Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Net income (loss) before income taxes for the years ended December 31, 2021, 2020 and 2019, includes the following components (in thousands):

	Year Ended December 31,
	2021		2020		2019
U.S.	$	193,161	$	(118,296)	$	149,797
Foreign	(146,850)		(17,410)		(23,563)
Net income (loss) before income tax	$	46,311	$	(135,706)	$	126,234

Provision for (benefit from) income taxes for the years ended December 31, 2021, 2020 and 2019 consist of the following (in thousands)

	Year Ended December 31,
	2021		2020		2019
Current:
Federal	$	64,585	$	20,162	$	23,703
State	10,234		4,087		1,888
Foreign	1,914		4,027		568
	76,733		28,276		26,159
Deferred:
Federal	(52,162)		(29,235)		(720)
State	(2,394)		(4,800)		(99)
Foreign	(11,204)		(4,013)		(18,146)
	(65,760)		(38,048)		(18,965)
Total provision for (benefit from) income taxes.	$	10,973	$	(9,772)	$	7,194

The reconciliation of federal statutory income tax rate to the effective income tax rate is as follows (in thousands):

	Years ended December 31,
	2021		2020		2019
Tax provision (benefit) at U.S. federal statutory rate	$	9,725	$	(28,498)	$	26,509
State income taxes, net of federal benefit	1,866		(1,137)		1,412
Foreign income taxed at different rates	10,563		8,710		2,887
Change in foreign deferred tax rate	—		(6,038)		(17,143)
Stock-based compensation	(8,807)		10,347		1,671
Foreign-derived intangible income	(10,477)		(3,518)		(8,600)
Research and development credits	(6,193)		(2,561)		(1,025)
Extinguishments of acquisition-related contingent consideration	—		12,237		—
Foreign Income Inclusion	(2,622)		—		—
Change in valuation allowance	15,905		—		—
Other	1,013		686		1,483
Total provision for (benefit from) income taxes	$	10,973	$	(9,772)	$	7,194

In August 2019, the Company acquired certain mobile game apps from an entity based in Cyprus. A deferred tax liability was created due to basis differences of assets acquired. In December 2019, pursuant to a year-end restructuring, the Company changed the tax residency of the operations related to the mobile game apps acquired. Accordingly, the deferred tax liability associated with basis differences in Cyprus was reduced by $17.1 million.

The following summarizes the current and deferred tax assets and liabilities (in thousands):

	As of December 31,
	2021		2020
Deferred tax assets:
Accrued expenses and reserves	$	6,374	$	4,757
Stock-based compensation	14,651		1,955
Tax credit carryforwards	4,835		2,526
Net operating loss	12,042		3,787
Identified intangibles	—		8,996
Operating lease liability	16,622		20,551
Other comprehensive income	16,251		—
Foreign tax deduction	12,363		—
Other	2,247		(256)
Valuation allowance	(18,842)		(531)
Total deferred tax assets	66,543		41,785
Deferred tax liabilities:
Depreciation and amortization	(5,433)		(6,857)
Identified intangibles	(6,049)		—
Operating lease right-of-use assets	(16,622)		(20,345)
Total deferred tax liabilities	(28,104)		(27,202)
Net deferred tax assets	38,439		14,583

As of December 31, 2021 and 2020, the Company has federal net operating loss carryforwards of $13.7 million and $19.6 million, respectively, to reduce future taxable income. The net operating losses are not subject to expiration. As of December 31, 2021 and 2020, the Company has federal tax credit carryforwards of $0.9 million and $0.9 million, respectively, to offset future tax liability. The credit carryforwards will begin to expire in 2035. As of December 31, 2021, the Company has federal capital loss carryforward of $4.7 million to reduce future capital gains. The capital loss carryforward will expire in 2026.

As of December 31, 2021 and 2020, the Company has California net operating loss carryforwards of $8.8 million and $9.2 million, respectively, to reduce future taxable income. The net operating losses will begin to expire in 2037. As of December 31, 2021 and 2020, the Company has California tax credit carryforwards of $9.5 million and $4.8 million, respectively, to offset future tax liability. The credit carryforwards are not subject to expiration. As of December 31, 2021 and 2020, the Company has Texas tax credit carryforwards of $0.2 million and $0.3 million, respectively, to offset future tax liability. The credit carryforwards will begin to expire in 2040.

The valuation allowance on the Company's net deferred tax assets increased by $18.3 million, $0.5 million and nil during the years ended December 31, 2021, 2020 and 2019, respectively.

In assessing the realizability of the Company’s deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management’s assessment is based on the weight of available evidence, including cumulative losses since inception and expected future losses and as such, management believes it is more likely than not that the deferred tax assets will be realized. As of December 31, 2021 and 2020, the Company maintained a valuation allowance with respect to certain of its deferred tax assets relating primarily to certain state tax credits and operating losses in certain non-U.S. jurisdictions that we believe are not likely to be realized.

Internal Revenue Code (IRC) Section 382 places a limitation on the amount of taxable income that can be offset by net operating loss carryforwards and tax credits after a greater than 50% change in control in ownership; California has similar rules. The Company’s capitalization described herein may have resulted in such a change. Utilization of the net operating loss carryforwards may be subject to annual limitations under IRC Section 382 and similar state provisions. The annual limitation may result in the expiration of the net operating loss carryforwards before utilization.

The Company has not provided U.S. income or foreign withholding taxes on the undistributed earnings of its foreign subsidiaries as of December 31, 2021 and 2020, because it intends to permanently reinvest such earnings outside of the U.S. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability will be immaterial, due to the participation exemption put in place in the Tax Act.

Uncertain Tax Positions

The following table summarizes the activity related to the gross unrecognized tax benefits (in thousands):

	As of December 31,
	2021		2020		2019
Balance at beginning of year	$	14,401	$	6,646	$	2,858
Increases related to prior year positions	5,027		4,681		2,377
Increases related to current year positions	2,631		3,498		1,581
Decreases related to lapse of statutes	(172)		(424)		(170)
Decreases related to settlements	(3,431)		—		—
Balance at end of year	$	18,456	$	14,401	$	6,646

Of the unrecognized tax benefits, $13.6 million and $13.0 million represents the amount that if recognized, would favorably affect the effective income tax rate in 2021 and 2020, respectively. The Company does not expect a significant change to its unrecognized tax benefits or recorded liabilities over the next twelve months. The unrecognized tax benefits may increase or change during the next year for items that arise in the ordinary course of business.

The Company records interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2021, 2020 and 2019, the Company had approximately $3.6 million, $2.3 million, and $0.7 million of interest and penalties, respectively.

The tax return for years 2017 through 2021 remain open to examination for federal and other major domestic taxing jurisdictions and for years 2016 through 2021 for other major foreign jurisdictions.