|3 Months Ended|
Mar. 31, 2022
NOTE 7—INCOME TAXES
The effective income tax expense rate for continuing operations for the three months ended March 31, 2022 and 2021 was as follows:
The effective income tax rate differs from the statutory federal income tax rate of 21% primarily because of the Canadian income tax provision and the partial valuation allowances recorded on the Company’s deferred tax assets.
For the three months ended March 31, 2022, the Company recorded income tax expense from continuing operations of $0.2 million, or (12.7)% of pretax loss from continuing operations, compared with income tax expense from continuing operations of $0.2 million, or (13.3)% of pretax loss from continuing operations, in the corresponding period of 2021. The $44,000 increase in income tax provision from continuing operations for the three months ended March 31, 2022, compared with the corresponding period in 2021 was primarily the result of the Canadian pre-tax book income.
The Company’s net deferred balance was primarily composed of indefinite lived deferred tax liabilities attributable to goodwill and trade names, and indefinite lived deferred tax assets related to the post 2017 net operating losses and the 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 March 31, 2022, the Company had $2.4 million net deferred tax liabilities, mainly composed of $12.4 million indefinite lived deferred tax liabilities attributable to
goodwill and trade names and $0.3 million of deferred tax liability related to its investment in Canada, partially offset by $6.9 million indefinite lived deferred tax assets attributable to post 2017 net operating losses, and $3.3 million indefinite lived deferred tax assets attributable to Section 163(j) interest addback.
As of March 31, 2022 and 2021, the Company would have needed to generate approximately $288.8 million and $273.8 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, 2022, the Company projects that its Canadian subsidiary will have generated approximately $6.2 million in 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, 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 March 31, 2022.
As of each of March 31, 2022 and 2021, the Company provided for a total liability of $3.0 million, of which $1.9 million for the period ended March 31, 2022, compared to $1.8 million for the corresponding period in 2021, related to discontinued operations, for unrecognized tax benefits related to various federal, foreign and state income tax matters, which were included in long-term 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, 2022, the Company accrued approximately $1.4 million, of which $0.9 million related to discontinued operations, in both other long-term liabilities of discontinued operations and 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 were paid in December 2021, and the second half will be paid 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