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Income Taxes | 12 Months Ended
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Dec. 31, 2019
Income Tax Disclosure [Abstract] |
Income Taxes | 12. INCOME TAXES Pretax income from continuing operations for the years ended December 31, 2019, 2018 and 2017 was $93.0 million, $74.4 million and $36.3 million, respectively. The provision for income taxes from continuing operations for the years ended December 31, 2019, 2018 and 2017 consists of the following (dollars in thousands):
|  | For the Year Ended December 31, |
|  | 2019 |  |  | 2018 |  |  | 2017 |
Current provision |  |  |  |  |  |  |  |  |  |  |  |
State and local |  | $ | 754 |  |  | $ | 524 |  |  | $ | 1,870 |
Total current provision |  |  | 754 |  |  |  | 524 |  |  |  | 1,870 |
Deferred provision |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | 19,230 |  |  |  | 16,144 |  |  |  | 67,936 |
State and local |  |  | 2,444 |  |  |  | 1,893 |  |  |  | (2,681 | )
Total deferred provision |  |  | 21,674 |  |  |  | 18,037 |  |  |  | 65,255 |
Total provision for income taxes |  | $ | 22,428 |  |  | $ | 18,561 |  |  | $ | 67,125 |
A reconciliation of the statutory U.S. federal income tax rate to our effective income tax rate for continuing operations for the years ended December 31, 2019, 2018 and 2017 is as follows:
|  | For the Year Ended December 31, |  |
|  | 2019 |  |  | 2018 |  |  | 2017 |  |
Statutory U.S. federal income tax rate |  |  | 21.0 |  | % |  | 21.0 |  | % |  | 35.0 |  | %
State and local income taxes |  |  | 2.7 |  |  |  | 3.1 |  |  |  | 2.3 |  |
Stock-based compensation |  |  | (1.3 | ) |  |  | (1.4 | ) |  |  | 3.2 |  |
Valuation allowance |  |  | - |  |  |  | - |  |  |  | 0.3 |  |
Legal settlement |  |  | - |  |  |  | 1.4 |  |  |  | - |  |
State audit settlement |  |  | (0.5 | ) |  |  | 0.1 |  |  |  | (4.6 | ) |
Federal income tax rate change |  |  | - |  |  |  | - |  |  |  | 145.3 |  |
Tax credits |  |  | (0.1 | ) |  |  | (0.2 | ) |  |  | (0.7 | ) |
Other |  |  | 2.3 |  |  |  | 1.0 |  |  |  | 4.4 |  |
Effective income tax rate |  |  | 24.1 |  | % |  | 25.0 |  | % |  | 185.2 |  | %
The effective tax rate for the year ended December 31, 2019 includes a $1.2 million favorable adjustment associated with the tax effect of stock-based compensation, which decreased the effective tax rate by 1.3% and a $0.5 million net benefit associated with the results of a Florida income tax audit covering the years ended December 31, 2014 through December 31, 2016, which decreased the effective tax rate by 0.5%. The 2019 effective tax rate also reflects the deductibility of $29.7 million of the FTC settlement, which is the amount paid for the purpose of restitution based on additional information obtained during the fourth quarter. The effective tax rate for the year ended December 31, 2018 includes a $1.0 million favorable adjustment, or 1.4% impact, associated with the tax effect of stock-based compensation, and a $1.1 million unfavorable adjustment, or 1.4% impact, related to the non-deductibility of the AG agreements. The 2018 effective tax rate also reflects the reduction in the U.S. corporate tax rate from 35% to 21% resulting from the enactment of the Tax Cuts and Jobs Act (“TCJA”) that became effective in January 2018. Due to the enactment of TCJA, the effective tax rate for the year ended December 31, 2017 increased by 145.3% as a result of revaluing our net deferred tax assets and net state unrecognized tax positions to reflect the new tax rate for future periods. This revaluation increased tax expense by $52.7 million for the year ended December 31, 2017. The 2017 effective tax rate also includes a $1.7 million net benefit associated with the results of an Illinois income tax audit covering the years ended December 31, 2012 through December 31, 2014 and amended return filings, which decreased the effective tax rate by 4.6%. Additionally, for the year ended December 31, 2017, we recognized a $1.1 million unfavorable adjustment associated with the adoption of ASU 2016-09, Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, which increased the effective tax rate by 3.2%. A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits as of December 31, 2019, 2018 and 2017 is as follows (dollars in thousands):
|  | 2019 |  |  | 2018 |  |  | 2017 |
Gross unrecognized tax benefits, beginning of the year |  | $ | 9,009 |  |  | $ | 8,564 |  |  | $ | 8,132 |
Additions for tax positions of prior years |  |  | - |  |  |  | 5 |  |  |  | 24 |
Additions for tax positions related to the current year |  |  | 1,957 |  |  |  | 1,839 |  |  |  | 1,625 |
Reductions for tax positions of prior years |  |  | (58 | ) |  |  | - |  |  |  | - |
Reductions due to lapse of applicable statute of limitations |  |  | (1,049 | ) |  |  | (1,399 | ) |  |  | (1,217 | )
