Annual report pursuant to Section 13 and 15(d)

Income Taxes

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Income Taxes
 12 Months Ended
Dec. 31, 2023
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,
  2023 2022 2021
(in thousands)
Domestic $ (240,904) $ (89,000) $ 9,730 
Foreign 7,907  10,581  10,631 
Total $ (232,997) $ (78,419) $ 20,361 

The components of the income tax expense (benefit) charged to operations are summarized as follows: 

  Year Ended December 31,
  2023 2022 2021
 (in thousands)
Current:
Federal $ 8,774  $ 1,185  $ — 
State 4,894  6,964  3,488 
Foreign 588  2,402  4,499 
14,256  10,551  7,987 
Deferred:      
Federal 2,138  (2,453) 4,021 
State (4,399) (1,439) (3,548)
Foreign 782  402  (793)
(1,479) (3,490) (320)
Total $ 12,777  $ 7,061  $ 7,667 
 
Deferred tax assets (liabilities), net consisted of the following:

  December 31,
  2023 2022
(in thousands)
Deferred revenue $ 8,699  $ 8,945 
Prepaid expenses and accrued expenses 6,663  8,847 
Right-of-use assets (17,528) (20,388)
Lease liabilities 29,497  31,328 
Net operating loss and tax credit carryforwards 63,866  64,590 
Property and equipment and intangible assets (84,139) (94,061)
Stock-based compensation expense 9,215  10,559 
Investment in partnerships (4,416) 2,836 
Convertible Notes 16,754  20,440 
R&D expenditures 68,543  43,956 
Withholding taxes (5,035) (4,841)
Other (865) 196 
Total deferred tax assets, net 91,254  72,407 
Less: valuation allowance (107,822) (88,603)
Deferred tax liabilities, net $ (16,568) $ (16,196)

The valuation allowance for deferred tax assets as of December 31, 2023 and 2022 was $107.8 million and $88.6 million, respectively. The change in the valuation allowance from 2022 to 2023 was primarily related to the increased deferred tax assets for R&D expenditures, original issue discount on convertible debt, and additional valuation allowance on state R&D tax credits and net operating loss carryforwards. 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, 2023. 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, 2023, a valuation allowance of $107.8 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 calculated at the statutory federal rate differs from the actual provision as follows:

  Year Ended December 31,
  2023 2022 2021
(in thousands)
Tax provision (benefit), at U.S. federal statutory tax rate $ (47,449) $ (15,515) $ 4,402 
State income tax provision (benefit), net of federal benefit (440) (3,463) 856 
Effect of stock-based compensation tax shortfall 3,394  717  (364)
Effect of limitation on executive compensation 1,057  2,511  1,678 
Effect of permanent items 447  869  661 
Effect of India partnerships 1,366  1,644  1,422 
Change in valuation allowance 19,219  26,974  5,660 
Effect of change in state and foreign income tax rates 97  (254) (1,184)
Uncertain tax positions 1,211  (617) 158 
Research and development credits (11,189) (10,993) (5,695)
Effect of goodwill impairment 40,282  —  — 
Change in India indefinite reinvestment assertion 3,699  4,372  — 
Other 1,083  816  73 
Income tax provision
 $ 12,777  $ 7,061  $ 7,667 
 
At December 31, 2023, the Company had net operating loss carryforwards, before any uncertain tax position reserves, for federal income tax purposes of approximately $64 million available to offset future federal taxable income, if any, of which $27 million expire through 2036 and $37 million are carried forward indefinitely. In addition, as of December 31, 2023, the Company had net operating loss carryforwards for state income tax purposes of approximately $225 million available to reduce future income subject to income taxes. The state net operating loss carryforwards that are subject to expiration expire through 2041. In addition, the Company had R&D credit carryforwards of approximately $38 million for federal and $15 million for California, Massachusetts and New Jersey, as well as foreign tax credits of $0.9 million available to offset federal income tax. Federal R&D credits began to expire in 2022 will expire through 2043. California R&D credits carryover indefinitely.
 
A reconciliation of the beginning and ending amount of unrecognized tax benefit follows:

  Year Ended December 31,
  2023 2022 2021
(in thousands)
Balance at beginning of year $ 13,612  $ 14,517  $ 15,132 
Additions based on tax positions related to the current year 2,456  2,522  1,631 
Additions (reductions) based on tax positions related to prior years 58  (296) (550)
Reductions for settlements with taxing authorities related to prior years —  —  (394)
Reductions for lapses of statute of limitations (839) (3,131) (1,302)
Balance at end of year $ 15,287  $ 13,612  $ 14,517 
 
At December 31, 2023, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $15.3 million. At this time, the Company estimates that the liability for unrecognized tax benefits will decrease by an estimated $1.6 million in the next twelve months as statutes of limitations expire and a transfer pricing agreement is concluded with India.
 
The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. For the years ended December 31, 2023 and 2022, income tax expense (benefit) included $(0.4) million and $0.3 million, respectively, of potential interest and penalties related to unrecognized tax benefits. The Company had accrued interest and penalties of $1.6 million and $2.0 million as of December 31, 2023 and 2022, respectively, which are included in other liabilities in the consolidated balance sheets.
 
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’s tax returns for the 2019-2022 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 2018-2022 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, 2023, 2022, 2021, 2020, 2019, 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.