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.