Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.4
Income Taxes
 12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
 
Loss before income tax benefit was generated in the following jurisdictions:
  Year Ended December 31,
  2020 2019 2018
Domestic $ (17,234) $ (61,047) $ (18,242)
Foreign 9,189  12,952  9,080 
Total $ (8,045) $ (48,095) $ (9,162)
The components of the income tax expense (benefit) charged to operations are summarized as follows: 
  Year Ended December 31,
  2020 2019 2018
Current:      
Federal $ (1,086) $ 4  $ 4,564 
State 2,111  2,803  1,044 
Foreign (4,542) 5,930  4,849 
(3,517) 8,737  10,457 
Deferred:      
Federal (2,659) (33,952) (19,444)
State 1,158  (5,603) (3,182)
Foreign (383) (75) (1,003)
(1,884) (39,630) (23,629)
Total $ (5,401) $ (30,893) $ (13,172)
 
Net deferred tax assets (liabilities) consisted of the following:
  December 31,
  2020 2019
Deferred revenue $ 5,811  $ 5,148 
Prepaid expenses and accruals 8,737  9,533 
Deferred rent and lease incentives 255  273 
Right of use asset (25,937) (18,507)
Lease liability 30,752  22,983 
Net operating loss and tax credit carryforwards 87,648  86,952 
Property and equipment and intangible assets (113,041) (127,255)
Stock-based compensation expense 9,122  8,033 
Investment in partnerships 1,727  2,196 
Convertible Notes (22,951) (8,471)
Other 639  2,218 
Total deferred tax liabilities, net (17,238) (16,897)
Less: valuation allowance (17,502) (12,584)
Net deferred tax liabilities $ (34,740) $ (29,481)
 
In December 2017, the Tax Cuts and Jobs Act (“Tax Act”) was enacted into United States law. Beginning in 2018, the Tax Act includes the Global Intangible Low-Taxed Income (“GILTI”) and Base-Erosion Anti-abuse Tax (“BEAT”) provisions. The Company elected to account for GILTI tax in the period in which it is incurred. The GILTI provision requires the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. The Company expects to fully offset any GILTI income with Net Operating Losses (“NOLs”). In 2019, the Company reevaluated the entity classification of its Indian entities to a flow-through status. As a result, the Company does not currently expect to be subject to BEAT. Additionally, the two Indian entities also are no longer subject to GILTI.

In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted into United States law. The CARES Act includes provisions which impact the Company, namely the temporary increase of the 163(j) limitation to 50% for tax years beginning in 2019 and 2020, the adjustment of qualified improvement property to a 15-year depreciable life, and a five-year carryback of any NOL generated in a taxable year beginning after December 31, 2017 and before January 1, 2021. A carryback of the 2019 NOL generated by the Company was filed in 2020 and the related refund of $1,224 is expected to be received in early 2021.
The deferred tax liability that is not being recorded because of the Company's assertion to permanently reinvest the earnings of its India subsidiaries is $5,550 related to the withholding tax in India, net of an assumed foreign tax deduction for this amount in the U.S.
 
The valuation allowance for deferred tax assets as of December 31, 2020 and 2019 was $17,502 and $12,584, respectively. The change in the valuation allowance from 2019 to 2020 was primarily related to additional R&D credits generated during 2020. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some or all of the deferred tax assets will be realized.
 
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence is the cumulative pre-tax loss incurred over the three years ended December 31, 2020. Such objective evidence limits the ability to consider other subjective evidence such as the Company's projections for future growth. On the basis of this evaluation, as of December 31, 2020, a valuation allowance of $17,502 has been recorded to record only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as the Company's projections for growth.

