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Note 13 - Income Taxes | 12 Months Ended
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Dec. 31, 2021
Notes to Financial Statements |
Income Tax Disclosure [Text Block] |
13. | Income Taxes
Deferred tax assets and liabilities reflect the effects of tax losses, credits, and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The current and deferred portions (in thousands) of federal, foreign and state income tax benefit or expense are as follows:
|  | For the Year Ended December 31, |
|  | 2021 |  |  | 2020 |
Federal income tax (expense) benefit: |  |  |  |  |  |  |  |
Current tax (expense) benefit |  | $ | (34,910 | ) |  | $ | 1,351 |
Deferred tax (expense) |  |  | (2,369 | ) |  |  | (21,752 | )
Total federal income tax (expense) |  | $ | (37,279 | ) |  | $ | (20,401 | )
Foreign income tax (expense) benefit: |  |  |  |  |  |  |  |
Current tax (expense) |  | $ | (107 | ) |  | $ | (143 | )
Deferred tax benefit (expense) |  |  | 1 |  |  |  | (5 | )
Total foreign income tax (expense) |  | $ | (106 | ) |  | $ | (148 | )
State and other income tax benefit (expense): |  |  |  |  |  |  |  |
Current tax (expense) |  | $ | (4,910 | ) |  | $ | (1,228 | )
Deferred tax benefit |  |  | 511 |  |  |  | 1,303 |
Total state and other income tax (expense) benefit |  | $ | (4,399 | ) |  | $ | 75 |
Total income tax (expense) |  | $ | (41,784 | ) |  | $ | (20,474 | )
The $34.9 million of 2021 current federal income tax expense in the above table is net of $13.8 million of tax benefits related to federal net operating loss and capital loss carry forwards. Similarly, the $4.9 million of 2021 current state and other income tax expense above is net of $0.8 million of tax benefits related to state net operating loss carry forwards. We experienced an effective income tax expense rate of 19.0% and 17.9% for the years ended December 31, 2021, and December 31, 2020, respectively. Our effective income tax expense rate for the year ended December 31, 2021, was below the statutory rate principally due to (1) our deduction for income tax purposes of amounts characterized in our consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes and (2) deductions associated with the exercise of stock options and the vesting of restricted stock at times when the fair value of our stock exceeded such share-based awards’ grant date. Offsetting the above factors are the effects on our effective tax rate of state and foreign income tax expense and executive compensation deduction limitations under Section 162(m) of the Internal Revenue Code of 1986. Our effective income tax expense rate for the year ended December 31, 2020, was below the statutory rate principally due to (1) our deduction for income tax purposes of amounts characterized in our consolidated financial statements as dividends on a preferred stock issuance, such amounts constituting deductible interest expense on a debt issuance for tax purposes and (2) the reversal in 2020 of our prior year accruals of interest and penalties on liabilities for unpaid taxes, such reversal arising from the complete abatement by the IRS of failure-to-pay penalties (and accrued interest thereon) related to a now-completed audit by the IRS of our 2008 tax returns. We report income tax-related interest and penalties (including those associated with both our accrued liabilities for uncertain tax positions and unpaid tax liabilities) within our income tax line item on our consolidated statements of income. We likewise report the reversal of income tax-related interest and penalties within such line item to the extent we resolve our liabilities for uncertain tax positions or unpaid tax liabilities in a manner favorable to our accruals therefor. For 2021, we experienced only de minimis interest expense and reversals, and for 2020, we reported a net reversal of income tax-related interest and penalties of $1.0 million within our income tax line item. The following table reconciles our effective income tax expense or benefit rates for 2021 and 2020:
|  | For the Year Ended December 31, |
|  | 2021 |  |  | 2020 |
Statutory federal expense rate |  |  | 21.0 | % |  |  | 21.0 | %
(Decrease) increase in statutory federal tax expense rate resulting from: |  |  |  |  |  |  |  |
Share-based compensation, net of executive compensation deduction limitations |  |  | (1.4 | ) |  |  | — |
Global intangible low-taxed income tax |  |  | 0.1 |  |  |  | 0.2 |
Net interest and penalties related to uncertain tax positions and unpaid tax liabilities (including reversals thereof from IRS settlement in 2020) |  |  | — |  |  |  | (0.6 | )
Interest expense on preferred stock classified as debt for tax purposes |  |  | (1.6 | ) |  |  | (2.6 | )
Foreign taxes, net of valuation allowance effects |  |  | (0.1 | ) |  |  | (0.2 | )
