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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes

9. Income Taxes

Income Tax Provision. The components of net income before income taxes are as follows (in thousands):

 

 

 

2021

 

 

2020

 

 

2019

 

Domestic

 

$

98,261

 

 

$

77,721

 

 

$

93,510

 

India

 

 

5,873

 

 

 

6,245

 

 

 

4,769

 

Foreign other

 

 

(3,188

)

 

 

1,390

 

 

 

7,444

 

Total

 

$

100,946

 

 

$

85,356

 

 

$

105,723

 

The income tax provision consists of the following (in thousands):

 

 

 

2021

 

 

2020

 

 

2019

 

Current:

 

 

 

 

 

 

 

 

 

Federal

 

$

17,012

 

 

$

17,760

 

 

$

16,616

 

State

 

 

5,835

 

 

 

5,373

 

 

 

2,910

 

India

 

 

959

 

 

 

1,788

 

 

 

1,004

 

Foreign other

 

 

2,443

 

 

 

2,990

 

 

 

2,515

 

 

 

 

26,249

 

 

 

27,911

 

 

 

23,045

 

Deferred:

 

 

 

 

 

 

 

 

 

Federal

 

 

2,294

 

 

 

(497

)

 

 

(1,943

)

State

 

 

344

 

 

 

(1,031

)

 

 

624

 

India

 

 

368

 

 

 

(387

)

 

 

36

 

Foreign other

 

 

(640

)

 

 

649

 

 

 

1,191

 

 

 

 

2,366

 

 

 

(1,266

)

 

 

(92

)

Total income tax provision

 

$

28,615

 

 

$

26,645

 

 

$

22,953

 

The effective tax rate in India of 22.6%, 22.4% and 21.8% in 2021, 2020 and 2019 respectively, differs from the statutory rate of approximately 29% due primarily to certain operations occurring within a Special Economic Zone (“SEZ”). Under the terms of SEZ, CSG qualifies for a reduced income tax rate on operations within the SEZ for a period of up to 10 years, beginning in 2018.

The difference between our income tax provision computed at the statutory Federal income tax rate and our financial statement income tax is summarized as follows (in thousands):

 

 

 

2021

 

 

2020

 

 

2019

 

Provision at Federal rate of 21%

 

$

21,199

 

 

$

17,925

 

 

$

22,202

 

State income taxes, net of Federal impact

 

 

4,882

 

 

 

3,430

 

 

 

2,792

 

Research and experimentation credits

 

 

(2,062

)

 

 

(2,705

)

 

 

(3,314

)

Stock award vesting

 

 

(538

)

 

 

(540

)

 

 

(3,661

)

Tax uncertainties

 

 

69

 

 

 

(403

)

 

 

(56

)

Section 162(m) compensation limitation

 

 

1,610

 

 

 

4,494

 

 

 

978

 

Foreign rate differential

 

 

592

 

 

 

462

 

 

 

930

 

Valuation allowance for deferred tax assets

 

 

1,427

 

 

 

1,002

 

 

 

(495

)

Withholding tax

 

 

2,305

 

 

 

2,572

 

 

 

2,408

 

Other impact of foreign operations

 

 

(468

)

 

 

621

 

 

 

227

 

Statutory rate change

 

 

(299

)

 

 

71

 

 

 

(10

)

Other

 

 

(102

)

 

 

(284

)

 

 

952

 

Total income tax provision

 

$

28,615

 

 

$

26,645

 

 

$

22,953

 

We have undistributed earnings of approximately $60 million from certain foreign subsidiaries. We intend to indefinitely reinvest these foreign earnings, therefore, a provision has not been made for foreign withholding taxes that might be payable upon remittance of such earnings. Determination of the amount of unrecognized deferred tax liability on unremitted foreign earnings is not practicable because of the complexities of the hypothetical calculation.

Deferred Income Taxes. Net deferred income tax assets as of December 31, 2021 and 2020 are as follows (in thousands):

 

 

 

2021

 

 

2020

 

Deferred income tax assets

 

$

56,065

 

 

$

59,895

 

Deferred income tax liabilities

 

 

(25,250

)

 

 

(33,099

)

Valuation allowance

 

 

(29,983

)

 

 

(21,700

)

Net deferred income tax assets

 

$

832

 

 

$

5,096

 

The components of our net deferred income tax assets (liabilities) as of December 31, 2021 and 2020 are as follows (in thousands):

 

 

 

2021

 

 

2020

 

Net deferred income tax assets:

 

 

 

 

 

 

Accrued expenses and reserves

 

$

9,470

 

 

$

12,587

 

Stock-based compensation

 

 

3,807

 

 

 

3,285

 

Software

 

 

(1,435

)

 

 

(1,532

)

Client contracts and related intangibles

 

 

(5,993

)

 

 

(5,199

)

Goodwill

 

 

(11,563

)

 

 

(9,109

)

Net operating loss carryforwards

 

 

31,548

 

