|3 Months Ended|
Mar. 31, 2021
NOTE 7—INCOME TAXES
The effective income tax expense rate for continuing operations for the three months ended March 31, 2021 and 2020 was as follows:
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 March 31, 2021, the Company recorded income tax expense from continuing operations of $0.2 million, or (13.3)% of pretax loss from continuing operations, compared with income tax expense from continuing operations of less than $0.1 million, or (5.4)% of pretax loss from continuing operations, in the same period for 2020. The increase in income tax provision from continuing operations for the three months ended March 31, 2021 compared with the corresponding period in 2020 was primarily the result of a $0.2 million Canadian income tax provision recorded during the three months ended March 31, 2021.
As of December 31, 2020, the Company had $220.6 million of federal net operating loss carryforwards, $191.3 million which will expire between 2026 and 2037, and state operating loss carryforwards of $271.9 million, with the majority expiring between 2021 and 2040. Additionally, the Company had $5.2 million of foreign operating loss carryforwards that will expire in 2040, along with $4.5 million in foreign tax credit carryforwards expiring between 2021 and 2030.
Under the Internal Revenue Code, the amount of and the benefits from net operating loss and tax credit carryforwards may be limited or permanently impaired in certain circumstances. In addition, under the Tax Cuts and Jobs Act, the amount of post 2017 net operating losses that the Company is permitted to deduct in any taxable year is limited to 80% of its taxable income in such year, where taxable income is determined without regard to the net operating loss deduction itself. The Tax Cuts and Jobs Act also generally eliminated the ability to carry back any net operating loss to prior taxable years, while allowing post 2017 unused net operating losses to be carried forward indefinitely.
As of March 31, 2021 and 2020, the Company would have needed to generate approximately $273.8 million and $269.2 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 March 31, 2021, the Company’s Canadian subsidiary had approximately $6.5 million in Canadian currency in undistributed earnings. The Company’s management asserts that all of the undistributed earnings will be reinvested in the Canadian subsidiary based on the following facts presented at the time of preparing the financial statements: (1) the Company’s domestic operations are not in need of working capital from the foreign subsidiary, and any temporary intercompany payable with the Canadian subsidiary will be repaid within one year from the end of the corporation’s tax year in which the indebtedness arises; (2) the Canadian subsidiary has not declared dividends since its inception in 2018, and management is not expecting the Canadian subsidiary to declare dividends in the foreseeable future; and (3) the Company’s management has developed a strategic growth initiative to pursue nuclear plant maintenance, modifications, and construction in Canada for the long-term. Therefore, the accrual of deferred tax liability with respect to the Company’s outside basis difference in its investment in Canada is not needed pursuant to the APB 23 exception.
As of March 31, 2021 and 2020, the Company provided for a total liability of $2.9 million and $2.8 million, respectively, of which, for both periods, $1.8 million related to discontinued operations for unrecognized tax benefits related to various federal, foreign and state income tax matters, which were included in long-term deferred liabilities of discontinued operations and other long-term liabilities. If recognized, the entire amount of the liability would affect the effective tax rate. As of March 31, 2021, the Company accrued approximately $1.5 million, of which $0.8 million related to discontinued operations, in other long-term liabilities for potential payment of interest and penalties related to uncertain income tax positions.
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 will be paid by December 2021, and the second half by December 2022.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/disclosureRef