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Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
An income tax expense (benefit) of $(43.4) million, $0.5 million, and $(2.4) million was recognized for the years ended December 31, 2022, 2021 and 2020, respectively.

Our loss from continuing operations before income taxes was as follows (in thousands):
For the Year Ended December 31,
202220212020
Domestic$(66,055)$(32,719)$(332,373)
Foreign3,978 2,918 1,833 
Loss from continuing operations before income taxes$(62,077)$(29,801)$(330,540)
Components of income tax expense (benefit) (in thousands) consist of the following:
For the Year Ended December 31,
202220212020
Current
Federal$(875)$(1,469)$(2,305)
State and local1,788 1,449 200 
Foreign1,318 1,027 721 
Total current tax expense (benefit)2,231 1,007 (1,384)
Deferred
Federal5,055 (5,866)(38,258)
State and local(2,790)(4,021)(9,565)
Foreign92 (493)(303)
Total deferred tax expense (benefit)2,357 (10,380)(48,126)
Change in valuation allowance(47,964)9,856 47,142 
Total tax expense (benefit)$(43,376)$483 $(2,368)

A reconciliation of the U.S. statutory tax rate to our effective tax rate is presented below:
For the Year Ended December 31,
202220212020
U.S. statutory tax rate21.0 %21.0 %21.0 %
U.S. state income taxes, net of U.S. federal tax benefit(0.6)%1.9 %2.9 %
Foreign earnings at other than U.S. rates(0.8)%0.3 %— %
Change in valuation allowance77.3 %(33.1)%(14.3)%
Benefit of net operating loss carryback provision— %— %1.1 %
Non-deductible goodwill impairment— %— %(11.5)%
Non-deductible excess compensation(27.8)%(10.1)%(0.3)%
Excess tax benefits (shortfalls) on stock-based compensation12.2 %8.1 %(0.3)%
Convertible debt extinguishment(3.4)%(1.5)%— %
Change in uncertain tax positions(1.1)%0.2 %— %
Nondeductible transaction costs(1.7)%— %— %
Change in state rate5.2 %6.8 %1.3 %
Return to provision(1.1)%6.6 %(0.8)%
Change in indefinite reinvestment assertion for domestic subsidiaries — %— %1.0 %
Tax sharing settlement— %(1.1)%— %
Tax receivable agreement(9.1)%— %— %
Other, net(0.2)%(0.7)%0.6 %
Effective tax rate69.9 %(1.6)%0.7 %

Deferred tax balances reflect the impact of temporary differences between the carrying amount of assets and liabilities and their tax basis and are stated at the tax rates expected to be in effect when the temporary differences are expected to be recovered or settled.
Significant components of the Company’s deferred tax assets and liabilities (in thousands) were as follows:
  As of December 31,
  20222021
Deferred Tax Assets
Start-up and organizational costs$84 $103 
Goodwill12,281 18,774 
Operating lease liabilities16,362 15,968 
Accrued expenses9,326 10,345 
Stock based compensation1,263 8,714 
Net operating loss carryforwards131,317 130,242 
Federal and state research tax credits1,828 1,828 
Fixed assets393 480 
Interest deduction limitation7,089 7,795 
Outside basis differences650 1,972 
Other6,677 9,236 
Subtotal187,270 205,457 
Valuation allowance(70,790)(101,345)
Total deferred tax assets116,480 104,112 
Deferred Tax Liabilities
Internally developed software costs11,173 12,501 
Intangible assets89,784 48,677 
Right-of-use assets - Operating12,696 12,284 
Contract fulfillment costs4,501 8,317 
Convertible debt— 17,604 
Other2,136 5,387 
Total deferred tax liabilities120,290 104,770 
Net deferred tax assets (liabilities)$(3,810)$(658)

Changes in our valuation allowance (in thousands) were as follows:
For the Year Ended December 31,
20222021
Balance at beginning-of-year$101,345 $89,723 
Charged (credited) to costs and expenses(47,964)9,856 
Charged to other accounts (1)
17,409 1,766 
Balance at end-of-year$70,790 $101,345 
______________
(1)Amounts charged to other accounts includes $17.3 million charged to shareholders’ equity and $0.1 million charged to discontinued operations for the year ended December 31, 2022 and $1.8 million charged to discontinued operations for the year ended December 31, 2021.

For the year ended December 31, 2022, the effective tax rate was 69.9% and the corresponding tax benefit recorded was $43.4 million. The Company and its U.S. subsidiaries continue to record a valuation allowance against its net deferred tax assets, with the exception of indefinite lived components. The income tax benefit recorded by the company in 2022 primarily relates to the $46.8 million reduction in the valuation allowance resulting from deferred tax liabilities established as part of the IPG acquisition accounting, partially offset by state and foreign taxes.

For the year ended December 31, 2021, the effective tax rate was (1.6)% and the corresponding tax expense recorded was $0.5 million. The income tax expense recorded by the Company in 2021 primarily relates to foreign taxes and the impact of the valuation allowance recorded against the Company’s net deferred tax assets, with the exception of indefinite lived components and those expected to reverse outside of the net operating loss carryover period.

