Income Taxes

12 Months Ended

Dec. 31, 2020

Note 9 - Income Taxes

The provision for income taxes is as follows (in thousands):

	Year Ended December 31,
	2020		2019			2018
Current:
Federal	$	2,943	$	8,806		$	7,412
State		396		1,381			408
		3,339		10,187			7,820
Deferred:
Federal		4,156		(774	)		(824	)
State		1,336		3,433			(289	)
		5,492		2,659			(1,113	)
Total provision	$	8,831	$	12,846		$	6,707

Deferred income tax assets and liabilities consist of the following components (in thousands):

	December 31,
	2020			2019
Deferred income tax assets:
Workers' compensation claims liabilities	$	9,946		$	12,151
Operating lease liability		6,107			5,920
Deferred compensation		2,235			1,988
Payroll tax deferral		1,668			—
Other		1,154			1,345
MCC accrual		1,062			1,458
Equity based compensation		555			913
State credit carryforward		518			923
Customer incentives		54			333
State loss carryforward		—			33
		23,299			25,064
Less: valuation allowance		163			173
		23,136			24,891
Deferred income tax liabilities:
Tax amortization of goodwill		(10,375	)		(10,312	)
Tax depreciation in excess of book depreciation		(7,187	)		(3,421	)
Operating lease right-of-use		(5,766	)		(5,588	)
Tax effect of unrealized gains, net		(2,871	)		(1,058	)
Other		(1,455	)		(1,724	)
		(27,654	)		(22,103	)
Net deferred income taxes	$	(4,518	)	$	2,788

The effective tax rate differed from the U.S. statutory federal tax rate due to the following:

	Year Ended December 31,
	2020				2019				2018
Statutory federal tax rate		21.0		%		21.0		%		21.0		%
State taxes, net of federal benefit		3.2				6.2				0.3
Adjustment for final positions on filed returns		0.6				(0.2	)			(1.1	)
Nondeductible expenses and other, net		0.7				1.3				1.2
Federal and state tax credits		(4.9	)			(7.5	)			(6.4	)
Other, net		0.1				0.2				—
		20.7		%		21.0		%		15.0		%

Under ASC 740, “Income Taxes,” management evaluates the realizability of the deferred tax assets on a quarterly basis under a “more-likely than not” standard. As part of this evaluation, management reviews all evidence both positive and negative to determine if a valuation allowance is needed. One component of this analysis is to determine whether the Company was in a cumulative loss position for the most recent 12 quarters. The Company was in a cumulative income position for the 12 quarters ended at both December 31, 2020 and December 31, 2019.

The Company’s realization of a portion of net deferred tax assets is based in part on our estimates of the timing of reversals of certain temporary differences and on the generation of taxable income before such reversals.

The Company is subject to income taxes in U.S. federal and multiple state and local tax jurisdictions. The Internal Revenue Service is examining the Company’s federal tax returns for the years ended December 31, 2011, 2012, 2013 and 2014. In July 2020, BBSI received a draft Revenue Agent Report in relation to the ongoing IRS audit for tax years 2011 to 2014. The report indicates that the IRS intends to disallow certain wage-based tax credits claimed, which would result in an estimated total additional tax due of approximately $2.3 million for the tax years 2012 through 2015, including the impact on carryover tax attributes. The Company disagrees with the initial determination and believes that it has technical merits to defend its position. Based on management’s more-likely-than-not assessment that the position is sustainable, no reserve has been recorded in the financial statements.

In the major jurisdictions where it operates, the Company is generally no longer subject to income tax examinations by tax authorities for the 2015 and 2016 tax year and tax years before 2011. As of December 31, 2020, 2019 and 2018, the Company had no material unrecognized tax benefits.

A portion of the consolidated income the Company generates is not subject to state income tax. Depending on the percentage of this income as compared to total consolidated income, the Company's state effective tax rate could fluctuate from expectations.

At December 31, 2020, the Company had an immaterial amount of state operating loss carryforwards. At December 31, 2020, the Company did not have a federal general business tax credit carryforward or an alternative minimum tax credit carryforward.

- 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 + Details