The expected income tax provision (benefit) calculated at the statutory federal rate differs from the actual provision as follows:
  Year Ended December 31,
  2020 2019 2018
Tax benefit, at U.S. federal statutory tax rate $ (1,787) $ (10,012) $ (1,559)
State income tax benefit, net of federal benefit (2,461) (5,390) (1,714)
Effect of stock-based compensation excess tax benefit (9,349) (11,983) (7,782)
Effect of permanent items 258  1,048  2,967 
Effect of India partnerships 2,977  —  — 
Change in valuation allowance 16,210  (3,364) (4,244)
Effect of change in state and foreign income tax rates 1,323  2,449  (269)
Uncertain tax positions (6,093) 4,478  (2,062)
BEAT liability —  —  3,760 
Research and development credits (5,939) (6,756) (4,770)
State net operating loss adjustment 31  (1,588) — 
Other (571) 225  2,501 
Income tax benefit $ (5,401) $ (30,893) $ (13,172)
 
At December 31, 2020, the Company had NOL carryforwards, before any uncertain tax position reserves, for federal income tax purposes of approximately $242,000 available to offset future federal taxable income, if any, of which $241,000 expire through 2040 and $1,000 are carried forward indefinitely. In addition, as of December 31, 2020, the Company had NOL carryforwards for state income tax purposes of approximately $211,000 available to reduce future income subject to income taxes. The state NOL carryforwards expire through 2040.
 
In addition, at December 31, 2020, the Company had a federal income tax receivable of approximately $727 related to the Alternative Minimum Tax (“AMT”) refund which it expects to receive in early 2021. As a result of tax reform, AMT credits are refundable for any taxable year beginning after 2017 and before 2022 in an amount equal to 50% (100% in the case of taxable years beginning in 2021) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability. Thus, the minimum tax credit was reclassified from a deferred tax asset to an income tax receivable. The Company also had minimal AMT credits for California, which are available to reduce future California income taxes, if any, over an indefinite period. In addition, the Company had research and development (“R&D”) credit carryforwards of approximately $26,958 for federal and $11,799 for California and Illinois, as well as foreign tax credits
of $886 available to offset federal income tax. Federal R&D credits begin to expire in 2022 through 2040. California R&D credits carryover indefinitely.
 
A reconciliation of the beginning and ending amount of unrecognized tax benefit follows:
  Year Ended December 31,
  2020 2019 2018
Balance at beginning of year $ 18,939  $ 15,628  $ 18,312 
Additions based on tax positions related to the current year 1,420  2,261  1,907 
Additions (reductions) based on tax positions related to prior years (2,793) 1,050  (3,976)
Reductions for settlements with taxing authorities related to prior years (2,434) —  (615)
Balance at end of year $ 15,132  $ 18,939  $ 15,628 
 
At December 31, 2020, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $15,132. At this time, the Company estimates that the liability for unrecognized tax benefits could decrease by an estimated $1,495 in the next twelve months as it is anticipated that reviews by tax authorities will be completed and voluntary disclosure agreements settled.
 
The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. For the years ended December 31, 2020 and 2019, income tax expense (benefit) included $(4,875) and $1,476, respectively, of potential interest and penalties related to unrecognized tax benefits. The Company had accrued interest and penalties of $1,383 and $7,336 as of December 31, 2020 and 2019, respectively.
 
The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, foreign subsidiaries of the Company file tax returns in foreign jurisdictions. The Company was notified by the Internal Revenue Service (“IRS”) in December 2017 that the calendar year 2015 and 2016 federal income tax returns have been selected for audit by the IRS. The Company’s tax returns for the 2015-2019 calendar years remain open to examination by the IRS in their entirety. With respect to state taxing jurisdictions, the Company’s tax returns for the 2016-2019 calendar years remain open to examination by various state revenue services.
 
The Company's Indian subsidiaries are currently under examination by the India Tax Authority for the fiscal years ended March 31, 2020, 2011 and 2010. Based on the outcome of examinations of the Company's subsidiaries or the result of the expiration of statutes of limitations, it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the consolidated balance sheets. It is possible that one or more of these audits may be finalized within the next twelve months.