Income Taxes

12 Months Ended

Dec. 31, 2021

Income Taxes

Income Taxes

16.   Income Taxes

The components of loss before income taxes were as follows:

	YEAR ENDED DECEMBER 31,
	2021		2020		2019
Domestic	$	(10,373)	$	(55,355)	$	(12,995)
Foreign		6,998		5,174		3,844
Total	$	(3,375)	$	(50,181)	$	(9,151)

The components of provision for (benefit from) income taxes were as follows:

	DECEMBER 31,
	2021		2020		2019
Current tax provision
Federal	$	451	$	326	$	483
State and local		1,798		1,659		1,692
Foreign		8,826		4,634		4,303
Total current		11,075		6,619		6,478
Deferred tax benefit
Federal		(4,416)		(3,620)		3,137
State and local		(1,156)		276		(5,431)
Foreign		4,388		(4,059)		(4,409)
Total deferred		(1,184)		(7,403)		(6,703)
Total provision (benefit)	$	9,891	$	(784)	$	(225)

The effective income tax rate was (293.06%), 1.56%, and 2.46% for the years ended December 31, 2021, 2020 and 2019, respectively. The primary reconciling items between the statutory income tax rate of 21% and the effective income tax rate were as a result of the following:

	2021				2020				2019
Tax at U.S. federal statutory rate	$	(709)	21.00	%	$	(10,538)	21.00	%	$	(1,919)	21.00	%
State taxes, net of federal benefit		226	(6.71)	%		1,125	(2.24)	%		(3,852)	42.14	%
Foreign rate differential		3,872	(114.72)	%		2,296	(4.58)	%		1,654	(18.09)	%
Permanent items		(670)	19.84	%		(139)	0.28	%		(177)	1.93	%
Equity compensation		3,534	(104.70)	%		13,562	(27.03)	%		412	(4.51)	%
GIL TI inclusion		540	(16.00)	%		932	(1.86)	%		570	(6.24)	%
Tax credits		(7,060)	209.19	%		(7,618)	15.18	%		(4,264)	46.65	%
Rate change		5,256	(155.75)	%		2,076	(4.14)	%		(2,922)	31.97	%
Other adjustments		3,131	(92.76)	%		1,223	(2.43)	%		3,736	(40.87)	%
Return to provision adjustments		(66)	1.95	%		(103)	0.21	%		(139)	1.52	%
Valuation allowance		1,837	(54.40)	%		(3,600)	7.17	%		6,676	(73.04)	%
Effective tax rate	$	9,891	(293.06)	%	$	(784)	1.56	%	$	(225)	2.46	%

A portion of the Company’s income was attributable to Madeira, Portugal, which qualified for special tax programs authorized by the European Union.  For the period of 2008 through 2011, the Company was subject to Madeira's income tax rate of 0%, for 2012 an income tax rate of 4% applied, and for the period of 2013 through 2020 an income tax rate of 5% applied, and for the period 2021 through 2027 an income tax rate of 5% will apply.

The tax effects of temporary differences that gave rise to deferred tax assets and liabilities are summarized as follows:

	DECEMBER 31,
	2021		2020
Deferred tax assets
Accounts receivable	$	61	$	29
Accrued compensation		3,552		4,222
Accrued expenses		-		137
Deferred revenue		696		—
Net operating loss carryforwards		4,117		5,229
R&D credit carryforward		4,965		7,054
Foreign tax credits		15,054		12,485
Interest rate hedge		253		925
Equity based compensation		3,015		—
Other assets		380		115
Interest expense		224		869
Right-of-use (ROU) Liability		2,944		—
Total gross deferred tax asset		35,261		31,065
Less: Valuation allowance		(18,235)		(16,715)
Net deferred tax asset		17,026		14,350
Deferred tax liabilities
Property, equipment, and other long-lived assets		(272)		(359)
Goodwill and intangible assets		(83,844)		(83,935)
Prepaid expenses		(1,968)		(1,724)
Accrued expenses		(184)		—
Deferred revenue		—		(1,482)
Right-of-use (ROU) Asset		(2,783)		—
Total gross deferred tax liability		(89,051)		(87,500)
Net deferred tax liability	$	(72,025)	$	(73,150)

The net change in the total valuation allowance resulted in an increase of $1,520 in 2021 compared to a decrease of $3,831 in 2020. The valuation allowance is determined separately for each jurisdiction. A U.S. valuation allowance was required against the foreign tax credit carryforward. At the foreign subsidiaries, the valuation allowance was primarily related to foreign net operating losses that, in the judgment of management, are not more likely than not to be realized.

In assessing the realizability of deferred tax assets, management considered 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 and carryforward attributes can be utilized. Management considered the reversal of deferred tax liabilities in making this assessment. Management believes it is more likely than not that the Company will realize the benefits of the deferred tax assets, net of the existing valuation allowance, at December 31, 2021.

At December 31, 2021, the Company has net operating loss carryforwards for federal income tax purposes of approximately $2,416, the majority of which will expire if unused in years 2024 through 2040. The Company has net operating loss carryforwards for state income tax purposes of approximately $2,576, which will expire if unused in years 2029 through 2039. The Company has foreign net operating loss carryforwards of $24,491 which will expire if unused starting in 2022.

The Company has $1,475 of federal research and development credits that will expire if unused in years 2025 through 2041, $417 of California research and development credits with indefinite carryover period, and $406 of foreign research and development credits that will expire if unused starting in 2029. The Company has foreign tax credits of $15,054 that will expire if unused in years 2025 through 2031, and also Canadian investment tax credits of $3,809 which will expire if unused in years 2030 through 2039.

The Company has net operating losses and tax credits that are subject to limitation under Internal Revenue Code Section 382 and Section 383 due to changes in ownership. The Company has analyzed the realizability of these tax attributes carried forward and have recorded deferred tax assets for the attributes that meet the more likely than-not realizability threshold.

Foreign undistributed earnings were considered permanently invested, therefore no provision for U.S. income taxes was accrued as of December 31, 2021 and 2020, with the exception of the withholding tax liability of $168 on the potential repatriation from Certara Canada Corporation.

The Company assessed its uncertain tax positions and determined that a liability of $1,059 and $897 was required to be recorded for uncertain tax positions as of December 31, 2021 and 2020, respectively. Uncertain tax positions relate primarily to federal and state R&D credits. The Company's policy is to recognize interest and penalties as a component of the provision for income taxes.  For December 31, 2021 and 2020, there were no interest or penalties recorded. The Company does not anticipate any significant changes to its uncertain tax positions during the next 12 months.

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

Balance at December 31, 2019	$	690
Additions for tax positions related to the current year		198
Additions for tax positions of prior years		9
Balance at December 31, 2020		897
Additions for tax positions related to the current year		156
Additions for tax positions of prior years		6
Balance at December 31, 2021	$	1,059

The uncertain tax positions, exclusive of interest and penalties, were $1,059 and $897 as of December 31, 2021 and December 31, 2020, respectively, which also represents potential tax benefits that if recognized, would impact the effective tax rate.

U.S. federal income tax returns are generally subject to examination for a period of three years after the filing of the return. However, the Internal Revenue Service can audit the NOLs generated in respective years in the years that the NOLs are utilized. State income tax returns are generally subject to examination for a period of three to six years after the filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Foreign income tax returns are generally subject to examination based on the tax laws of the respective jurisdictions.

The Company is subject to tax on Global Intangible Low-Taxed Income (“GILTI”) and has elected to account for GILTI as a current period expense.