Subtotal |  |  | 9,859 |  |  |  | 9,009 |  |  |  | 8,564 |
Interest and penalties |  |  | 1,901 |  |  |  | 1,862 |  |  |  | 1,909 |
Total gross unrecognized tax benefits, end of the year |  | $ | 11,760 |  |  | $ | 10,871 |  |  | $ | 10,473 |
The total amount of net unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future periods was $9.3 million and $8.6 million for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, our short and long-term reserves, recorded within current accrued income taxes and other non-current liabilities, respectively, related to FASB’s interpretation No. 48 of ASC Topic 740-10, Accounting for Uncertainty in Income Taxes or (“FIN 48”), were $1.0 million and $8.9 million, respectively. We record interest and penalties related to unrecognized tax benefits within provision for income taxes on our consolidated statements of income (loss) and comprehensive income (loss). The total amount of accrued interest and penalties resulting from such unrecognized tax benefits was $1.9 million for each of the years ended December 31, 2019 and 2018. For the years ended December 31, 2019, 2018 and 2017, we recognized less than $0.1 million of benefit, less than $0.1 million of benefit and less than $0.2 million of expense, respectively, related to interest and penalties from unrecognized tax benefits in our consolidated results of continuing operations. Perdoceo and its subsidiaries file income tax returns in the U.S. and in various state and local jurisdictions. Perdoceo and its subsidiaries are routinely examined by tax authorities in these jurisdictions. As of December 31, 2019, Perdoceo had been examined by the Internal Revenue Service through our tax year ending December 31, 2014. Due to the expiration of various statutes of limitations, it is reasonably possible that Perdoceo’s gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $1.5 million. Deferred income tax assets and liabilities result primarily from temporary differences in the recognition of various expenses for tax and financial statement purposes, and from the recognition of the tax benefits of net operating loss carry forwards. Components of deferred income tax assets and liabilities for continuing operations as of December 31, 2019 and 2018 are as follows (dollars in thousands):
|  | December 31, |
|  | 2019 |  |  | 2018 |
Deferred income tax assets: |  |  |  |  |  |  |  |
Accrued occupancy |  | $ | 15,814 |  |  | $ | 2,871 |
Deferred rent obligations |  |  | - |  |  |  | 1,382 |
Foreign tax credits |  |  | 32,998 |  |  |  | 32,998 |
Valuation allowance foreign tax credits |  |  | (32,998 | ) |  |  | (32,998 | )
Compensation and employee benefits |  |  | 7,402 |  |  |  | 7,038 |
Tax net operating loss carry forwards |  |  | 45,130 |  |  |  | 66,319 |
Valuation allowance |  |  | (12,001 | ) |  |  | (13,656 | )
Allowance for doubtful accounts |  |  | 4,547 |  |  |  | 3,388 |
Covenant not-to-compete |  |  | - |  |  |  | 2 |
Accrued settlements and legal |  |  | 1,728 |  |  |  | 252 |
Deferred compensation |  |  | - |  |  |  | 494 |
Accrued restructuring and severance |  |  | 347 |  |  |  | 156 |
Equity method for investments |  |  | 525 |  |  |  | 525 |
General business tax credits |  |  | 1,511 |  |  |  | 1,292 |
Illinois edge credits |  |  | - |  |  |  | 1,383 |
Valuation allowance edge credits |  |  | - |  |  |  | (1,383 | )
Depreciation |  |  | - |  |  |  | 2,453 |
Amortization |  |  | 7,633 |  |  |  | 9,950 |
Other |  |  | 1,110 |  |  |  | 331 |
Total deferred income tax assets |  |  | 73,746 |  |  |  | 82,797 |
Deferred income tax liabilities: |  |  |  |  |  |  |  |
Depreciation |  |  | 153 |  |  |  | - |
Right of use asset, net |  |  | 12,037 |  |  |  | - |
Other |  |  | 1,387 |  |  |  | 1,169 |
Total deferred income tax liabilities |  |  | 13,577 |  |  |  | 1,169 |
Net deferred income tax assets |  | $ | 60,169 |  |  | $ | 81,628 |
As of December 31, 2019, the Company has a gross deferred tax asset before valuation allowance of $334.9 million and a gross deferred tax liability of $56.8 million. As of December 31, 2018, the Company had a gross deferred tax asset before valuation allowance of $382.8 million and a gross deferred tax liability of $4.9 million. As of December 31, 2019, we have federal Net Operating Loss (“NOL”) carry forwards of approximately $108.5 million, available to offset future taxable income, which do not begin expiring until 2035 and are fully expired in 2037. Additionally, we have $33.0 million of foreign tax credits which expire during 2022 and 2023, and we continue to maintain a full valuation allowance against the foreign tax credits deferred tax balance. We have state NOL carry forwards of approximately $380.8 million, which expire between 2020 and 2037. Of this amount, approximately $178.7 million