Income Taxes

6 Months Ended

Jun. 30, 2020

Income tax expense for the six months ended June 30, 2020 and 2019 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:


	Six Months Ended June 30,
	2020		2019
U.S. federal statutory tax rate	21.0	%	21.0	%
State income taxes, net of federal tax benefit	(0.6)		1.7
General business credits	(6.6)		(1.5)
Employee stock-based compensation	1.8		(3.7)
IRC 162(m) limitation	8.1		2.4
Nondeductible expenses	0.7		0.1
Other	(0.5)		0.2
Effective tax rate	23.9	%	20.2	%

The effective tax rate for the six months ended June 30, 2020 and 2019 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 six months ended June 30, 2020 as compared to the six months ended June 30, 2019 is primarily due to an increase of $2.4 million as a result of the IRC 162(m)

Note 10—Income Taxes (continued)

limitation on the deductibility of certain executive compensation and a $5.8 million decline in excess tax benefits from stock-based compensation. We recognized a discrete tax expense related to tax shortfalls from stock based-compensation of $1.2 million for the six months ended June 30, 2020, compared to a $4.6 million excess tax benefit for the prior year comparable period. These increases were partially offset by the impact of general business credits.

On March 27, 2020, the CARES Act was signed into law, which, among other things, includes certain income tax provisions for individuals and corporations; however, these benefits do not impact our current tax provision.

We have made a policy election to account for Global Intangible Low-Taxed Income ("GILTI") in the year the GILTI tax is incurred. For the six months ended June 30, 2020, the provision for GILTI tax expense was not material to our financial statements.

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 June 30, 2020, we released our valuation allowance against our capital loss carryforwards, as we recognized capital gains on the sale of certain investment securities during the current period sufficient to offset our capital loss carryforward amount. Accordingly, it is more-likely-than-not that the tax benefits related to the capital loss carryforwards will be realized before they expire. As of June 30, 2019, 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 2019. 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. During the quarter ended June 30, 2020, the IRS initiated an examination of our 2017 U.S. federal tax return. We do not expect that this examination will have a material impact on our consolidated financial statements.

As of June 30, 2020, we have federal net operating loss carryforwards of approximately $31.9 million and state net operating loss carryforwards of approximately $57.9 million which will be available to offset future income. If not used, the federal net operating losses will expire between 2021 and 2035. Of our total state net operating loss carryforwards, approximately $31.7 million will expire between 2021 and 2039, while the remaining balance of approximately $26.2 million does not expire and carries forward indefinitely. The 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 $16.3 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 June 30, 2020 and December 31, 2019, we had a liability of $9.7 million and $8.3 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:


	Six Months Ended June 30,
	2020		2019
	(In thousands)
Beginning balance	$	8,398	$	6,965
Increases related to positions taken during prior years	235		—
Increases related to positions taken during the current year	1,200		1,569


Ending balance	$	9,833	$	8,534

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate	$	9,660	$	8,481

As of June 30, 2020 and 2019, we recognized accrued interest and penalties related to unrecognized tax benefits of approximately $0.7 million and $0.5 million, respectively.

- 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.

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