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Income Taxes | 12 Months Ended
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Dec. 31, 2022
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes Loss before provision for income taxes consisted of the following for the years ended December 31, 2022, 2021, and 2020 (in thousands):
|  |  | Year Ended December 31,
|  |  |  |  | 2022 |  | 2021 |  | 2020
United States |  |  |  |  | $ | (483,914) |  |  | $ | (318,907) |  |  | $ | (185,580) |
Foreign |  |  |  |  | (398,511) |  |  | (212,323) |  |  | (94,637) |
Total |  |  |  |  | $ | (882,425) |  |  | $ | (531,230) |  |  | $ | (280,217) |
The components of the provision for income taxes consists of the following for the years ended December 31, 2022, 2021, and 2020 (in thousands):
| Year Ended December 31,
| 2022 |  | 2021 |  | 2020
Current: |  |  |  |  |
Federal | $ | 12,258 |  |  | $ | (111) |  |  | $ | 183 |
State | 1,605 |  |  | 219 |  |  | 155 |
Foreign | 26,255 |  |  | 13,594 |  |  | 4,412 |
Total current tax expense (benefit) | 40,118 |  |  | 13,702 |  |  | 4,750 |
Deferred: |  |  |  |  |
Federal | 4,347 |  |  | (4,874) |  |  | — |
State | (3,167) |  |  | (851) |  |  | (156) |
Foreign | (4,235) |  |  | (6,600) |  |  | (2,503) |
Total deferred tax expense (benefit) | (3,055) |  |  | (12,325) |  |  | (2,659) |
Total tax provision | $ | 37,063 |  |  | $ | 1,377 |  |  | $ | 2,091 |
Reconciliations of the income tax provision at the U.S. federal statutory tax rate to the provision for income taxes are as follows (in thousands):
| Year Ended December 31,
| 2022 |  | 2021 |  | 2020
U.S. federal statutory tax rate | $ | (185,399) |  |  | $ | (111,558) |  |  | $ | (58,846) |
Changes in income taxes resulting from: |  |  |  |  |
State tax expense, net of federal benefit | (4,466) |  |  | (36,984) |  |  | (12,698) |
Foreign income taxed at different rates | (94,940) |  |  | (30,114) |  |  | (29,958) |
Federal research and development credits | (15,929) |  |  | (31,088) |  |  | (12,338) |
Stock-based compensation | 89,515 |  |  | (91,623) |  |  | (22,624) |
Tax effects of restructuring | 169,886 |  |  | — |  |  | — |
Base-erosion and anti-abuse tax | 10,353 |  |  | — |  |  | — |
Change in valuation allowance | 63,800 |  |  | 301,330 |  |  | 139,219 |
Other | 4,243 |  |  | 1,414 |  |  | (664) |
Total tax provision | $ | 37,063 |  |  | $ | 1,377 |  |  | $ | 2,091 |
Our income tax provision for the year ended December 31, 2022 was primarily driven by the earnings of our foreign subsidiaries, which are taxed at rates that differ from the U.S. statutory rate, losses that cannot be benefited due to the valuation allowance against the net deferred tax assets of our United States, Denmark, U.K., and China entities, base-erosion and anti-abuse tax ("BEAT") mainly arising as a result of the U.S. mandatory research and development capitalization rules. F ollowing our acquisition of ironSource, the Company undertook certain tax restructuring efforts as part of the integration of the acquired business. As a result of the restructuring, we recognized $192.2 million of US federal and state deferred tax liabilities, which reduce our need for a valuation allowance in the U.S., except for timing differences that resulted in $11.6 million of income tax expense. Our income tax provision for the year ended December 31, 2021 was primarily driven by the earnings of our foreign subsidiaries, which are taxed at rates that differ from the U.S. statutory rate, losses that cannot be benefited due to the valuation allowance against the net deferred tax assets of our United States, Denmark, and U.K. entities, gain recognized from an intercompany transaction with our subsidiary in Israel, and an income tax benefit recognized as a result of a partial release of our valuation allowance against our deferred tax assets in connection with business combinations. The types of temporary differences that give rise to significant portions of our deferred tax assets and liabilities as of December 31, 2022 and 2021 are set forth below (in thousands):
| As of December 31,
| 2022 |  | 2021 (1)
Deferred tax assets: |  |  |
Net operating losses | $ | 437,382 |  |  | $ | 332,622 |
Tax credits | 110,762 |  |  | 81,847 |
Stock-based compensation | 59,443 |  |  | 29,647 |
Capitalized R&D expenditures | 255,123 |  |  | 94,686 |
Operating lease liabilities | 23,287 |  |  | 24,137 |
Other | 27,702 |  |  | 29,785 |
Gross deferred tax assets | 913,699 |  |  | 592,724 |
Valuation allowance | (632,580) |  |  | (568,124) |
Total deferred tax assets | 281,119 |  |  | 24,600 |
Deferred tax liabilities: |  |  |
Intangible Asset | (404,491) |  |  | (4,469) |
Operating lease ROU assets | (16,995) |  |  | (20,467) |
Total deferred tax liabilities | (421,486) |  |  | (24,936) |
Net deferred tax assets | $ | (140,367) |  |  | $ | (336) |
