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INCOME TAXES | 12 Months Ended
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Dec. 31, 2022
Income Tax Disclosure [Abstract] |
INCOME TAXES | INCOME TAXES Provision for Income Taxes We are subject to tax in U.S. federal and various state and local jurisdictions, as well as Canada and India. We are open to federal and significant state income tax examinations for tax year 2016 and subsequent years. The provision for income taxes consists of the following:
| Year Ended December 31,
(in millions) | 2022 | 2021 | 2020
Current: |  |  |
Federal | $ | 112 |  | $ | 86 |  | $ | 96 |
State | 36 |  | 28 |  | 30 |
Foreign | — |  | 1 |  | 1 |
Total Current | 148 |  | 115 |  | 127 |
Deferred: |  |  |
Federal | (17) |  | (7) |  | (33) |
State | (6) |  | (3) |  | (9) |
Foreign | 2 |  | (2) |  | — |
Total Deferred | (21) |  | (12) |  | (42) |
Total | $ | 127 |  | $ | 103 |  | $ | 85 |
The U.S. federal statutory income tax rate reconciled to our effective tax rate is as follows:
| Year Ended December 31,
| 2022 | 2021 | 2020
(in millions, except percent) | Pre-Tax Income | Tax Expense/(Benefit) | Percent of Pre-Tax Income (Loss) | Pre-Tax Income | Tax Expense/(Benefit) | Percent of Pre-Tax Income (Loss) | Pre-Tax Income | Tax Expense/(Benefit) | Percent of Pre-Tax Income (Loss)
| $ | 482 |  |  |  | $ | 441 |  |  |  | $ | 357 |  |  |
U.S. federal statutory tax rate |  | $ | 101 |  | 21 | % |  | $ | 93 |  | 21 | % |  | $ | 75 |  | 21 | %
State income taxes, net of federal benefit |  | 34 |  | 7 |  |  | 32 |  | 7 |  |  | 25 |  | 7 |
Tax rate change |  | — |  | — |  |  | (1) |  | — |  |  | — |  | — |
Nondeductible meals, entertainment and penalties |  | 3 |  | 1 |  |  | 2 |  | — |  |  | — |  | — |
Stock based compensation |  | 3 |  | 1 |  |  | (2) |  | — |  |  | (2) |  | — |
Uncertain tax positions |  | — |  | — |  |  | (1) |  | — |  |  | 1 |  | — |
Tax credits |  | (8) |  | (2) |  |  | (7) |  | (2) |  |  | (6) |  | (2) |
State and tax return to provision adjustments |  | (9) |  | (2) |  |  | (10) |  | (2) |  |  | (7) |  | (2) |
Other |  | 3 |  | — |  |  | (3) |  | (1) |  |  | (1) |  | — |
Total |  | $ | 127 |  | 26 | % |  | $ | 103 |  | 23 | % |  | $ | 85 |  | 24 | %
Our effective income tax rate increased by 3% to 26% in 2022 from 23% in 2021. The increase was primarily attributable to increases in nondeductible expenses and charges to valuation allowances. In addition, there is a decrease in tax benefits related to stock-based compensation. The 2021 effective tax rate was also impacted by a one-time benefit associated with a favorable adjustment of our previously disputed receivable from the IRS. The Inflation Reduction Act enacted on August 16, 2022 introduced new provisions including a corporate book minimum tax not applicable to us and an excise tax on net stock repurchases made after December 31, 2022. We continue to monitor developments and evaluate impacts, if any, of these provisions to our results of operations. Deferred Income Taxes Significant components of our deferred tax assets and liabilities are as follows:
| Year Ended December 31,
(in millions) | 2022 | 2021
Deferred tax assets: |  |
Net operating losses (federal and state) | $ | 7 |  | $ | 3 |
Accrued expenses | 17 |  | 20 |
Accrued workers' compensation costs | 8 |  | 9 |
Recovery credit | 20 |  | 13 |
Operating lease liabilities | 14 |  | 13 |
Stock based compensation | 3 |  | 3 |
Tax benefits relating to uncertain positions | 1 |  | 1 |
Tax credits (federal, state and foreign) | 7 |  | 6 |
Section 174 Capitalized R&D | 13 |  | — |
Other | 3 |  | — |
Total | 93 |  | 68 |
Valuation allowance | (8) |  | (5) |
Total deferred tax assets | 85 |  | 63 |
Deferred tax liabilities: |  |
Depreciation and amortization | (54) |  | (37) |
Prepaid commission expenses | (24) |  | (24) |
Operating lease right-of-use assets | (10) |  | (10) |
Other | — |  | (1) |
Total deferred tax liabilities | (88) |  | (72) |
Net deferred tax liabilities | $ | (3) |  | $ | (9) |
As a result of the Zenefits acquisition, we acquired $158 million of federal and state net operating losses and $11 million of federal, state and Canada tax credits. Subsequent to an IRC §382 analysis, the Company recognized $149 million and $9 million of valuation allowances against the net operating losses and tax credits respectively, primarily, through goodwill. These balances are not disclosed in the above table as they are deemed worthless attributes. As of December 31, 2022, we have an acquired federal net operating loss of $2 million which can be carried forward indefinitely. In 2021 we have an immaterial amount. We have capital loss carryforwards of $3 million which will expire in 2027. As of December 31, 2022 and 2021, we have various state net operating loss carryforwards of $94 million and $45 million, respectively, most of which, if unused, will expire in years 2023 through 2042. As of December 31, 2022 and 2021, we have state tax credit carryforwards (net of federal benefit) of $5 million and $6 million, respectively, that will begin expiring in 2026. In addition, Canada tax credit carryforwards of $2 million will begin expiring in 2036. The provision for income taxes for the year ended December 31, 2022 included $3 million of excess tax benefits resulting from equity incentive plan activities. Valuation Allowance We have recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized, related to state tax credits, state net operating loss and capital loss carryforwards. A reconciliation of the beginning and ending amount of the valuation allowance is presented in the table below:
| Year Ended December 31,
(in millions) | 2022 | 2021 | 2020
Valuation allowance at January 1 | $ | 5 |  | $ | 5 |  | $ | 5 |
Charged to net income | 3 |  | — |  | — |
Valuation allowance at December 31 | 8 |  | 5 |  | 5 |
Uncertain Tax Positions A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) related to uncertain income tax provisions, which would affect the effective tax rate if recognized, is presented in the table below:
| Year Ended December 31,
(in millions) | 2022 | 2021 | 2020
Unrecognized tax benefits at January 1 | $ | 7 |  | $ | 8 |  | $ | 7 |
Additions for tax positions of prior periods | — |  | — |  | 1 |
Additions for tax positions of current period | 2 |  | 1 |  | 1 |
Reductions for tax positions of prior period: |  |  |
Settlements with taxing authorities | — |  | — |  | (1) |
Lapse of applicable statute of limitations | (2) |  | (1) |  | — |
Adjustments to tax positions | — |  | (1) |  | — |
Unrecognized tax benefits at December 31 | $ | 7 |  | $ | 7 |  | $ | 8 |
As of December 31, 2022 and 2021, the total amount of gross interest and penalties accrued were immaterial. The unrecognized tax benefit, including accrued interest and penalties, is included in other non-current liabilities on the consolidated balance sheets. It is reasonably possible the amount of the unrecognized benefit could increase or decrease within the next twelve months, which would have an impact on net income.

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