v3.22.4
Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The domestic and foreign components of income before provision for income taxes were as follows (in thousands):
December 31,
202220212020
Domestic$32,945 $61,822 $28,169 
Foreign4,522 2,981 3,411 
Income before provision for income taxes$37,467 $64,803 $31,580 
The provision for income taxes consisted of the following (in thousands):
December 31,
202220212020
Current provisions for income taxes:
Federal$11,379 $2,437 $360 
State2,060 714 240 
Foreign1,349 295 1,434 
Total current tax expense14,788 3,446 2,034 
Deferred tax expense:
Federal(5,491)4,513 1,845 
State(769)251 1,170 
Foreign234 (11)(82)
Total deferred tax expense(6,026)4,753 2,933 
Total provision for income taxes$8,762 $8,199 $4,967 
The following table presents a reconciliation of the U.S. federal statutory income tax rate to the Company’s effective tax rate for the periods presented:
December 31,
202220212020
Federal statutory income tax rate21.00 %21.00 %21.00 %
State after-tax rate3.45 1.49 4.47 
Stock options2.67 (10.38)(6.79)
Research credit(4.51)(1.37)(2.04)
Transfer pricing reserve0.76 (1.26)1.32 
Foreign rate differential(0.02)0.73 0.61 
Foreign derived intangible income(2.13)(0.48)(3.26)
Section 162(m) limitation2.59 2.49 — 
Other(0.38)0.42 0.42 
Effective tax rate23.43 %12.64 %15.73 %
Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
December 31,
202220212020
Deferred tax assets:
Net operating loss carryforwards$263 $56 $124 
Accruals and allowances1,067 1,104 614 
Tax credits1,954 1,396 1,631 
Stock-based compensation4,907 3,171 2,045 
Unrealized gain on equity investment124 — — 
Intangibles assets907 1,010 1,106 
Lease obligation5,074 5,226 — 
Other1,222 808 1,101 
Total deferred tax assets15,518 12,771 6,621 
Valuation allowance(1,954)(1,396)(1,372)
Total deferred tax assets, net of valuation allowance13,564 11,375 5,249 
Deferred tax liabilities:
Property, equipment, and software(3,905)(8,316)(4,995)
Goodwill(843)(749)(653)
Prepaid expense(1,188)(1,365)(400)
Right-of-use asset(5,158)(5,201)— 
Acquired intangibles(1,996)— — 
Unrealized loss on equity investment— (1,296)— 
Total deferred tax liabilities(13,090)(16,927)(6,048)
Net deferred income tax asset (liabilities)$474 $(5,552)$(799)
The Company had gross federal and state net operating loss carryforwards of approximately $1.1 million and $1.3 million, respectively, as of December 31, 2022. The federal net operating loss never expires and the state net operating losses will expire at various dates beginning in 2035 if not utilized and may be subject to annual limitations of usage, as promulgated by the Internal Revenue Service, due to ownership changes that may have occurred in the past. As of December 31, 2022, the Company had state research and development credit carryforwards of $4.1 million. The state credits can be carried forward indefinitely.
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (“Code”), the Company’s ability to utilize net operating loss carryforwards or other tax attributes, such as research tax credits, in any taxable year may be limited if the Company experiences an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of the Company’s stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three year period. Similar rules may apply under state tax laws. Net operating loss carryforwards and other tax attributes generated are currently not subject to limitation by Section 382, but subsequent changes in the Company’s stock ownership as well as other changes that may be outside of the Company’s control, could result in additional ownership changes under Section 382 of the Code.
Deferred Tax Valuation Allowance
A valuation allowance is provided for deferred tax assets where the recoverability of the assets is uncertain. The determination to provide a valuation allowance is dependent upon the assessment of whether it is more likely than not that sufficient future taxable income will be generated to utilize the deferred tax assets. Management has determined that there is sufficient positive evidence that a valuation allowance against deferred tax assets is not required as of December 31, 2022 and 2021, except for state research credit carryforwards, starting in 2020, for which realization is not deemed more likely than not given the Company expects to generate more credits in future than can be utilized against projected taxable income.
The Company has not historically provided for U.S. deferred taxes on the cumulative earnings of non-U.S. affiliates that have been reinvested indefinitely. However, under the 2017 Tax Act the Company was deemed to have repatriated the cumulative earnings of its non-U.S. affiliates and the U.S. liability associated with those cumulative earnings has been reflected in the current federal tax provision. In addition, the Tax Act has enacted tax provisions that will subject all foreign earnings to U.S. taxation. The Company will continue to maintain its policy of indefinite reinvestment to the extent that the repatriation of foreign earnings are restricted by local laws, accounting rules, substantial incremental costs associated with repatriating the foreign earnings, or other business requirements.
Uncertain Tax Positions
The activity related to the unrecognized income tax benefits is as follows (in thousands):
Year Ended December 31,
202220212020
Gross unrecognized income tax benefits — beginning balance$2,364 $3,208 $2,369 
Increases related to tax positions taken during the current year1,788 649 951 
Decreases related to tax positions taken during current year— — — 
Increases related to tax positions taken during the prior years386 — — 
Decreases related to tax positions taken during the prior years(235)(1,493)(112)
Gross unrecognized income tax benefits — ending balance$4,303 $2,364 $3,208 
The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of December 31, 2022 and 2021, the Company had approximately $0.2 million and $0.1 million, respectively, of accrued interest related to uncertain tax positions.
All of the $4.3 million of unrecognized income tax benefits would, if recognized, impact the effective tax rate in the period in which each of the benefits is recognized.
The Company files U.S., state and foreign income tax returns with varying statutes of limitations. The federal, state, and foreign returns statute of limitations remains open for tax years from 2013 and thereafter. There are currently no income tax audits involving any U.S. states or foreign tax jurisdictions.