Income Taxes

9 Months Ended

Sep. 30, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income TaxesFor the three months ended September 30, 2021 and 2020, the Company recorded income tax expense of $1.6 million and $1.5 million, respectively, which reflects an effective tax rate of (146.0)% and 126.6%, respectively. For the nine months ended September 30, 2021 and 2020, the Company recorded income tax expense of $22.8 million and $4.6 million, respectively, which reflect an effective tax rate of (64.5)% and 147.0%, respectively. The increase in the income tax expense for the three and nine months ended September 30, 2021 was primarily driven by a change in valuation allowance for U.S. deferred tax assets and impairment of goodwill and intangible assets.

The Company regularly assesses the need for a valuation allowance related to its deferred income tax assets, which includes consideration of both positive and negative evidence related to the likelihood of realization of such deferred income tax assets to determine, based on the weight of the available evidence, whether it is more-likely-than-not that some or all of its deferred tax assets will not be realized. In its assessment, the Company considers recent financial operating results, projected future taxable income, the reversal of existing taxable differences and tax planning strategies. During the nine months ended September 30, 2021, as a result of a U.S. cumulative loss over the last three years and lower financial expectations for the remainder of 2021, the Company concluded that it was not more likely than not that a portion of the U.S. deferred income tax assets would be realized. The Company provided a valuation allowance on U.S. federal and state net operating loss carryforwards, and other U.S. net deferred income tax assets that have a limited life and are not supportable by indefinite-lived intangibles deferred tax liability sourced income as of September 30, 2021. The Company accordingly recognized a charge of $21.5 million to establish a valuation allowance related to the U.S. deferred income tax assets which was recorded discretely in the quarter ended June 30,2021. In addition, the Company intends to continue maintaining a valuation allowance on its Israel and German deferred tax assets until there is sufficient evidence to support reversal of all or some portion of these allowances. There were no material changes to the facts or the amount of the valuation allowances as of September 30, 2021.

As of September 30, 2021 and December 31, 2020, the Company has $4.7 million and $4.6 million of unrecognized tax benefits, respectively, all of which would impact the effective tax rate if recognized. As of September 30, 2021 and December 31, 2020, the Company has recorded $0.5 million and $0.4 million of interest and penalties related to unrecognized tax benefits, respectively, all of which would impact the effective tax rate if recognized. The Company recognized an increase to interest and penalties of $0.1 million primarily due to U.S. tax credits and state nexus. The Company’s policy is to classify interest and penalties as a component of income tax expense. There were no significant changes to unrecognized tax benefits during the nine months ended September 30, 2021. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within the next twelve months. Based on the current status of German, U.S. federal, state, local and other foreign audits, the Company does not expect the amount of unrecognized tax benefits to significantly decrease in the next 12 months as a result of settlements of tax audits and/or the expiration of statutes of limitations.

As a matter of course, the Company may be audited by German, U.S. federal and state, Israeli, French, U.K. and other foreign tax authorities within the countries it operates. From time to time, these audits may result in proposed assessments. The Company was notified during 2020 that the Israeli tax authorities were auditing the Company's subsidiary, Spark Networks Ltd., for the tax years 2015-2019. There is minimal activity in the entity and while the Company does not expect adverse findings, any adverse finding could result in a reduction of the net operating loss carryforward, which has a full valuation allowance against it. The Company's two German entities are currently being audited by German tax authorities for the tax years 2017-2018 for Spark SE and for the tax years 2016-2018 for Spark GmbH. The Company is responding to questions and requests for information. At this point, there is no indication of any uncertainty with respect to both Israeli and German tax returns.