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Income Taxes
 12 Months Ended
Dec. 31, 2020
Income Taxes [Abstract]  
Income Taxes 8. Income Taxes

Income Tax Expense

(Loss) income before income taxes consists of the following (in thousands):

2020

2019

2018

Domestic

$

(11,443)

$

6,369

$

4,560

Foreign

(5,731)

(4,725)

(10,951)

(Loss) income before income taxes

$

(17,174)

$

1,644

$

(6,391)

Income tax expense benefit consists of the following (in thousands):

2020

2019

2018

Current:

Federal

$

(2,460)

$

48

$

402

State

445

80

246

Foreign

707

2,041

2,009

(1,308)

2,169

2,657

Deferred:

Federal

1,721

(850)

(2,188)

State

384

(131)

(154)

Foreign

(1,289)

(1,264)

(3,866)

816

(2,245)

(6,208)

Income tax benefit

$

(492)

$

(76)

$

(3,551)

Our income tax benefit in 2020, 2019, and 2018 included our federal, state, and foreign tax obligations. Our effective income tax rate was a tax benefit of 3%, 5%, and 56% for the years ended December 31, 2020, 2019, and 2018, respectively. Our income tax rate for the year ended December 31, 2020 was primary affected by excess tax benefits on stock compensation, the research and development tax credit, adjustments for prior year tax items, and releases of uncertain tax position liabilities. These tax benefits were partially offset by nondeductible executive compensation, intercompany interest expense disallowance, changes in valuation allowances on future tax assets, and nondeductible meals and entertainment expenses. Our income tax rate for the year ended December 31, 2019 was primarily affected by excess tax benefits on stock compensation, the research and development tax credit and releases of uncertain tax position liabilities. These tax benefits were partially offset by nondeductible executive compensation, intercompany interest expense disallowance, and nondeductible meals and entertainment expenses. Our income tax rate for the year ended December 31, 2018 was primarily affected by excess tax benefits on stock compensation, the research and development tax credit, and non-includable income related to the On-X settlement which increased our benefit. These tax benefits were offset by changes in valuation allowances on future tax benefits and nondeductible meals and entertainment expenses.

The income tax benefit amounts differ from the amounts computed by applying the U.S. federal statutory income tax rate of 21% for the years ended December 31, 2020, 2019, and 2018 to pretax income as a result of the following (in thousands):

2020

2019

2018

Tax expense (benefit) at statutory rate

$

(3,606)

$

345

$

(1,340)

Increase (reduction) in income taxes resulting from:

Valuation allowance change

3,952

153

719

Nondeductible executive compensation

580

778

320

Foreign income taxes

378

425

(250)

Foreign interest disallowance

298

292

--

Nondeductible entertainment expenses

94

201

206

Foreign deferred items

(63)

365

--

Equity compensation

(204)

(1,921)

(2,081)

State income taxes, net of federal benefit

(455)

(108)

(8)

Research and development credit

(457)

(400)

(557)

Net change in uncertain tax positions

(1,115)

(360)

(154)

Other

106

154

(406)

Total income tax benefit

$

(492)

$

(76)

$

(3,551)

Deferred Taxes

We generate deferred tax assets primarily as a result of net operating losses, excess interest carryforward, accrued compensation, stock compensation, and capital leases. Our deferred tax liabilities are primarily made up of intangible assets acquired in previous years, unrealized gains and losses, and capital leases.

The tax effects of temporary differences which give rise to deferred tax assets and liabilities at December 31 are as follows (in thousands):

2020

2019

Deferred tax assets:

Loss carryforwards

$

7,911

$

7,030

Finance and operating leases

6,880

7,497

Excess interest carryforward

2,660

4,544

Stock compensation

2,034

2,153

Accrued expenses

2,002

1,890

Property

1,397

1,147

Deferred compensation

1,326

1,107

Credit carryforwards

1,214

710

Inventory and deferred preservation costs write-downs

308

299

UNICAP

97

425

Tax benefit of tax reserves

54

52

Other

2,647

1,659

Less valuation allowance

(7,170)

(3,218)

Total deferred tax assets, net

21,360

25,295

2020

2019

Deferred tax liabilities:

Intangible assets

(35,770)

(35,555)

Finance and operating leases

(6,617)

(7,048)

Unrealized gains and losses

(4,929)

--

Financing arrangements

(4,700)

--

Debt costs

(1,528)

(1,917)

Prepaid items

(417)

(494)

Property

--

(28)

Other

(665)

(616)

Total deferred tax liabilities

(54,626)

(45,658)

Total net deferred tax liabilities

$

(33,266)

$

(20,363)

As of December 31, 2020 we maintained a total of $7.2 million in valuation allowances against deferred tax assets, including state and federal net operating loss carryforwards, and a net deferred tax liability of $33.3 million. As of December 31, 2019 we maintained a total of $3.2 million in valuation allowances against deferred tax assets, related primarily to state and foreign net operating loss carryforwards, and a net deferred tax liability of $20.4 million.

