Income Tax Expense

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Tax Expense

12. INCOME TAX EXPENSE

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, under which deferred tax assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and the respective tax bases.

Green Thumb Industries Inc. is organized in Canada but maintains all of its operations in the United States. Due to this inverted entity structure, the Company is subject to both U.S. and Canadian taxation.

For the years ended December 31, 2022, 2021 and 2020, income taxes expense consisted of:

		Years Ended December 31,
		2022		2021		2020
	(in thousands)
Current:
Federal	$	106,425	$	96,749	$	65,118
State		36,436		35,402		16,640
Foreign		—		—		—
Total Current		142,861		132,151		81,758
Deferred:
Federal		(37,362)		(6,151)		3,520
State		(10,722)		(1,388)		(1,425)
Foreign		—		—		—
Total Deferred		(48,084)		(7,539)		2,095
Total	$	94,777	$	124,612	$	83,853

The difference between the income tax expense for the years ended December 31, 2022, 2021 and 2020 and the expected income taxes based on the statutory tax rate applied to earnings (loss) arises as follows:

12. INCOME TAX EXPENSE (Continued)

		Years Ended December 31,
		2022		2021		2020
	(in thousands)
Income before Income Taxes	$	108,432	$	204,975	$	102,931
Statutory Tax Rates		21%		21%		21%
Expense/(Recovery) based on Statutory Rates		22,771		43,045		21,615
State Taxes		24,077		31,476		14,837
Provision to Return Adjustment		499		971		5,299
Adjustments for Stock Compensation		497		(1,836)		(211)
Non-deductible Expenses		40,870		40,847		27,570
Change in State Rate Reconciliation		(127)		54		(2,535)
Change in Valuation Allowance		(25,970)		10,712		7,706
Change in Uncertain Tax Position		30,607		2,776		9,918
Other Differences		1,553		(3,433)		(346)
Income Tax Expense	$	94,777	$	124,612	$	83,853

Income taxes paid for the years ended December 31, 2022, 2021 and 2020 were $118,176 thousand, $148,104 thousand and $72,575 thousand, respectively.

As the Company operates in the cannabis industry, it is subject to the limitations of IRC Section 280E under which the Company is only allowed to deduct expenses directly related to sales of product from its taxable income. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E. Therefore, the effective tax rate can be highly variable and may not necessarily correlate with pre-tax income or loss.

Deferred taxes are provided using an asset and liability method whereby deferred tax assets are recognized based on the rates at which they are expected to reverse in the future. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. The effect on deferred tax assets and liabilities of a change in tax law or tax rates is recognized in income in the period that enactment occurs.

At December 31, 2022 and 2021, the components of deferred tax assets and liabilities were as follows:

		Years Ended December 31,
		2022		2021
	(in thousands)
Deferred Tax Assets
Operating Lease Liabilities	$	60,588	$	42,982
Net Operating Losses		1,864		21,237
163(j) Interest Limitation		7,499		9,864
Warrant Fair Value Derivative		—		1,200
Stock-based Compensation		10,646		5,383
Asset Acquisition Life Difference		—		1,329
Capitalized Inventory		5,846		—
Fair Value Investments		3,306		—
Other		5,391		5,214
Valuation Allowance		(702)		(27,174)
Total Deferred Tax Assets		94,438		60,035
Deferred Tax Liabilities
Operating Right of Use Assets	$	(56,546)	$	(39,165)
Fair Value Investments		—		(4,703)
Warrant Fair Value Derivative		(4,804)		—
Intangibles		(52,508)		(84,896)
Total Deferred Tax Liabilities		(113,858)		(128,764)
Net Deferred Tax Liabilities	$	(19,420)	$	(68,729)

12. INCOME TAX EXPENSE (Continued)

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company assessed the positive and negative evidence to determine if sufficient future taxable income will be generated to use the existing deferred tax assets. A valuation allowance is maintained as of December 31, 2022 and 2021 in the amount of $702 thousand and $27,174 thousand, respectively.

As of December 31, 2022, the Company had $7,308 thousand of gross federal net operating loss carryforwards which will not expire. Additionally, the Company had $9,644 thousand of gross state net operating loss carryforwards, if not claimed, begin to expire in 2031.

Pursuant to IRC Sections 382 and 383, utilization of net operating losses and credits may be subject to annual limitations in the event of any significant future changes in its ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization.

The Company operates in a number of tax jurisdictions and are subject to examination of its income tax returns by tax authorities in those jurisdictions who may challenge any item on these returns. Because the tax matters challenged by tax authorities are typically complex, the ultimate outcome of these challenges is uncertain. In accordance with ASC 740, Income Taxes, the Company recognizes the benefits of uncertain tax positions in our consolidated financial statements only after determining that it is more likely than not that the uncertain tax positions will be sustained.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

		2022		2021		2020
	(in thousands)
Balance at Beginning of Year	$	13,117	$	10,341	$	2,113
Gross increases related to tax positions in a prior period		9,531		823		2,382
Gross decreases related to tax positions in a prior period		(1,100)		—		—
Gross increases related to tax positions in the current period		21,582		6,166		7,536
Gross decreases related to tax positions in a current period		—		(4,213)		(1,690)
Balance at End of Year	$	43,130	$	13,117	$	10,341

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2022 and 2021, the Company recognized $3,555 thousand and $1,377 thousand of interest and penalties, respectively. There are no positions for which it is reasonably possible that the uncertain tax benefit will significantly increase or decrease within twelve months. The Company files income tax returns in the U.S., various state jurisdictions, and Canada, which jurisdictions have varying statutes of limitations. The U.S. federal statute of limitation remains open for the 2019 tax year to the present. The state income tax returns generally remain open for the 2019 tax year through the present. Net operating losses arising prior to these years are also open to examination if and when utilized.