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Income Taxes | 12 Months Ended
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Dec. 31, 2020
Income Tax Disclosure [Abstract] |
Income Taxes | 13. INCOME TAXES Pretax income from continuing operations for the years ended December 31, 2020, 2019 and 2018 was $146.8 million, $93.0 million and $74.4 million, respectively. The provision for income taxes from continuing operations for the years ended December 31, 2020, 2019 and 2018 consists of the following (dollars in thousands):
|  | For the Year Ended December 31, |
|  | 2020 |  |  | 2019 |  |  | 2018 |
Current provision |  |  |  |  |  |  |  |  |  |  |  |
State and local |  | $ | 2,110 |  |  | $ | 754 |  |  | $ | 524 |
Total current provision |  |  | 2,110 |  |  |  | 754 |  |  |  | 524 |
Deferred provision |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | 15,425 |  |  |  | 19,230 |  |  |  | 16,144 |
State and local |  |  | 4,941 |  |  |  | 2,444 |  |  |  | 1,893 |
Total deferred provision |  |  | 20,366 |  |  |  | 21,674 |  |  |  | 18,037 |
Total provision for income taxes |  | $ | 22,476 |  |  | $ | 22,428 |  |  | $ | 18,561 |
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, 2020, 2019 and 2018 is as follows:
|  | For the Year Ended December 31, |  |
|  | 2020 |  |  | 2019 |  |  | 2018 |  |
Statutory U.S. federal income tax rate |  |  | 21.0 |  | % |  | 21.0 |  | % |  | 21.0 |  | %
State and local income taxes |  |  | 2.7 |  |  |  | 2.7 |  |  |  | 3.1 |  |
Stock-based compensation |  |  | (0.3 | ) |  |  | (1.3 | ) |  |  | (1.4 | ) |
Valuation allowance |  |  | (10.9 | ) |  |  | - |  |  |  | - |  |
Legal settlement |  |  | - |  |  |  | - |  |  |  | 1.4 |  |
State audit settlement |  |  | - |  |  |  | (0.5 | ) |  |  | 0.1 |  |
Tax credits |  |  | (0.1 | ) |  |  | (0.1 | ) |  |  | (0.2 | ) |
Other |  |  | 2.9 |  |  |  | 2.3 |  |  |  | 1.0 |  |
Effective income tax rate |  |  | 15.3 |  | % |  | 24.1 |  | % |  | 25.0 |  | %
The effective tax rate for the year ended December 31, 2020 includes a $16.0 million favorable adjustment related to the release of a valuation allowance maintained against the portion of the foreign tax credit carryforward supported by an overall domestic loss (“ODL”) account balance, which decreased the effective tax rate by 10.9%. The 2020 effective tax rate also reflects a $0.4 million favorable adjustment associated with the tax effect of stock-based compensation, which decreased the effective tax rate by 0.3%. 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. 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. A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits as of December 31, 2020, 2019 and 2018 is as follows (dollars in thousands):
|  | 2020 |  |  | 2019 |  |  | 2018 |
Gross unrecognized tax benefits, beginning of the year |  | $ | 9,859 |  |  | $ | 9,009 |  |  | $ | 8,564 |
Additions for tax positions of prior years |  |  | - |  |  |  | - |  |  |  | 5 |
Additions for tax positions related to the current year |  |  | 2,954 |  |  |  | 1,957 |  |  |  | 1,839 |
Reductions for tax positions of prior years |  |  | (51 | ) |  |  | (58 | ) |  |  | - |
Reductions due to lapse of applicable statute of limitations |  |  | (968 | ) |  |  | (1,049 | ) |  |  | (1,399 | )
Subtotal |  |  | 11,794 |  |  |  | 9,859 |  |  |  | 9,009 |
Interest and penalties |  |  | 1,919 |  |  |  | 1,901 |  |  |  | 1,862 |
Total gross unrecognized tax benefits, end of the year |  | $ | 13,713 |  |  | $ | 11,760 |  |  | $ | 10,871 |
The total amount of net unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future periods was $10.8 million and $9.3 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, 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 $10.8 million, respectively. We record interest and penalties related to unrecognized tax benefits within provision for income taxes on our consolidated statements of income. 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, 2020 and 2019. For the years ended December 31, 2020, 2019 and 2018, we recognized less than $0.1 million of expense, less than $0.1 million of expense and less than $0.1 million of benefit, 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 and are routinely examined by tax authorities in these jurisdictions. As of December 31, 2020, 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 and tax credit carry forwards. Components of deferred income tax assets and liabilities for continuing operations as of December 31, 2020 and 2019 are as follows (dollars in thousands):
|  | December 31, |
|  | 2020 |  |  | 2019 |
Deferred income tax assets: |  |  |  |  |  |  |  |
Accrued occupancy |  | $ | 13,028 |  |  | $ | 15,814 |
Foreign tax credits |  |  | 27,321 |  |  |  | 32,998 |
Valuation allowance foreign tax credits |  |  | (16,958 | ) |  |  | (32,998 | )
Compensation and employee benefits |  |  | 7,054 |  |  |  | 7,402 |
Tax net operating loss carry forwards |  |  | 19,183 |  |  |  | 45,130 |
Valuation allowance |  |  | (12,069 | ) |  |  | (12,001 | )
Allowance for doubtful accounts |  |  | 5,363 |  |  |  | 4,547 |
Accrued settlements and legal |  |  | 203 |  |  |  | 1,728 |
Accrued restructuring and severance |  |  | 353 |  |  |  | 347 |
Equity method for investments |  |  | 406 |  |  |  | 525 |