 

 

26,893

 

Property and equipment

 

 

(6,136

)

 

 

(8,816

)

Deferred revenue

 

 

3,578

 

 

 

4,020

 

State taxes

 

 

2,020

 

 

 

1,804

 

Contingent payments

 

 

(123

)

 

 

(1,017

)

Foreign exchange gain/loss

 

 

1,064

 

 

 

1,406

 

Operating lease right-of-use assets and lease liabilities

 

 

1,768

 

 

 

1,962

 

Unrecognized tax benefit

 

 

522

 

 

 

446

 

Credits and incentives

 

 

951

 

 

 

612

 

Other

 

 

1,337

 

 

 

(546

)

Total deferred income tax assets

 

 

30,815

 

 

 

26,796

 

Less: valuation allowance

 

 

(29,983

)

 

 

(21,700

)

Net deferred income tax assets

 

$

832

 

 

$

5,096

 

 

We regularly assess the likelihood of the future realization of our deferred income tax assets. To the extent we believe that it is more likely than not that a deferred income tax asset will not be realized, a valuation allowance is established. As of December 31, 2021, we believe we will generate sufficient taxable income in the future such that we will realize 100% of the benefit of our U.S. Federal deferred income tax assets, thus no valuation allowance has been established. As of December 31, 2021, we have deferred income tax assets net of federal benefit related to state and foreign income tax jurisdictions of $4.0 million and $36.7 million, respectively, and have established valuation allowances against those state and foreign income tax deferred income tax assets of $1.8 million and $28.2 million, respectively.

As of December 31, 2021 and 2020, we have an acquired U.S. Federal net operating loss (“NOL”) carryforward of approximately $18 million and $24 million, respectively, which will begin to expire in 2024 and can be utilized through 2033. The acquired U.S. Federal NOL carryforward is attributable to the pre-acquisition periods of acquired businesses. The annual utilization of this U.S. Federal NOL carryforward is limited pursuant to Section 382 of the Internal Revenue Code of 1986, as amended. In addition, as of December 31, 2021 and 2020, we have: (i) state NOL carryforwards of approximately $41 million and $49 million, respectively, which will expire beginning in 2022 with a portion of the losses available over an indefinite period of time; and (ii) foreign subsidiary NOL carryforwards of approximately $116 million and $107 million, respectively, which will expire beginning in 2024, with a portion of the losses available over an indefinite period of time.

Accounting for Uncertainty in Income Taxes. We are required to estimate our income tax liability in each jurisdiction in which we operate, including U.S. Federal, state, and foreign income tax jurisdictions. Various judgments and estimates are required in evaluating our tax positions and determining our provisions for income taxes. There are certain transactions and calculations for which the ultimate income tax determination may be uncertain. In addition, we may be subject to examination of our income tax returns by various foreign, federal, state, or local tax authorities, which could result in adverse outcomes. For these reasons, we establish a liability associated with unrecognized tax benefits based on estimates of whether additional taxes and interest may be due. This liability is adjusted based upon changing facts and circumstances, such as the closing of a tax audit, the expiration of a statute of limitations or the refinement of an estimate.

A reconciliation of the beginning and ending balances of our liability for unrecognized tax benefits is as follows (in thousands):

 

 

 

2021

 

 

2020

 

 

2019

 

Balance, beginning of year

 

$

1,393

 

 

$

1,540

 

 

$

1,668

 

Additions related to prior acquisitions

 

 

1,508

 

 

 

160

 

 

 

—

 

Lapse of statute of limitations

 

 

(151

)

 

 

(313

)

 

 

(420

)

Additions for tax positions of prior years

 

 

36

 

 

 

111

 

 

 

322

 

Reductions for tax positions of prior years

 

 

(62

)

 

 

(105

)

 

 

(30

)

Additions for tax positions of current year

 

 

205

 

 

 

—

 

 

 

—

 

Balance, end of year

 

$

2,929

 

 

$

1,393

 

 

$

1,540

 

We recognize interest and penalty expense associated with our liability for unrecognized tax benefits as a component of income tax expense in our Income Statements. In addition to the $2.9 million, $1.4 million, and $1.5 million of liability for unrecognized tax benefits as of December 31, 2021, 2020, and 2019, we had $0.7 million, $0.6 million, and $0.6 million, respectively of income tax-related accrued interest, net of any federal benefit of deduction. If recognized, the $2.9 million of unrecognized tax benefits as of December 31, 2021, would favorably impact our effective tax rate in future periods.

We file income tax returns in the U.S. Federal jurisdiction, various U.S. state and local jurisdictions, and many foreign jurisdictions. The U.S., U.K., India, and Australia are the primary taxing jurisdictions in which we operate. The years open for audit vary depending on the taxing jurisdiction. We estimate that it is reasonably possible that the amount of gross unrecognized tax benefits will decrease by up to $0.6 million over the next twelve months due to completion of audits and the expiration of statute of limitations.