Income Taxes

9 Months Ended

Sep. 30, 2019

Income tax expense for the nine months ended September 30, 2019 and 2018 differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. The sources and tax effects of the differences are as follows:



	Nine Months Ended September 30,
	2019		2018
U.S. federal statutory tax rate	21.0	%	21.0	%
State income taxes, net of federal tax benefit	1.5		(0.1	)
General business credits	(2.0	)	(1.4	)
Employee stock-based compensation	(3.7	)	(16.1	)
IRC 162(m) limitation	1.9		2.7
Other	0.4		0.2
Effective tax rate	19.1	%	6.3	%

The effective tax rate for the nine months ended September 30, 2019 and 2018 differs from the statutory federal income tax rate of 21%, primarily due to state income taxes, net of federal tax benefits, general business credits, employee stock-based compensation, and the Internal Revenue Code (IRC) 162(m) limitation on the deductibility of certain executive compensation. The increase in the effective tax rate for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 is primarily due to a $13.6 million decline in benefit on the recognition of excess tax benefits from stock-based compensation and additional expenses related to state taxes, net of federal tax benefits. For the nine months ended September 30, 2019 and 2018, we recognized discrete tax benefits related to the excess tax benefits from stock-based compensation of $4.4 million and $18.0 million, respectively.

Note 10—Income Taxes (Continued)

We establish a valuation allowance when we consider it more-likely-than-not that some portion or all of the deferred tax assets will not be realized. As of September 30, 2019 and 2018, we did not have a valuation allowance on any of our deferred tax assets as we believed it was more-likely-than-not that we would realize the benefits of our deferred tax assets.

We are subject to examination by the Internal Revenue Service, or IRS, and various state tax authorities. We remain subject to examination of our federal income tax return for the years ended December 31, 2016 through 2018. We generally remain subject to examination of our various state income tax returns for a period of four to five years from the respective dates the returns were filed.

As of September 30, 2019, we have net operating loss carryforwards of approximately $34.7 million and $33.7 million for federal and state tax purposes, respectively, which will be available to offset future income. If not used, these carryforwards will expire between 2020 and 2035. These net operating losses are subject to an annual IRC Section 382 limitation, which restricts their utilization against taxable income in future periods. In addition, we have state business tax credits of approximately $14.2 million that can be carried forward indefinitely and other state business tax credits of approximately $1.1 million that will expire between 2023 and 2027.

As of September 30, 2019 and December 31, 2018, we had a liability of $8.0 million and $6.9 million, respectively, for unrecognized tax benefits related to various federal and state income tax matters excluding interest, penalties and related tax benefits. The reconciliation of the beginning unrecognized tax benefits balance to the ending balance is as follows:



	Nine Months Ended September 30,
	2019			2018
	(In thousands)
Beginning balance	$	6,965		$	5,560
Increases related to positions taken during prior years	—			470
Increases related to positions taken during the current year	1,569			1,170
Decreases related to positions settled with tax authorities	—			—
Decreases as a result of a lapse of applicable statute of limitations	(456		)	(664		)
Ending balance	$	8,078		$	6,536

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate	$	8,023		$	6,536

As of September 30, 2019 and 2018, we recognized accrued interest and penalties related to unrecognized tax benefits of approximately $0.4 million and $0.3 million, respectively.