General business tax credits |  |  | 1,620 |  |  |  | 1,511 |
Amortization |  |  | 5,656 |  |  |  | 7,633 |
Other |  |  | 1,388 |  |  |  | 1,110 |
Total deferred income tax assets |  |  | 52,548 |  |  |  | 73,746 |
Deferred income tax liabilities: |  |  |  |  |  |  |  |
Depreciation |  |  | 111 |  |  |  | 153 |
Right of use asset, net |  |  | 10,611 |  |  |  | 12,037 |
Other |  |  | 1,475 |  |  |  | 1,387 |
Total deferred income tax liabilities |  |  | 12,197 |  |  |  | 13,577 |
Net deferred income tax assets |  | $ | 40,351 |  |  | $ | 60,169 |
As of December 31, 2020, the Company has a gross deferred tax asset before valuation allowance of $194.4 million and a gross deferred tax liability of $51.5 million. As of December 31, 2019, the Company had a gross deferred tax asset before valuation allowance of $334.9 million and a gross deferred tax liability of $56.8 million. Under the TCJA, a federal net operating loss (“NOL”) incurred in 2018 and in future years can no longer be carried back, but may be carried forward indefinitely. However, the deductibility of such NOL carryforwards is limited to 80% of future taxable income. The CARES Act, which provides tax relief to assist companies dealing with the effects of COVID-19, suspended this 80% limitation during the 2018 through 2020 tax years and allows for a 5 year carryback of NOL’s incurred in tax years beginning after December 31, 2017 and before January 1, 2021. The Company has determined neither the TCJA nor the CARES Act will impact its NOL usage since our NOL carryforward was generated in tax years prior to 2018. For the tax year ended December 31, 2020, we expect to fully utilize the NOL carryforward which existed as of December 31, 2019 of approximately $109.7 million. Additionally, the Company anticipates utilizing $5.7 million of the $33.0 million of foreign tax credits available as of December 31, 2019 to offset the federal tax liability that would otherwise be due in 2020. Of the remaining $27.3 million of foreign tax credits which expire during 2022 and 2023, we continue to maintain a $17.0 million valuation allowance against the portion of the foreign tax credit carryforward not supported by an ODL account balance. We have state NOL carryforwards of approximately $314.2 million, which expire between 2021 and 2037. Of this amount, approximately $180.3 million relates to separate state NOL carryforwards and $15.5 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. 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, 2019 and for the first two quarters of 2020, a valuation allowance of $45.0 million was maintained with respect to our foreign tax credits and state net operating losses based on a consideration at each period end of both positive and negative evidence related to the realization of the deferred tax assets. During the quarter ended September 30, 2020, the Company re-evaluated the need for a valuation allowance against the portion of its foreign tax credit carryforward supported by an ODL account balance and determined it was more likely than not that it would be realized. The Company assessed various factors, including taxable income through the year to date ended September 30, 2020, future taxable income, the immaterial impact of the COVID-19 pandemic on operating results thus far and the recent Trident acquisition, and determined the federal NOL carryforward is expected to be fully utilized in 2020. With the expected full utilization of the federal NOL, the Company anticipates being able to utilize the entire ODL account balance in 2020 and 2021 to convert domestic income to foreign sourced income. This will allow the Company to claim approximately $16.0 million of foreign tax credit carryforward, prior to its expiration in 2022, to offset the federal tax liability that would otherwise be due. We continue to maintain a full valuation allowance against the foreign tax credits not supported by an ODL account balance and state net operating losses. As of December 31, 2020, the total valuation allowance attributable to our non-ODL supported foreign tax credits and state net operating losses is $29.0 million. The Company concluded it was not more likely than not for the deferred tax assets related to the non-ODL supported 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.

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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://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32857-109319 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -URI http://asc.fasb.org/extlink&oid=116825942&loc=d3e330215-122817 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 17 -Subparagraph (b) -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32809-109319 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -URI http://asc.fasb.org/extlink&oid=116825942&loc=d3e330036-122817 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 14 -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32705-109319 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 270 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 30 -Section 50 -Paragraph 2 -Subparagraph (a) -URI http://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 + Details
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