For the year ended December 31, 2020, the effective tax rate was 0.7% and the corresponding tax benefit recorded was $2.4 million. The income tax benefit recorded by the Company in 2020 primarily relates to the impacts from the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). On March 27, 2020, in response to the COVID-19 pandemic, the CARES Act, was signed into law. The CARES Act allowed NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years for the recovery of previously paid federal income taxes. The Company recorded an income tax benefit related to
carrying back New Century Health’s 2018 NOL as part of a federal income tax refund claim for taxes it paid on income in 2013 and 2014. The remaining income tax provisions included in the CARES Act, did not have a significant impact on the Company.

As of December 31, 2022, the Company had $186.9 million of federal and $301.8 million of state NOL carryforwards available to offset future taxable income that begin to expire in 2032 and 2023, respectively, and $295.5 million federal and $245.0 million of state NOLs with an indefinite carryforward period, subject to a utilization limit of 80% of taxable income in any given year. However, as it is more likely than not that such tax benefit will not be realized based on our evaluation, we have established a valuation allowance against those NOLs. Furthermore, Internal Revenue Code Section 382 imposes limitations on the utilization of NOLs in the event of certain changes in ownership of the Company, which may have occurred or could occur in the future. This could result in an annual limit on the Company’s ability to utilize NOLs and could cause U.S. federal and state income taxes to be due sooner than if no such limitations applied.

As of December 31, 2022, the Company had $2.1 million and $0.3 million of research and development credits for federal and state income tax purposes, respectively, which could expire unutilized beginning in 2037 and 2028, respectively. The Company has established a partial valuation allowance against those credits.

On August 16, 2022, the President signed into law the Inflation Reduction Act of 2022 which contained provisions effective January 1, 2023, including a 15% corporate minimum tax and a 1% excise tax on stock buybacks, both of which we expect to be immaterial to our financial results, financial position and cash flows.

Changes in our unrecognized tax benefits (in thousands) were as follows:
For the Year Ended December 31,
202220212020
Balance at beginning-of-year$609 $678 $753 
Gross increases - tax positions in prior period616 — — 
Gross increases - tax positions in current period399 — — 
Lapse of statute of limitations— (69)(75)
Balance at end-of-year$1,624 $609 $678 

We are subject to taxation in various jurisdictions in the U.S., India and the Philippines. Tax years 2011 and all subsequent periods remain subject to examination by the U.S. federal and state taxing jurisdictions due to the availability of NOL carryforwards. Included in the balance of unrecognized tax benefits as of December 31, 2022, are $0.6 million of tax benefits that, if recognized, would not affect the overall effective tax rate, due to the offsetting impact on the Company’s valuation allowance. The Company has recognized $0.3 million of interest and penalties related to uncertain tax positions as a component of income tax expense for the year ended December 31, 2022. The Company recognized no interest and penalties related to uncertain tax positions for the year ended December 31, 2021. The Company has accrued interest and penalties related to uncertain tax positions of $0.4 million and $0.0 million as of December 31, 2022 and 2021, respectively. The Company had recognized $1.6 million of uncertain tax positions as of December 31, 2022, and $0.6 million as of December 31, 2021. The Company and its subsidiaries are not currently subject to income tax audits in any U.S. state or local jurisdiction, or any foreign jurisdiction, for any tax year.

Tax Receivables Agreement

Pursuant to the Offering Reorganization, Class B Exchanges increased our tax basis in our share of Evolent Health LLC’s tangible and intangible assets. These increases in tax basis increase our depreciation and amortization deductions and create other tax benefits and, therefore, may reduce the amount of tax that we would otherwise be required to pay in the future. In addition, certain NOLs of Evolent Health Holdings (and of an affiliate of TPG) are available to us as a result of the Offering Reorganization.

In connection with the Offering Reorganization, we entered into the TRA with the holders of Class B common units. The agreement requires us to pay to such holders 85% of the cash savings, if any, in U.S. federal, state and local, and foreign income tax (as applicable) we realize as a result of any deductions attributable to the increase in tax basis following the Class B Exchanges or deductions attributable to imputed interest or future increases in tax basis following payments made under the TRA. Additionally, pursuant to the same agreement we will pay the former stockholders of Evolent Health Holdings 85% of the amount of the cash savings, if any, in U.S. federal, state and local, and foreign income tax that we realize as a result of the utilization of the NOLs of Evolent Health Holdings (and the affiliate of TPG) attributable to periods prior to the Offering Reorganization, approximately $79.3 million, as well as deductions attributable to imputed interest on any payments made under the agreement. The Company has recorded a partial TRA liability of $46.0 million as of December 31, 2022.
We will benefit from the remaining 15% of any realized cash savings. The TRA was effective upon the completion of the Offering Reorganization and will remain in effect until all such tax benefits have been used or expired, or until the agreement is terminated. See Note 11 for additional discussion of the implications of the TRA.