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Income Taxes
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The following are domestic and foreign components of the Company’s income (loss) before income taxes (in thousands):
Year Ended December 31,
202320222021
Domestic$67,643 $71,136 $(11,127)
Foreign2,907 2,948 1,851 
Income (loss) before income taxes
$70,550 $74,084 $(9,276)
The components of the Company's income tax expense (benefit) are as follows (in thousands):
Year Ended December 31,
202320222021
Current:
Federal$30,124 $6,099 $— 
State and local8,498 4,394 438 
Foreign801 2,373 1,632 
Total current income tax expense39,423 12,866 2,070 
Deferred:
Federal(14,866)(5,517)(10,147)
State and local(2,414)5,191 (4,702)
Foreign(691)50 (97)
Total deferred income tax benefit(17,971)(276)(14,946)
Total income tax expense (benefit)
$21,452 $12,590 $(12,876)
A reconciliation of the income taxes computed at the U.S. federal statutory tax rate of 21% to the income tax expense (benefit) is as follows (in thousands):
Year Ended December 31,
202320222021
U.S. federal statutory income tax rate$14,816 $15,559 $(1,948)
State and local income taxes, net of federal benefit5,002 3,451 (2,102)
Foreign derived intangible income deduction
(1,110)(519)— 
Foreign rate differential(1,872)56 250 
Stock-based compensation7,931 (435)(18,518)
Transaction costs— — 4,792 
Officers compensation limitation2,356 2,146 7,828 
Non-deductible expenses909 315 235 
Tax credits(9,189)(17,598)(3,112)
Uncertain tax positions
1,449 — — 
Change in valuation allowance2,282 12,654 — 
Return to provision(1,532)(3,775)(389)
Other410 736 88 
Income tax expense (benefit)
$21,452 $12,590 $(12,876)
During the year ended December 31, 2023, the Israeli Innovation Authority approved the Company’s application to be considered a Preferred Enterprise, as defined under the Law of Encouragement of Capital Investments, for the tax years ended December 31, 2023, 2022, 2021, and 2020. This approval resulted in a reduction in the statutory tax rate applied to the Company’s preferred income, as defined under the Law of Encouragement of Capital Investments, during those years from 23% to 16%. As a result, the Company recognized a cumulative benefit of $2.0 million during the year ended December 31, 2023, representing a $0.02 and $0.01 benefit to basic and diluted net income per share, respectively. The approval expires as of the end of the tax year ended December 31, 2023.
The components of deferred tax assets and liabilities are as follows (in thousands):
Year Ended December 31,
20232022
Deferred income tax assets:
Net operating loss carryforwards$409 $1,116 
Stock-based compensation3,892 3,471 
Accrued expenses7,349 7,201 
Tax credit carryforwards15,606 16,792 
Capitalized development51,541 26,578 
Operating lease liabilities3,358 4,471 
Total deferred tax assets82,155 59,629 
Less valuation allowance(14,935)(12,748)
Net deferred tax assets67,220 46,881 
Deferred tax liabilities:
Property and equipment(736)(927)
Operating lease right-of-use assets(2,233)(2,842)
Intangible assets and goodwill(4,635)(2,006)
Unremitted earnings of foreign subsidiaries(776)(348)
Deferred commissions(2,346)(2,454)
Other
(220)— 
Total deferred tax liabilities(10,946)(8,577)
Total net deferred tax assets$56,274 $38,304 
The Company regularly assesses the need for a valuation allowance against its deferred tax assets as prescribed by ASC 740, Income Taxes. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, which includes historical operating performance and the Company’s ability to generate sufficient taxable income in the future, whether it is more likely than not that some or all the deferred tax assets will not be realized. Although the Company incurred a current year pretax profit and maintains a recent history of cumulative earnings, during the year ended December 31, 2023, the Company continued to maintain a valuation allowance against the deferred tax asset associated with carried forward California Research and Development Credits, as the Company believes that it is more likely than not that it will not generate sufficient California sourced taxable income in future years to utilize that deferred tax asset. This valuation allowance totaled $14.9 million and $12.7 million as of December 31, 2023 and 2022, respectively.
The change in the valuation allowance was comprised of the following (in thousands):
Year Ended December 31,
202320222021
Valuation allowance, at beginning of year$12,748 $— $— 
Increase in valuation allowance recorded through earnings2,281 12,654 — 
Decrease in valuation allowance recorded through other comprehensive income(94)— — 
Increase in valuation allowance recorded through other comprehensive income— 94 — 
Valuation allowance, at end of year$14,935 $12,748 $— 
As of December 31, 2023, the Company had no gross U.S. federal operating loss carryforwards, and $9.1 million of gross state operating loss carryforwards, of which $0.1 million of the state operating loss carryforwards carryforward indefinitely. The remaining gross state operating loss carryforwards as of December 31, 2023 will expire at various dates beginning in the year ending December 31, 2030, if not utilized. As of December 31, 2022, the Company had no gross U.S. federal operating loss carryforwards and $21.2 million of gross state operating loss carryforwards. Additionally, as of December 31, 2023 and 2022, the Company had U.S. federal credit carryforwards of zero and $13.6 million, respectively, and state credit carryforwards of $23.5 million and $19.6 million, respectively. These amounts differ from the listing of deferred taxes above due to the federal detriment of state benefits, and unrecognized tax benefits recorded against the deferred tax. The majority of gross state credit carryforwards are not subject to expiration.
Utilization of net operating loss and credit carryforwards may be subject to an annual limitation provided for in the Internal Revenue Code and similar state codes. Such annual limitation could result in the expiration of net operating loss and credit carryforwards before utilization. The Company does not believe that such limitation rules will have a material impact on the consolidated financial statements.
The following is a reconciliation of the total amounts of unrecognized tax benefits (in thousands):
Year Ended December 31,
202320222021
Unrecognized tax benefit, beginning of year:$17,077 $6,337 $5,121 
Gross increases - tax positions in prior year3,912 7,720 281 
Gross increases - tax positions in current year3,341 3,020 935 
Gross decreases - tax positions in prior year— — — 
Gross decreases - tax positions in current year— — — 
Unrecognized tax benefit, end of year$24,330 $17,077 $6,337 
For the years ended December 31, 2023 and 2022, the Company had gross unrecognized tax benefits of $24.3 million and $17.1 million, respectively. If recognized, $22.6 million, or $16.7 million net of existing valuation allowances, of unrecognized tax benefits would impact the Company’s effective tax rate. The Company has not accrued material interest or penalties related to unrecognized tax benefits reflected in the consolidated financial statements during the years ended December 31, 2023, 2022, and 2021. The Company believes that any change to the unrecognized tax benefits in the next 12 months will not be material to the consolidated financial statements.
In the normal course of business, the Company is subject to taxation in and is regularly audited by federal, state, and foreign tax authorities. As of December 31, 2023, the Company is not under audit by the Internal Revenue Service, any state authority, or any material foreign jurisdiction for income taxes for any open years. Due to the Company’s historic net operating loss carryforwards, the Company’s domestic income tax returns are open to examination by the Internal Revenue Service beginning with tax year 2012 and by state taxing authorities beginning with tax year 2011.
As of December 31, 2023, the Company does not consider the available cash balances related to undistributed earnings of its foreign subsidiaries to be indefinitely reinvested.