Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

11. Income Taxes

The components of our income taxes are as follows:

	Year Ended December 31,
(in thousands)	2022			2021			2020
Current
Federal	$	6,974		$	(361	)	$	235
State		3,120			2,532			848
Total current income tax expense		10,094			2,171			1,083
Deferred
Federal		(421	)		6,521			(7,472	)
State		(76	)		6,385			(3,438	)
Total deferred income tax (benefit) expense		(497	)		12,906			(10,910	)
Total income tax expense (benefit)	$	9,597		$	15,077		$	(9,827	)

The following is a reconciliation of the U.S. federal statutory rate of 21.0% to our effective income tax rate:

	Year Ended December 31,
(dollars in thousands)	2022			2021			2020
Income taxes computed at federal statutory rate	$	(4,879	)	$	(2,137	)	$	(63,725	)
State income taxes (1)		2,465			8,385			(2,768	)
Stock-based compensation		383			491			609
Excess tax (benefits) related to stock-based compensation		4,565			(43,797	)		(19,961	)
Research and development credits, net of reserves		(6,401	)		(8,206	)		(3,541	)
Nondeductible officers' compensation		12,295			21,905			79,046
Increase (decrease) in valuation allowance		68			37,782			(293	)
Transaction costs		39			438			277
Basis difference on disposition		659			—			—
Nondeductible penalties		318			16			6
Other		85			200			523
Income tax expense (benefit)	$	9,597		$	15,077		$	(9,827	)
Effective income tax rate		(41.3	%)		(148.1	%)		3.2	%

(1)Includes the state tax effects for (i) excess tax (benefits) related to stock-based compensation of $0.8 million, ($6.4) million and ($1.7) million for 2022, 2021 and 2020, respectively, and (ii) increase in valuation allowance of $4.4 and $14.6 million for 2022 and 2021, respectively. The state tax effect for valuation allowance in 2020 was not material.

Deferred taxes, net consist of the following:

	December 31,
(in thousands)	2022			2021
Deferred tax assets
Other assets	$	2,703		$	5,072
Operating lease liabilities		14,402			9,702
Stock-based compensation		12,542			10,097
Research and development credits, net of reserves		14,382			19,407
Tax credit carryforward		769			580
Interest expense carryforward		—			4,699
Charitable contribution carryforward		6,810			8,817
Goodwill		10,705			8,668
Capitalized research and development expenditures		9,269			—
Net operating losses		8,737			21,907
Total deferred tax assets		80,319			88,949
Valuation allowance		(57,115	)		(52,679	)
Deferred tax assets, net of valuation allowance		23,204			36,270
Deferred tax liabilities
Other liabilities		(1,143	)		(527	)
Operating lease right-of-use assets		(8,815	)		(6,727	)
Property and equipment		(4,383	)		(4,699	)
Capitalized software		—			(10,926	)
Intangible assets		(9,157	)		(13,635	)
Total deferred tax liabilities		(23,498	)		(36,514	)
Total deferred tax liabilities, net	$	(294	)	$	(244	)

We recognized total excess tax benefits of ($5.4) million, $50.2 million and $21.7 million associated with equity award exercises and vesting in income tax (expense) benefit for the years ended December 31, 2022, 2021 and 2020, respectively.

We consider all available positive and negative evidence in our assessment of the recoverability of our net deferred tax assets. Based on the weight of the evidence, we believed it was more likely than not that our net deferred tax assets in excess of tax amortizable goodwill would not be fully realizable primarily due to cumulative three-year pre-tax losses adjusted for permanent book to tax differences principally from substantial excess tax benefits realized mainly in 2021 and 2020 from the exercise of stock options granted prior to our IPO. Accordingly, we maintained a full valuation allowance against our net deferred tax assets in excess of tax amortizable goodwill as of December 31, 2022. Our judgment regarding the need for a valuation allowance, including the exact timing and amount of any release, may reasonably change in the next twelve months due to many factors, including changes in the level of tax profitability that we achieve, changes in tax laws or regulations and price fluctuations of our Class A common stock and its related effects on future excess tax benefits from outstanding stock options.

At December 31, 2022, we had U.S. federal net operating loss carryforwards ("NOLs") of $28.5 million available to reduce future federal income taxes. Approximately $11.6 million of these NOLs were generated before January 1, 2018 and will expire in varying amounts starting 2033. The remaining $16.9 million of these NOLs are carried over indefinitely but utilization is subject to an 80% taxable income limitation. At December 31, 2022, we also had state NOLs of $48.0 million available to reduce future state income taxes which will expire in varying amounts beginning 2024.

Section 382 of the Internal Revenue Code (“IRC”) limits the utilization of U.S. NOLs following a change of control. In 2020, there was a change in ownership of the PSCs. Utilization of the PSCs' NOLs are subject to an annual limitation based on changes in ownership, as defined by Sections 382/383. Any adjustment to the PSCs’ NOLs for Section 382 limitation would

not be material to the consolidated financial statements as a full valuation allowance has been established against the NOLs from the PSCs due to uncertainty regarding their future realization.

As of December 31, 2022, we had U.S. federal and California research tax credits carryforwards of $4.7 million and $19.8 million, respectively. The U.S. federal research tax credits will begin to expire in 2042 while the unused California research tax credits generally may be carried forward indefinitely.

At December 31, 2022, tax years 2019 and forward were subject to examination by the Internal Revenue Service (“IRS”), and tax years 2018 and forward were subject to examination by the various state taxing jurisdictions in which we are subject to tax. At December 31, 2022, we were not subject to any federal or state income tax audits.

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

(in thousands)
Gross unrecognized tax benefits at December 31, 2019	$	4,374
Increases related to prior year tax positions		126
Increases related to current year tax positions		3,327
Settlements with taxing authorities		(119	)
Lapse of statute of limitations		(317	)
Gross unrecognized tax benefits at December 31, 2020		7,391
Increases related to prior year tax positions		999
Increases related to current year tax positions		6,911
Lapse of statute of limitations		(505	)
Gross unrecognized tax benefits at December 31, 2021		14,796
Increases related to prior year tax positions		422
Increases related to current year tax positions		2,444
Decreases related to prior year tax positions		(1,160	)
Lapse of statute of limitations		(1,804	)
Gross unrecognized tax benefits at December 31, 2022	$	14,698

As of December 31, 2022, we had gross unrecognized tax benefits of approximately $14.7 million, $7.4 million of which is a reduction to deferred tax assets and the remaining $7.3 million which would affect our effective tax rate if recognized. The reduction in unrecognized tax benefits in 2023 due to the expiration of statute of limitations is not expected to be material.

At December 31, 2022 and 2021, accrued interest and penalties related to uncertain tax positions were not material.

For tax years beginning after December 31, 2021, the Tax Cuts & Jobs Act of 2017 eliminated the option to deduct research and development expenditures as incurred and instead required taxpayers to capitalize and amortize them over five or fifteen years beginning in 2022. We calculated the amount of research and development expenditures required to be capitalized in 2022 and reflected the impact in our 2022 income tax expense.

On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (“IRA”) into law. The IRA contains several revisions to the Internal Revenue Code, including a 15% corporate minimum income tax and a 1% excise tax on corporate stock repurchases in tax years beginning after December 31, 2022 with certain exclusions for (i) repurchased shares for withholding taxes on vested RSUs and (ii) treasury shares reissued in the same tax year for settlement of stock option exercises or vesting of RSUs. While these tax law changes have no immediate effect, we will continue to evaluate its impact as further information becomes available and as we complete any share repurchases in the future.