|6 Months Ended|
Jun. 30, 2020
NOTE 8—INCOME TAXES
The effective income tax expense rate for continuing operations for the three and six months ended June 30, 2020 and 2019 was as follows:
Income tax expense for the interim periods is based on estimates of the effective tax rate for the entire fiscal year. The effective income tax rate is based upon the estimated income during the calendar year, the estimated composition of the income in different jurisdictions, and discrete adjustments, if any, in the applicable quarterly periods for settlements of tax audits or assessments and the resolution or identification of tax position uncertainties.
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 June 30, 2020, the Company recorded income tax expense from continuing operations of $0.2 million, or 7.2% of pretax income from continuing operations, compared with income tax expense from continuing operations of less than $0.1 million, or 1.2% of pretax income from continuing operations, in the corresponding period in 2019. For the six months ended June 30, 2020, the Company recorded income tax expense from continuing operations of $0.2 million, or 13.4% of pretax income from continuing operations, compared with income tax expense from continuing operations of less than $0.1 million, or 4.5% of pretax income from continuing operations in the corresponding period in 2019.
The increase in income tax provision from continuing operations for the three and six months ended June 30, 2020, compared with the corresponding periods in 2019 was primarily the result of the $0.2 million current year Canadian income tax provision. In addition, the increase in the indefinitely-lived deferred tax liability outpaced the increase in the indefinitely-lived deferred tax assets, which resulted in additional deferred tax expense of less than $0.1 million.
As of June 30, 2020, and 2019, the Company would have needed to generate approximately $268.1 million and $278.4 million, respectively, of future financial 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 June 30, 2020 and 2019, the Company had undistributed earnings in one of its Canadian subsidiaries.
As of June 30, 2020, and 2019, the Company provided for a total liability of $2.8 million and $2.7 million, respectively, of which $1.7 million and $1.8 million, respectively, 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 tax assets and other long-term liabilities. If recognized, the entire amount of liability would affect the effective tax rate. As of June 30, 2020, the Company accrued approximately $1.2 million, of which $0.7 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 CARES Act did not have a material impact on the Company’s unaudited condensed consolidated financial condition or results of operations as of and for the three and six months ended June 30, 2020. However, the Company has deferred the timing of federal estimated tax payments and employer payroll taxes as permitted by the CARES Act.
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://fasb.org/us-gaap/role/ref/legacyRef