Income Taxes

9 Months Ended

Sep. 30, 2020

Tredegar recorded a tax benefit of $8.3 million on a pretax loss from continuing operations of $31.6 million in the first nine months of 2020. Therefore, the effective tax rate in the first nine months of 2020 was 26.2%, compared to 15.5% in the first nine months of 2019. The quarterly effective tax rate is an estimate based on a proration of the components of the Company’s estimated annual effective tax rate and discrete items recorded during the first nine months of the year.

The significant differences between the U.S. federal statutory rate and the effective income tax rate for the nine months ended September 30, 2020 and 2019 are as follows:


(In thousands, except percentages)	2020				2019
Nine Months Ended September 30,	Amount		%		Amount		%
Income tax (benefit) expense at federal statutory rate	$	(6,639)	21.0	%	$	14,284	21.0	%
Foreign tax incentives	(3,412)		10.8	%	(2,416)		(3.6)	%
Changes in estimates related to prior year tax provision	(1,001)		3.2	%	(36)		(0.1)	%
Research and development tax credit	(612)		1.9	%	(336)		(0.5)	%
State taxes, net of federal income tax benefit	(537)		1.7	%	560		0.8	%
Tax contingency accruals and tax settlements	(148)		0.5	%	(2,527)		(3.7)	%
Valuation allowance due to foreign losses and impairments	—		—	%	(2,074)		(3.0)	%
Tax impact of dividend received	—		—	%	(1,016)		(1.5)	%

Foreign Derived Intangible Income (FDII)	—		—	%	(546)		(0.8)	%
Valuation allowance for capital loss carry-forwards	61		(0.2)	%	—		—	%
Non-deductible expenses	312		(1.0)	%	242		0.4	%
Stock-based compensation	240		(0.8)	%	(132)		(0.2)	%
U.S. Tax on Foreign Branch Income	656		(2.1)	%	3,034		4.5	%
Foreign rate differences	2,772		(8.8)	%	1,513		2.2	%







Income tax expense (benefit) at effective income tax rate	$	(8,308)	26.2	%	$	10,550	15.5	%

Tredegar accrues U.S. federal income taxes on unremitted earnings of foreign subsidiaries where required. However, due to changes in the taxation of dividends under the U.S. Tax Cuts and Jobs Act of 2017, Tredegar will only record U.S. federal income taxes on unremitted earnings of its foreign subsidiaries where Tredegar cannot take steps to eliminate any potential tax on future distributions from its foreign subsidiaries.

The Brazilian federal statutory income tax rate is a composite of 34.0% (25.0% of income tax and 9.0% of social contribution on income). Terphane Ltda.’s manufacturing facility in Brazil is the beneficiary of certain income tax incentives that allow for a reduction in the statutory Brazilian federal income tax rate to 15.25% levied on the operating profit on certain of its products. The incentives have been granted for a 13-year period, from the commencement date of January 1, 2015. The benefit from the tax incentives was $3.4 million and $2.4 million in the first nine months of 2020 and 2019, respectively.

Tredegar and its subsidiaries file income tax returns in the U.S., various states, and jurisdictions outside the U.S. With exceptions for some U.S. states and non-U.S. jurisdictions, Tredegar and its subsidiaries are no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2016.

During the nine months ended September 30, 2020, new legislation was enacted and new IRS guidance was issued to provide relief to businesses in response to COVID-19. We have evaluated the tax provisions included in legislation such as the CARES Act, as well as recent IRS guidance and we do not expect it to have a significant impact on our financial position, results of operations or cash flows.