As of December 31, 2020 we had approximately $2.4 million of federal net operating loss carryforwards related to the acquisitions of Cardiogenesis and Hemosphere that we anticipate partially utilizing before expiration, $3.4 million of state net operating loss carryforwards, that will begin to expire in 2021, approximately $2.3 million of foreign net operating loss carryforwards that will begin to expire in 2025, $1.2 million in research and development tax credit carryforwards that begin to expire in 2030, and $138,000 in credits from other jurisdictions that mostly expire in 2027.

As of December 31, 2020 we had a deferred tax asset of $2.7 million of disallowed interest expense deduction carryforwards as a result of the new interest deductibility rule imposed by the “Tax Cuts and Jobs Act” of 2017 (“Tax Act”), and modified by the CARES Act. This rule disallows interest expense to the extent it exceeds 30% of adjusted taxable income, modified to be 50% in 2019 and 2020 by the CARES Act. For the years ending December 31, 2020 and 2019 our interest deduction was limited to $15.8 million and $16.3 million, respectively. The temporary increase in the limit as a result of the CARES Act allowed us to utilize previously disallowed interest in the amounts of $2.9 million and $3.3 million in 2020 and 2019 respectively. The remaining unutilized interest deduction deferred tax asset of $2.7 million can be carried forward indefinitely.

Reinvestment of Unremitted Earnings

We intend to reinvest substantially all of the unremitted earnings of our non-U.S. subsidiaries to fund working capital, strategic investments, and debt repayment and postpone their remittance indefinitely. Accordingly, no provision for state and local taxes or foreign withholding taxes was recorded on these unremitted earnings in the accompanying Consolidated Statements of Operations and Comprehensive Loss. The Company is permanently reinvested with respect to the outside basis differences in its non-U.S. subsidiaries with the exception of one of its German subsidiaries. As of December 31, 2020 we had a deferred tax liability of $141,000 for the tax effects of this outside basis difference in its Consolidated Statements of Operations and Comprehensive Loss.

Uncertain Tax Positions

A reconciliation of the beginning and ending balances of our uncertain tax position liability, excluding interest and penalties, is as follows (in thousands):

2020

2019

2018

Beginning balance

$

3,523

$

3,889

$

4,328

Increases related to current year tax positions

473

691

368

Decreases due to the lapsing of statutes of limitations

(1,703)

(880)

(467)

Decreases related to prior year tax positions

(238)

(154)

--

Increases (decreases) for foreign exchange differences

99

(22)

16

Increases (decreases) related to prior year tax positions

420

(1)

249

Decreases related to settlements

--

--

(605)

Ending balance

$

2,574

$

3,523

$

3,889

A reconciliation of the beginning and ending balances of our liability for interest and penalties on uncertain tax positions is as follows (in thousands):

2020

2019

2018

Beginning balance

$

434

$

402

$

315

Accrual of interest and penalties

81

227

161

Decreases related to prior year tax positions

(254)

(195)

(74)

Ending balance

$

261

$

434

$

402

As of December 31, 2020 our uncertain tax liability of $2.8 million, including interest and penalties, was recorded as a reduction to deferred tax assets of $300,000, and a non-current liability of $2.5 million on our Consolidated Balance Sheets, all of which, except for the portion related to interest and penalties, is expected to impact our tax rate when recognized. The uncertain tax position decrease related to prior year tax positions is primarily due to the lapse of the statute of limitations in various jurisdictions. As of December 31, 2019 our total uncertain tax liability, including interest and penalties of $4.0 million, was recorded as a reduction to deferred tax assets of $300,000 and as a non-current liability of $3.7 million on our Consolidated Balance Sheets.

We believe it is reasonably possible that approximately $210,000 of our uncertain tax liability will be recognized in 2020 due to the lapsing of various federal and state and foreign statutes of limitations, of which substantially all would affect the tax rate.

Other

Our tax years 2017 and forward generally remain open to examination by the major taxing jurisdictions to which we are subject. However, certain returns from years prior to 2017, in which net operating losses and tax credits have arisen, are still open for examination by the tax authorities.