Income Taxes

9 Months Ended

Sep. 30, 2020

We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amount of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when temporary differences reverse. The effect of changes in tax rates on deferred taxes is recognized in the period that the change is enacted. A valuation allowance is recorded to reduce the Company's deferred tax assets to the amount that is more likely than not to be realized. We had no recorded valuation allowance at September 30, 2020 and December 31, 2019. Our effective tax rate was 24.7% and 25.2% for the three months ended September 30, 2020 and 2019, respectively. The change in the effective tax rate is primarily the result of a favorable prior period provision to actual adjustment. Our effective tax rate was 24.5% and 24.5% for the nine months ended September 30, 2020 and 2019, respectively.

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits in income tax expense.

At September 30, 2020 and December 31, 2019, we had a total of $4.7 million and $5.0 million in gross unrecognized tax benefits, respectively included in long-term income taxes payable in the consolidated balance sheet. Of this amount, $3.7 million and $4.0 million represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate as of September 30, 2020 and December 31, 2019. The net change in unrecognized tax benefits was a decrease of $0.2 million and a decrease of $0.1 million during the three months ended September 30, 2020 and September 30, 2019, respectively. The net decrease in unrecognized tax benefits during the three months ended September 30, 2020 was due to settlements with corresponding reductions to uncertain tax liabilities net of additions. The net change in unrecognized tax benefits was a decrease of $0.3 million and an increase of $0.3 million during the nine months ended September 30, 2020 and September 30, 2019, respectively. The net decrease in unrecognized tax benefits during the nine months ended September 2020 was mainly due to the expiration of certain statutes of limitation net of additions. This change had the corresponding increasing or decreasing impact on the effective state tax rate during the respective periods. The total net amount of accrued interest and penalties for such unrecognized tax benefits was $0.8 million and $0.9 million at September 30, 2020 and December 31, 2019, respectively and is included in long-term income taxes payable in the consolidated balance sheets. Income tax expense is increased each period for the accrual of interest on outstanding positions and penalties when the uncertain tax position is initially recorded. Income tax expense is reduced in periods by the amount of accrued interest and penalties associated with reversed uncertain tax positions due to lapse of applicable statute of limitations, when applicable or when a position is settled.

Net interest and penalties included in income tax expense for the three month period ended September 30, 2020 and September 30, 2019 was a net expense of approximately zero and $0.1 million, respectively. The favorable impact for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was due to the accrual reductions for interest and penalties in excess of settlements. Net interest and penalties included in income tax expense for the nine month period ended September 30, 2020 and September 30, 2019 was a net benefit of approximately $0.1 million and $0.1 million, respectively. The favorable impact for the nine month period ended September 30, 2020 to income tax expense was due to reversals of interest and penalties due to lapse of applicable statute of limitations and settlements, net of additions for interest and penalty accruals during the same period. These unrecognized tax benefits relate to risks associated with state income tax filing positions for our corporate subsidiaries.

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


	2020
	(in thousands)
Balance at January 1, 2020	$	5,010
Additions based on tax positions related to current year	305
Reductions for tax positions of prior years	(428)
Settlements	(196)
Balance at September 30, 2020	$	4,691

A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. These changes could result from the expiration of the statute of limitations, examinations or other unforeseen circumstances. We do not have any outstanding litigation related to income tax matters. At this time, management’s best estimate of the reasonably possible change in the amount of gross unrecognized tax benefits is approximately no change to an increase of $1.0 million during the next twelve months, due to the combination of expiration of certain statute of limitations and estimated additions. The federal statute of limitations remains open for the years 2017 and forward. Tax years 2010 and forward are subject to audit by state tax authorities depending on the tax code and administrative practice of each state.

On March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Act (the "CARES Act"). The CARES Act is an emergency economic stimulus package in response to the coronavirus outbreak which, among other things, contains numerous income tax provisions. The Company has evaluated the impact of the CARES Act and believes it will not have a material impact on the Company's consolidated financial statements or related disclosures.