Annual report pursuant to Section 13 and 15(d)

Income Taxes

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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
 
Income (loss) before income tax expense (benefit) was generated in the following jurisdictions:
  Year Ended December 31,
  2021 2020 2019
(in thousands)
Domestic $ 9,730  $ (17,234) $ (61,047)
Foreign 10,631  9,189  12,952 
Total $ 20,361  $ (8,045) $ (48,095)

The components of the income tax expense (benefit) charged to operations are summarized as follows: 
  Year Ended December 31,
  2021 2020 2019
Current:
 (in thousands)
Federal $ —  $ (1,086) $ 4 
State 3,488  2,111  2,803 
Foreign 4,499  (4,542) 5,930 
7,987  (3,517) 8,737 
Deferred:      
Federal 4,021  (2,659) (33,952)
State (3,548) 1,158  (5,603)
Foreign (793) (383) (75)
(320) (1,884) (39,630)
Total $ 7,667  $ (5,401) $ (30,893)
 
Net deferred tax assets (liabilities) consisted of the following:
  December 31,
  2021 2020
(in thousands)
Deferred revenue $ 6,436  $ 5,811 
Prepaid expenses and accruals 8,099  8,737 
Right of use asset (22,190) (25,937)
Lease liability 28,994  30,752 
Net operating loss and tax credit carryforwards 85,698  87,648 
Property and equipment and intangible assets (100,314) (113,041)
Stock-based compensation expense 9,652  9,122 
Investment in partnerships 2,941  1,727 
Convertible Notes —  (22,951)
Other (173) 894 
Total deferred tax liabilities, net 19,143  (17,238)
Less: valuation allowance (40,164) (17,502)
Net deferred tax liabilities $ (21,021) $ (34,740)
 
Beginning in 2022, the Tax Cuts and Jobs Act ("TCJA") eliminates the option to deduct research and development ("R&D") expenditures currently and requires taxpayers to amortize them over five years pursuant to IRC Section 174. Although Congress is considering legislation that would defer the amortization requirement to later years, we have no assurance that the provision will be repealed or otherwise modified. If the requirement is not modified, the Company could expect to pay material cash taxes beginning in 2022.

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 $6.2 million 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, 2021 and 2020 was $40.2 million and $17.5 million, respectively. The change in the valuation allowance from 2020 to 2021 was primarily related to the adoption of ASU 2020-06, additional R&D credits generated during 2021, the Harvest acquisition, and additional valuation allowance on state NOLs. 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, 2021. 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, 2021, a valuation allowance of $40.2 million 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,
  2021 2020 2019
(in thousands)
Tax provision (benefit), at U.S. federal statutory tax rate $ 4,402  $ (1,787) $ (10,012)
State income tax provision (benefit), net of federal benefit 856  (2,461) (5,390)
Effect of stock-based compensation excess tax benefit (364) (9,349) (11,983)
Effect of limitation on executive compensation 1,678  961  1,940 
Effect of permanent items 661  (703) (892)
Effect of India partnerships 1,422  2,977  — 
Change in valuation allowance 5,660  16,210  (3,364)
Effect of change in state and foreign income tax rates (1,184) 1,323  2,449 
Uncertain tax positions 158  (6,093) 4,478 
Research and development credits (5,695) (5,939) (6,756)
State net operating loss adjustment —  31  (1,588)
Other 73  (571) 225 
Income tax provision (benefit) 7,667  (5,401) (30,893)
 
At December 31, 2021, the Company had NOL carryforwards, before any uncertain tax position reserves, for federal income tax purposes of approximately $195 million available to offset future federal taxable income, if any, of which $154 million expire through 2036 and $41 million are carried forward indefinitely. In addition, as of December 31, 2021, the Company had NOL carryforwards for state income tax purposes of approximately $233 million available to reduce future income subject to income taxes. The state NOL carryforwards that are subject to expiration expire through 2041. In addition, the Company had R&D credit carryforwards of approximately $32 million for federal and $13 million for California and
Illinois, as well as foreign tax credits of $0.9 million available to offset federal income tax. Federal R&D credits begin to expire in 2022 through 2041. California R&D credits carryover indefinitely.
 
A reconciliation of the beginning and ending amount of unrecognized tax benefit follows:
  Year Ended December 31,
  2021 2020 2019
(in thousands)
Balance at beginning of year $ 15,132  $ 18,939  $ 15,628 
Additions based on tax positions related to the current year 1,631  1,420  2,261 
Additions (reductions) based on tax positions related to prior years (550) (2,793) 1,050 
Reductions for settlements with taxing authorities related to prior years (394) (2,434) — 
Reductions for lapses of statute of limitations (1,302) —  — 
Balance at end of year $ 14,517  $ 15,132  $ 18,939 
 
At December 31, 2021, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $14.5 million. At this time, the Company estimates that the liability for unrecognized tax benefits will decrease by an estimated $3.6 million in the next twelve months as statutes of limitations expire.
 
The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. For the years ended December 31, 2021 and 2020, income tax expense (benefit) included $0.6 million and $(4.9) million, respectively, of potential interest and penalties related to unrecognized tax benefits. The Company had accrued interest and penalties of $1.9 million and $1.4 million as of December 31, 2021 and 2020, 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 August 2021 that the calendar year 2018 federal income tax return had been selected for audit by the IRS. The Company’s tax returns for the 2018-2020 calendar years remain open to examination by the IRS in their entirety. The IRS's audit of the Company's 2015 and 2016 tax returns has been closed. With respect to state taxing jurisdictions, the Company’s tax returns for the 2017-2020 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, 2019, 2018, 2017, 2012, 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.