relates to separate state NOL carryforwards and $19.0 million relates to combined state NOL carryforwards, which we anticipate will not be used due to the teach-out of the schools in the applicable combined filing jurisdictions. Additionally, our Illinois edge credits of $1.8 million gross will not be used to offset Illinois state income tax prior to their expiration in 2019 given the need to first exhaust an available NOL carryforward. Valuation allowances have been established against the full amounts of the deferred tax balances for the separate state NOL and the combined state NOL. In assessing the continued need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. Topic 740 provides that important factors in determining whether a deferred tax asset will be realized include whether sufficient taxable income is expected in future years in order to use the deferred tax asset. In evaluating the realizability of deferred income tax assets, we consider, among other things, historical levels of taxable income along with possible sources of future taxable income, which include: the expected timing of the reversals of existing temporary reporting differences, the existence of taxable income in prior carryback years, the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits and expected future taxable income. Changes in, among other things, income tax legislation, statutory income tax rates, or future taxable income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods. If, based on the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, we record a valuation allowance, or release all or a portion of the valuation allowance if it is more likely than not the deferred tax assets are expected to be realized. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. A high degree of judgment is required to determine if, and the extent to which, valuation allowances should be recorded against deferred tax assets. As of December 31, 2018, a valuation allowance of $48.0 million was maintained with respect to our foreign tax credits, state net operating losses and Illinois edge credits. After considering both positive and negative evidence related to the realization of our deferred tax assets, we have determined that it is necessary to continue to record the valuation allowance against the foreign tax credits and state net operating losses. The $1.4 million valuation allowance attributable to the Illinois edge credits is no longer needed since these credits expire in 2019. Additionally, the total valuation allowance as of December 31, 2018 was reduced by $0.8 million during 2019 to reflect the results of a Florida income tax audit and the realizability of that state’s net operating loss carryforward. As of December 31, 2019, the total valuation allowance attributable to our foreign tax credits and state net operating losses is $45.0 million. The Company concluded it was not more likely than not for the deferred tax assets related to the foreign tax credits to be realized and maintained the valuation allowance with respect to these assets. The separate state NOLs can generally only be used by the originating entity and relate to entities that no longer maintain active schools. Since these entities are not expected to generate future operating income, the more likely than not threshold was not reached with respect to this portion of the deferred tax assets. Similarly, the Company determined a valuation allowance was needed with respect to the portion of the combined state net operating losses which will likely go unused due to the teach-out of the schools located in the applicable combined filing jurisdictions. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased or decreased, and additional weight may be given to subjective evidence such as our projections for growth. We will continue to evaluate our valuation allowance in future years for any change in circumstances that causes a change in judgment about the realizability of the deferred tax asset. Accumulated Other Comprehensive Income Effective January 1, 2019, the Company adopted ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”). This new guidance provides the option to reclassify stranded tax effects within AOCI to retained earnings in each period when the effect of the change in the U.S. federal corporate income tax rate in the Tax Cut and Jobs Act is recorded. The Company evaluated and concluded the stranded tax effects were immaterial and elected not to reclassify the income tax effects of the Tax Cuts and Jobs Act from AOCI to retained earnings.

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- Definition 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. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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