NOTE 8—INCOME TAXES The effective income tax expense rate for continuing operations for the three and nine months ended September 30, 2022 and 2021 was as follows: | | | | | | | | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | 2022 | | 2021 | | 2022 | | 2021 | Effective income tax rate for continuing operations | | (8.2)% | | (0.8)% | | 5.4% | | 12.1% |
The effective income tax rate differs from the statutory federal income tax rate of 21% primarily because of the partial valuation allowances recorded on the Company’s deferred tax assets and the Canadian income tax provision. For the three months ended September 30, 2022, the Company recorded income tax benefit from continuing operations of $0.3 million, or (8.2)% of pretax income from continuing operations, compared with income tax benefit from continuing operations of $0.01 million, or (0.8)% of pretax income from continuing operations, in the corresponding period of 2021. For the nine months ended September 30, 2022, the Company recorded income tax benefit from continuing operations of $0.2 million, or 5.4% of pretax loss from continuing operations, compared with income tax expense from continuing operations of $0.3 million, or 12.1% of pretax income from continuing operations, in the corresponding period of 2021. The $0.3 million decrease in income tax provision from continuing operations for the three months ended September 30, 2022, compared with the corresponding period in 2021, was primarily related to a $0.6 million decrease in the Canadian income tax provision, partially offset by a $0.3 million decrease in the U.S. income tax benefit related to the indefinite lived deferred tax assets. The $0.5 million decrease in income tax provision from continuing operations for the nine months ended September 30, 2022, compared with the corresponding period in 2021, was primarily related to a $0.7 million decrease in the Canadian income tax provision, partially offset by a $0.2 million decrease in the U.S. income tax benefit related to the indefinite lived deferred tax assets. The Company’s net deferred balance was primarily composed of indefinite lived deferred tax liabilities attributable to goodwill and trade names, and the indefinite lived deferred tax assets related to the post 2017 net operating losses and Section 163(j) interest addback. A full valuation allowance was applied to most of the remaining deferred balances. The indefinite lived deferred tax assets enabled the release of the valuation allowance to the extent that it can offset the indefinite lived deferred tax liabilities. Because all indefinite lived deferred tax liabilities are part of continued operations, and the release of valuation allowance is attributable to the future taxable income related to these deferred tax liabilities, the entire valuation allowance released was recorded in continuing operations according to ASC 740-20-45-3. As of September 30, 2022, the Company had $2.3 million net deferred tax liabilities, mainly composed of $12.4 million indefinite lived deferred tax liabilities attributable to goodwill and trade names, partially offset by $6.8 million indefinite lived deferred tax assets attributable to post 2017 net operating losses, $3.4 million indefinite lived deferred tax assets attributable to Section 163(j) interest addback, $0.2 million deferred tax assets accrued for the current period as a result of the Canadian net operating loss, plus $0.3 million deferred tax liability accrued with respect to the Company’s outside basis difference in its investment in Canada. As of September 30, 2022, and 2021, the Company would have needed to generate approximately $287.2 million and $270.4 million, respectively, of future taxable income in order to realize its deferred tax assets.
The Company’s foreign subsidiaries may generate earnings that are not subject to U.S. income taxes so long as they are permanently reinvested in its operations outside of the U.S. Pursuant to ASC 740-30, undistributed earnings of foreign subsidiaries that are no longer permanently reinvested would become subject to deferred income taxes. As of September 30, 2022, the Company projects that its Canadian subsidiary will have generated approximately $5.1 million undistributed earnings by the end of 2022. The Company’s management expects that all of the undistributed earnings will be repatriated back to the United States within the next 12 months. The Company formed the Canadian subsidiary in 2018 without significant capital investment, and the majority of the undistributed earnings was expected to be repatriated as dividends to the United States at the United States-Canada treaty rate of 5%. As a result, the Company accrued a deferred tax liability of $0.3 million related to its investment in Canada for its outside basis difference as of September 30, 2022. As of September 30, 2022 and 2021, the Company provided for a total liability of $2.3 million and $3.0 million, respectively, for uncertain income tax positions, which include the unrecognized tax benefits related to various federal, foreign and state income tax matters, and the accrual of interest, penalties, and foreign currency adjustments that can potentially arise from these positions. For the period ended September 30, 2022, the $2.3 million reserved for uncertain income tax positions was included in long-term liabilities of discontinued operations and other long-term liabilities, of which $1.2 million was related to discontinued operations, compared to $1.9 million for the corresponding period in 2021. If the unrecognized tax benefit is recognized, the reduction in the liability would be recorded as a tax benefit and reduce the effective tax rate. Of the $2.3 million reserved for uncertain income tax positions as of September 30, 2022, approximately $1.1 million was accrued for potential payment of interest and penalties, of which, $0.5 million was related to discontinued operations. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. The Company has incorporated the impact of the CARES Act to the tax provision. In addition, the Company deferred payments of federal employer payroll taxes of approximately $4.9 million, as permitted by the CARES Act. The first half of the deferred amounts were paid in December 2021, and the second half will be paid by December 2022. On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (“IRA”) into law. The IRA contains a number of revisions to the Internal Revenue Code, including a 15% corporate minimum income tax and a 1% excise tax on corporate stock repurchases in tax years beginning after December 31, 2022. While these tax law changes have no immediate effect and are not expected to have a material adverse effect on the Company’s results of operations going forward, the Company will continue to evaluate the IRA’s impact as further information becomes available.
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