryforwards and state tax credit carryforwards due to expire beginning in 2023 through 2041. As of December 31, 2023, the Company has state income tax net operating loss (NOL) carryforwards of $250.5 million, which will expire at various dates from 2024 through

2042, and $1.3 million of federal NOLs and $27.3 million of state NOLs that carry forward indefinitely. Such NOL carryforwards expire as follows:

			State and Local
	Federal NOL		NOL
2024 - 2028	$	—	$	24,113
2029 - 2033		—		69,815
2034- 2042		—		129,266
Indefinite		1,333		27,328
	$	1,333	$	250,522

As of December 31, 2023, the Company has foreign net operating loss carryforwards of $20.9 million, $0.1 million of which were generated by Exela Poland, $0.2 million were generated in Hungary and Serbia, $0.7 million is generated in Netherland, $0.2 million were generated in Finland, $0.5 million were generated in Morocco and will expire in 2024, 2025, 2024, 2028 and 2027, respectively. The remainder of the foreign net operating losses will be carried forward indefinitely.

The Company adopted the provision of accounting for uncertainty in income taxes in the Topic of the ASC 740, Income Taxes (“ASC 740”). ASC 740 clarifies the accounting for uncertain tax positions in the Company's financial statements and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on tax returns. The total amount of unrecognized tax benefits, exclusive of interest and penalties, is $2.9 million, and $2.2 million at December 31, 2023 and 2022 respectively. Included in the balance of unrecognized tax benefits as of December 31, 2023 and 2022 are $2.9 million and $0.8 million, respectively, of tax benefits that, if recognized, would benefit the effective tax rate. Total accrued interest and penalties recorded on the consolidated balance sheet was $3.9 million and $2.0 million at December 31, 2023 and 2022, respectively. The total amount of interest and penalties recognized in the consolidated statement of operations for the years ended December 31, 2023 and 2022 was $1.9 million and $(0.4) million, respectively.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:

	Year Ended December 31,
	2023		2022
Unrecognized tax benefits—January 1	$	2,163	$	2,077
Gross increases—tax positions in prior period		2,230		—
Gross decreases—tax positions in prior period		(1,481)		(20)
Gross increases—tax positions in current period		88		106
Settlement		—		—
Lapse of statute of limitations		(82)		—
Unrecognized tax benefits—December 31	$	2,918	$	2,163

The Company files income tax returns in the U.S. and various state and foreign jurisdictions. The statute of limitations for U.S. purposes is open for tax years ending on or after December 31, 2018. State jurisdictions that remain subject to examination are not considered significant. The Company has significant foreign operations in India and EMEA. The Company may be subject to examination by the India tax authorities for tax periods ending on or after March 31, 2014.

At December 31, 2023, the Company maintains its prior indefinite reinvestment assertion on undistributed earnings related to certain foreign subsidiaries. Accordingly, no deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of approximately $145.0 million of undistributed earnings from these foreign subsidiaries as those earnings continue to be permanently reinvested. However, the Company does not indefinitely reinvest earnings in Canada, China, India, Mexico and Philippines. The Company recorded $9.1 million and $7.9 million of foreign withholding taxes on the undistributed earnings of these jurisdictions at December 31, 2023 and 2022, respectively. The Company recorded $1.2 million deferred expense and $0.8 million of deferred expense in the

consolidated statement of operations at December 31, 2023 and 2022, respectively. The foreign withholding taxes deferred expense recorded in the current year is attributable to the current year undistributed earnings.