Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those

temporary differences are expected to be recovered or settled. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are expected to become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The Company includes interest accrued on the underpayment of income taxes in interest expense and penalties, if any, related to unrecognized tax benefits in general and administrative expenses. The Company recorded a valuation allowance against its U.S. deferred tax asset as it considered its cumulative loss in recent years as a significant piece of negative evidence. Since valuation allowances are evaluated on a jurisdiction by jurisdiction basis, we believe that the deferred tax assets related to LivePerson Australia, LivePerson UK, Kasamba Israel, LivePerson Japan and LivePerson LTD Israel are more likely than not to be realized as these jurisdictions have positive cumulative pre-tax book income after adjusting for permanent and one-time items. During the year ended December 31, 2020, there was an increase in the valuation recorded of $6.9 million.

The Company had a valuation allowance on certain deferred tax assets for the years ended December 31, 2018, December 31, 2019 and December 31, 2020 of $30.2 million, $48.5 million and $55.4 million, respectively. An increase in the valuation allowance in the amount of $35.1 million was recorded as an expense and a decrease of $28.2 million related to convertible notes was charged to equity during 2020. An increase in the valuation allowance in the amount of $25.0 million was recorded as an expense and a decrease of $6.7 million related to the issuance of convertible notes was charged to equity during 2019.

Under Section 382 of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’), the Company’s use of its federal net operating loss (“NOL”) carryforwards may be limited if the Company experiences an ownership change, as defined in Section 382 of the Code. Such an annual limitation could result in the expiration of the NOL carryforwards before utilization. Corresponding provisions of state law may limit the Company’s ability to utilize NOL carryforwards for state tax purposes. As of December 31, 2020, the Company had approximately $311.7 million of federal NOL carryforwards available to offset future taxable income. Included in this amount is $5.1 million of federal NOL carryovers from the Company’s acquisition of Proficient in 2006. Approximately $41.2 million of these federal NOL carryforwards were generated in taxable years ending on or before December 31, 2017 and will expire in various years through 2037. Federal NOL carryforwards generated in taxable years ending after December 31, 2017, do not expire, but generally may only offset up to 80% of federal taxable income earned in a taxable year.    

The domestic and foreign components of income (loss) before provision for income taxes consist of the following (amounts in thousands): 

	Year Ended December 31,
	2020		2019		2018
United States	$	(113,689)	$	(105,961)	$	(38,078)
Israel	2,214		2,791		3,163
United Kingdom	536		5,377		3,690
Netherlands	3,398		(465)		3,235
Australia	1,663		716		686
Germany	243		3,854		2,900
Other (1)	507		462		230
	$	(105,128)	$	(93,226)	$	(24,174)
(1) Includes Japan and France

No additional provision has been made for U.S. income taxes on the undistributed earnings of its Israeli subsidiary, LivePerson Ltd. (formerly HumanClick Ltd.), as such earnings have been taxed in the U.S. and accumulated earnings of the Company’s other foreign subsidiaries are immaterial through December 31, 2020.

The provision for income taxes consists of the following (amounts in thousands):

	Year Ended December 31,
	2020		2019		2018
Current income taxes:
U.S. Federal	$	(581)	$	(452)	$	(1,932)
State and local	59		89		67
Foreign	2,408		4,415		3,032
Total current income taxes	1,886		4,052		1,167
Deferred income taxes:
U.S. Federal	(151)		126		(295)
State and local	459		135		(28)
Foreign	272		(1,468)		14
Total deferred income taxes	580		(1,207)		(309)
Total provision for income taxes	$	2,466	$	2,845	$	858

The difference between the total income taxes computed at the federal statutory rate and the provision for income taxes consists of the following:

	Year Ended December 31,
	2020		2019		2018
Federal statutory rate	21.00	%	21.00	%	21.00	%
State taxes, net of federal benefit	4.82	%	2.95	%	3.30	%
Non-deductible expenses – stock based compensation	(1.21)	%	1.82	%	4.73	%
Global Intangible Low Tax Income Inclusion	—	%	(2.29)	%	(7.99)	%
Non-deductible expenses – Other	0.14	%	(0.37)	%	(0.28)	%
Non-deductible excess compensation	(5.52)	%	(1.20)	%	(2.30)	%
Foreign taxes	(3.98)	%	(1.86)	%	(1.34)	%
Valuation allowance	(30.87)	%	(26.42)	%	(28.91)	%
Stock based compensation - excess tax benefit	9.93	%	6.18	%	6.10	%
Other	3.34	%	(2.86)	%	2.09	%
Total provision	(2.35)	%	(3.05)	%	(3.60)	%

The effects of temporary differences and federal NOL carryforwards that give rise to significant portions of federal deferred tax assets and deferred tax liabilities at December 31, 2020 and 2019 are presented below (amounts in thousands):

	Year Ended December 31,
	2020		2019
Deferred tax assets:
Net operating loss carryforwards	$	78,651	$	49,423
Foreign Tax Credit	1,222		—
Original Issue Discount	16,464		5,201
Interest	1,986		875
Operating lease liability	5,150		3,306
Accounts payable and accrued expenses	7,289		5,934
Non-cash compensation	7,401		4,195
Intangibles amortization	3,620		3,273
Allowance for doubtful accounts	954		419
Total deferred tax assets	122,737		72,626
Less valuation allowance	(55,357)		(48,451)
Deferred tax assets, net of valuation allowance	67,380		24,175
Deferred tax liabilities:
Property and equipment	(10,048)		(6,361)
Goodwill amortization and contingent earn-out adjustments	(5,294)		(3,430)
Convertible Notes Issuance	(49,118)		(11,055)
Operating lease right of use asset	(2,511)		(2,504)
Total deferred tax liabilities	(66,971)		(23,350)
Net deferred tax assets (liabilities)	$	409	$	825

We have income tax NOL carryforwards related to federal and Australian income tax carryforwards of $311.7 million and $2.0 million respectively. The Australian NOLs can be carried forward indefinitely. $270.4 million of the federal NOLs can be carried forward indefinitely. $6.0 million of the federal NOLs will expire between 2021 and 2026, and $35.2 million will expire between 2036 and 2037. We have $221.9 million of state NOLs, of which $47.3 million can be carried forward indefinitely and $174.6 million expire between 2023 and 2040.

ASC Topic 740-10 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with other provisions contained within this guidance. This topic prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.  For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities.  The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate audit settlement. The Company had unrecognized tax benefits of $3.6 million as of December 31, 2020 and $2.0 million as of December 31, 2019, respectively. Accrued interest and penalties included in the Company's liability related to unrecognized tax benefits and recorded in accrued expenses and other current liabilities were immaterial at December 31, 2020 and 2019.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	Year Ended December 31,
	2020		2019
Unrecognized tax benefits balance at January 1	$	2,053	$	1,921
Gross decrease for tax positions of prior years	(438)		—
Gross increase for tax positions of current years	2,984		584
Decrease due to expiration of statue	—		(452)
Decrease due to settlement	(984)		—
Gross unrecognized tax benefits at December 31	$	3,615	$	2,053

The tax years subject to examination by major tax jurisdictions include the years 2015 and forward for U.S states and New York City, the years 2016 and forward for U.S. Federal, and the years 2015 and forward for certain foreign jurisdictions.

Tax Legislation    

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law making several changes to the Internal Revenue Code. The changes include, but are not limited to: increasing the limitation on the amount of deductible interest expense, allowing companies to carryback certain net operating losses, and increasing the amount of net operating loss carryforwards that corporations can use to offset taxable income. As a result of the CARES Act, the Company filed refund claims relating to prior years totaling $0.6 million.