State taxes, net of valuation allowance effects |  |  | 1.6 |  |  |  | (0.1 | )
Prior year provision to return reconciling items, tax effects of non-controlling interests, and other |  |  | (0.6 | ) |  |  | 0.2 |
Effective tax expense rate |  |  | 19.0 | % |  |  | 17.9 | %
As of December 31, 2021 and December 31, 2020, the respective significant components (in thousands) of our deferred tax assets and liabilities (which are included as a component of our Income tax liability on our consolidated balance sheets) were:
|  | As of December 31, |
|  | 2021 |  |  | 2020 |
Deferred tax assets: |  |  |  |  |  |  |  |
Software development costs/fixed assets |  | $ | — |  |  | $ | 75 |
Provision for loan loss |  |  | 14,647 |  |  |  | 30,080 |
Credit card fair value election differences |  |  | 48,730 |  |  |  | 173 |
Equity-based compensation |  |  | 967 |  |  |  | 715 |
Accrued expenses |  |  | 159 |  |  |  | 466 |
Accruals for state taxes and interest associated with unrecognized tax benefits and unpaid accrued tax liabilities |  |  | 149 |  |  |  | 121 |
Federal net operating loss and capital loss carry-forwards |  |  | — |  |  |  | 11,279 |
Federal tax credits and minimum tax credit carry-forward |  |  | — |  |  |  | 25 |
Foreign net operating loss carry-forward |  |  | 304 |  |  |  | 306 |
Interest expense on debt with equity treatment for tax purposes |  |  | — |  |  |  | 631 |
Other |  |  | 506 |  |  |  | 202 |
State tax benefits, primarily from net operating losses |  |  | 27,081 |  |  |  | 36,052 |
Deferred tax assets, gross |  | $ | 92,543 |  |  | $ | 80,125 |
Valuation allowances |  |  | (22,716 | ) |  |  | (31,701 | )
Deferred tax assets, net of valuation allowances |  | $ | 69,827 |  |  | $ | 48,424 |
Deferred tax (liabilities): |  |  |  |  |  |  |  |
Prepaid expenses and other |  | $ | (513 | ) |  | $ | (225 | )
Software development costs and fixed assets |  |  | (41 | ) |  |  | — |
Equity in income of equity-method investee |  |  | (697 | ) |  |  | (1,457 | )
Market discount on acquired credit card and other loans receivable |  |  | (94,958 | ) |  |  | (61,255 | )
Deferred costs |  |  | (590 | ) |  |  | (545 | )
Convertible senior notes |  |  | — |  |  |  | (10,057 | )
Deferred tax (liabilities), gross |  | $ | (96,799 | ) |  | $ | (73,539 | )
Deferred tax (liabilities), net |  | $ | (26,972 | ) |  | $ | (25,115 | )
We undertook a detailed review of our deferred taxes and determined that a valuation allowance was required for certain deferred tax assets in state tax jurisdictions within the U.S. and in the U.K. We reduce our deferred tax assets by valuation allowances if it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible. In making our valuation allowance determinations, we consider all available positive and negative evidence affecting specific deferred tax assets, including our past and anticipated future performance, the reversal of deferred tax liabilities, the length of carry-back and carry-forward periods, and the implementation of tax planning strategies. Because our valuation allowance evaluations require consideration of future events, significant judgment is required in making the evaluations, and our conclusions could be materially different if our expectations are not met. Our valuation allowances totaled $22.7 million and $31.7 million as of December 31, 2021, and December 31, 2020, respectively; a release of approximately $1.1 million of state valuation allowances accounted for part of the decline in valuation allowance balances between December 31, 2020, and December 31, 2021. Our subsidiaries file federal, state and/or foreign income tax returns. In the normal course of our business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the U.S., the U.K., and various U.S. states and territories. With a few exceptions of a non-material nature, we are no longer subject to federal, state, local, or foreign income tax examinations for years prior to 2016. Reconciliations (in thousands) of our unrecognized tax benefits from the beginning to the end of 2021 and 2020, respectively, are as follows:
|  | 2021 |  |  | 2020 |
Balance at January 1, |  | $ | (577 | ) |  | $ | (513 | )
Reductions based on tax positions related to prior years |  |  | 33 |  |  |  | — |
(Additions) reductions based on tax positions related to prior years |  |  | (26 | ) |  |  | 48 |
Additions based on tax positions related to the current year |  |  | (107 | ) |  |  | (82 | )
Interest and penalties accrued |  |  | (31 | ) |  |  | (30 | )
Balance at December 31, |  | $ | (708 | ) |  | $ | (577 | )
Further, our unrecognized tax benefits that, if recognized, would affect the effective tax rate are not material at only $0.7 million and $0.6 million as of December 31, 2021, and 2020, respectively.

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