|6 Months Ended|
Jun. 30, 2022
NOTE 7—INCOME TAXES
The effective income tax expense rate for continuing operations for the three and six months ended June 30, 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 partial valuation allowances recorded on the Company’s deferred tax assets and the Canadian income tax provision.
For the three months ended June 30, 2022, the Company recorded income tax benefit from continuing operations of $0.2 million, or 3.1% of pretax loss from continuing operations, compared with income tax expense from continuing operations of $0.1 million, or 2.8% of pretax income from continuing operations, in the corresponding period of 2021. For the six months ended June 30, 2022, the Company recorded income tax expense from continuing operations of $0.1 million, or (0.8)% of pretax loss from continuing operations, compared with income tax expense from continuing operations of $0.3 million, or 19.8% of pretax income from continuing operations, in the corresponding period of 2021. The decrease in income tax provision from continuing operations for the three and six months ended June 30, 2022, compared with the corresponding periods in 2021, was primarily related to the $0.2 million decrease in the Canadian income tax provision.
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 June 30, 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, partially offset by $6.8 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, plus $0.3 million deferred tax liability accrued with respect to the Company’s outside basis difference in its investment in Canada.
As of June 30, 2022, and 2021, the Company would have needed to generate approximately $291.3 million and $273.4 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 June 30, 2022, the Company projects that its Canadian subsidiary will have generated approximately $5.9 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 June 30, 2022.
As of each of June 30, 2022 and 2021, the Company provided for a total liability of $2.3 million and $2.9 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 June 30, 2022, the $2.3 million reserved for uncertain income tax positions were included in long-term liabilities of discontinued operations and other long-term liabilities, of which $1.2 million were related to discontinued operations, compared to $1.8 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. Among the $2.3 million reserved for uncertain income tax positions, 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.
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