(1) Certain prior year amounts have been reclassified to conform to current year presentation. In the tax year ended December 31, 2022, we capitalized certain research and development costs incurred by our U.S. and foreign subsidiaries, which resulted in a deferred tax asset of $255.1 million. This deferred tax asset associated with capitalized research and development costs is offset by a valuation allowance and future taxable temporary differences. The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods. We regularly assess the ability to realize our deferred tax assets and establish a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. We weigh all available positive and negative evidence, including our earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Due to the weight of objectively verifiable negative evidence, including our history of losses, we believe that it is more likely than not that our U.S. federal, state, and certain foreign deferred tax assets will not be realized as of December 31, 2022 and 2021, and as such, we have maintained a full valuation allowance against such deferred tax assets. In the event we determine that we will be able to realize all or part of our net deferred tax assets in the future, the valuation allowance against deferred tax assets will be reversed in the period in which we make such determination. The release of a valuation allowance against deferred tax assets may cause greater volatility in the effective tax rate in the periods in which the valuation allowance is released. The valuation allowance against our U.S. federal, state and foreign deferred tax assets increased by $64.5 million and $302.3 million in the years ended December 31, 2022 and 2021, respectively. The increase in the valuation allowance in the years ended December 31, 2022 and 2021 was primarily related to deferred tax assets for which insufficient positive evidence exists to support their realizability, including NOL carryforwards, capitalized research and development expenses, and credits for research and development. Our NOL carryforwards for U.S. federal, state, and foreign purposes were $785.8 million, $415.0 million, and $1.1 billion, respectively, with most of our foreign NOL carryforward balances arising from Denmark and the U.K. jurisdictions. The NOL carryforwards, if not utilized, will begin to expire in 2032, 2024, and 2039, respectively. Our U.S. federal, state, and foreign research and development credit carryforwards were $90.0 million, $44.4 million and $10.4 million, respectively. The U.S. federal credit carryforwards, if not utilized, will begin to expire in 2032, while the California credit carryforwards have no expiration. The foreign credit carryforwards, if not utilized, will begin to expire in 2041. Federal and state tax laws impose restrictions on the utilization of NOL and research and development credit carryforwards in the event of a change in ownership of our business as defined by the Internal Revenue Code, Sections 382 and 383. Under Section 382 and 383 of the Code, substantial changes in our ownership may limit the amount of NOL and research and development credit carryforwards that are available to offset taxable income. The annual limitation would not automatically result in the loss of NOL or research and development credit carryforwards but may limit the amount available in any given future period. We are maintaining our reinvestment assertion with respect to foreign earnings for the period ended December 31, 2022, which is that all earnings are permanently reinvested for all jurisdictions. Based on our reinvestment assertion and losses from our foreign entities, we have not recorded a liability for the period ended December 31, 2022. A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits, excluding accrued net interest and penalties, is as follows (in thousands):
| As of December 31,
| 2022 |  | 2021 |  | 2020 (1)
Unrecognized tax benefits, beginning balance | $ | 110,315 |  |  | $ | 74,670 |  |  | $ | 37,392 |
Gross increases for tax positions taken in prior years | 1,232 |  |  | 1,729 |  |  | 1,689 |
Gross decreases for tax positions taken in prior years | (613) |  |  | (2,507) |  |  | (694) |
Gross increases for tax positions taken in current year | 55,931 |  |  | 38,406 |  |  | 38,829 |
Acquired tax positions | 11,989 |  |  | — |  |  | — |
Reductions resulting from lapses of statues of limitations | (2,000) |  |  | (1,700) |  |  | (2,952) |
Foreign exchange gains and losses | (270) |  |  | (283) |  |  | 406 |
Unrecognized tax benefits, ending balance | $ | 176,584 |  |  | $ | 110,315 |  |  | $ | 74,670 |
(1) Certain prior year amounts have been reclassified to conform to current year presentation. As of December 31, 2022 and 2021, we had unrecognized tax benefits of $176.6 million and $110.3 million, respectively, of which $24.3 million and $11.9 million would affect the effective tax rate if recognized. We recognize interest and penalties related to our unrecognized tax benefits within our provision for income taxes. The amount of interest and penalties accrued as of December 31, 2022 and 2021 were $3.0 million and $2.5 million. We are subject to taxation in the United States and various other state and foreign jurisdictions. The material jurisdictions in which we are subject to potential examination include the United States, Denmark, and Israel. Our 2012 and subsequent tax years remain open to examination by the Internal Revenue Service. Our 2018 and subsequent tax years remain open to examination in Israel and Denmark. We believe that adequate amounts have been reserved in accordance with ASC 740 for any adjustments to the provision for income taxes or other tax items that may ultimately result from examinations. The timing of the resolution, settlement, and closure of any audits is highly uncertain, and it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. Given the number of years remaining that are subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits. If the taxing authorities prevail in the assessment of additional tax due, the assessed tax, interest, and penalties, if any, could have a material adverse impact on our financial position, results of operations, or cash flows.

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