XML 43 R23.htm IDEA: XBRL DOCUMENT v3.22.4
INCOME TAXES
12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
INCOME TAXES

16. INCOME TAXES

 

For the years ended December 31, 2022 and 2021, the Company estimated its income tax provision based upon the annual pre-tax income or loss. Although the Company reported GAAP earnings in 2021 and 2022, it incurred losses historically and there is uncertainty regarding future U.S. taxable income, which makes realization of a deferred tax asset difficult to support in accordance with ASC 740. Accordingly, a valuation allowance has been recorded against all federal and state deferred tax assets as of December 31, 2022 and December 31, 2021, with the exception of a net deferred tax liability relating to the amortization of intangibles for tax purposes.

 

 

The annual adjusted earnings and profits of our foreign affiliates pass through to the U.S. as federal and state taxable income under the Global Intangible Low-Taxed Income (“GILTI”) regime. For the tax years ended December 31, 2022 and 2021, the net GILTI from our foreign affiliates was absorbed against our current year U.S. consolidated loss. For state tax purposes, the Company’s foreign earnings may be taxable depending on each individual state’s legislative stance on the recent tax reform legislation. The activity in the deferred tax valuation allowance was as follows for the years ended December 31, 2022 and 2021:

 

   Year Ended December 31, 
   2022   2021 
   ($ in thousands) 
Beginning balance  $86,728   $89,994 
Current year valuation allowance increase (decrease)   5,363    (3,266)
Ending balance  $92,091   $86,728 

 

The income (loss) before tax for financial reporting purposes during the years ended December 31, 2022 and 2021 consisted of the following:

 

   Year Ended December 31, 
   2022   2021 
   ($ in thousands) 
United States  $6,137   $1,048 
Foreign   (528)   1,945 
Total  $5,609   $2,993 

 

The provision (benefit) for income taxes for the years ended December 31, 2022 and 2021 consisted of the following:

 

   Year Ended December 31, 
   2022   2021 
   ($ in thousands) 
Current:          
Federal  $-   $(285)
State   80    148 
Foreign   21    5 
    101    (132)
Deferred:          
Federal   63    190 
State   13    99 
    76    289 
Total income tax provision  $177   $157 

 

 

The components of the Company’s deferred income taxes as of December 31, 2022 and 2021 are as follows:

 

   December 31,   December 31, 
   2022   2021 
   ($ in thousands) 
Deferred tax assets:          
Allowance for doubtful accounts  $221   $138 
Deferred revenue   97    89 
Property and intangible assets   2,213    2,422 
State net operating loss (“NOL”) carryforwards   27,262    20,466 
Federal net operating loss (“NOL”) carryforwards   57,179    57,602 
Section 163(j) interest limitation   2,525    2,413 
Stock based compensation   173    714 
ASC 842 - ROU asset   (1,243)   (996)
Prepaid commissions   (253)   (213)
Cumulative balance translation adjustment   819    469 
Section 267 limitation   7    7 
Deferred payroll taxes   -    155 
Credit carryovers   2,498    2,498 
ASC 842 - Lease liability   1,386    1,398 
Accrued compensation   171    272 
Other   69    59 
Valuation allowance   (92,091)   (86,728)
Total deferred tax assets   1,033    765 
Deferred tax liabilities:          
Goodwill amortization   (1,558)   (1,214)
Net deferred tax liability  $(525)  $(449)

 

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss carryforwards. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years.

 

The Company has recorded goodwill as a result of its acquisitions. Goodwill is generally not amortized for financial reporting purposes. For tax purposes, goodwill from asset acquisitions is tax deductible and amortized over 15 years. As such, deferred income tax expense and a deferred tax liability arise as a result of the tax-deductibility of this indefinitely lived asset (also known as a naked credit). The resulting deferred tax liability, which is expected to continue to increase over the amortization period, will have an indefinite life. As a result of the Company having indefinite life net operating losses under the recent tax reform legislation, the federal deferred tax liability resulting from the amortization of goodwill was offset against these indefinite federal operating net loss deferred tax assets to the extent allowable. The remaining deferred tax liability could remain on the Company’s consolidated balance sheet indefinitely unless there is an impairment of goodwill (for financial reporting purposes) or a portion of the business is sold.

 

Due to the fact that the aforementioned deferred tax liability could have an indefinite life, it is not netted against the Company’s deferred tax assets when determining the required valuation allowance in accordance with ASC 740 guidelines. Doing so would result in the understatement of the valuation allowance and related deferred income tax expense.

 

 

A reconciliation of the federal statutory income tax rate (21%) for 2022 and 2021 to the Company’s effective income tax rate (determined in dollars) for the years ended December 31, 2022 and 2021 is as follows:

   Year Ended December 31, 
   2022   2021 
   ($ in thousands) 
Federal provision at statutory rate  $1,178   $629 
Increase (decrease) in income taxes resulting from:          
State tax expense, net of federal benefit   77    178 
Non-deductible items   20    85 
Impact of foreign operations   (137)   (561)
Subpart F GILTI inclusion   62    317 
Stock based compensation   239    (399)
Change in contingent consideration   (649)   - 
NOL carryback   -    (230)
Deferred true-up   858    550 
Valuation allowance   (1,471)   (412)
Total income tax provision  $177   $157 

 

At December 31, 2022 and 2021, the Company did not record any uncertain tax positions based on the technical merits. Therefore, a tabular roll forward was excluded and there has been no accrued interest and penalties. The Company is subject to taxation in the United States, various states, Pakistan and Sri Lanka. As of December 31, 2022, all tax years since 2014 remain open to examination due to the carryover of unused net operating losses and tax credits in the United States by major taxing jurisdictions in which the Company is subject to tax. For the first six months of 2022, the Pakistan Federal Board of Revenue allowed a 100% tax credit against earnings from IT activities, which precludes the Pakistan subsidiaries from being subject to income taxes. A new tax became effective July 1, 2022, whereby IT companies are subject to a 0.25% tax deducted at the source on receipts received from foreign sources with no further tax being due. It is the Company’s policy that any assessed penalties and interest on uncertain tax positions would be charged to income tax expense.

 

The former Pakistan tax credit and foreign receipts tax does not have a significant impact on the Company’s effective tax rate as all of its earnings in Pakistan have been fully included in the U.S. federal tax rate reconciliation at 21% for 2022 and 2021. The Pakistan statutory corporate tax rate is 29% before consideration of the aforementioned tax credit and the foreign receipts tax.

 

As of December 31, 2022, the Company has a total federal NOL carry forward of approximately $273 million of which approximately $199 million will expire between 2034 and 2037, and the balance of approximately $74 million has an indefinite life. Out of the total federal NOL carry forward, approximately $238 million is from the CareCloud and Meridian acquisitions and is subject to the federal Section 382 NOL annual usage limitations. The Company has state NOL carry forwards of approximately $211 million, of which $86 million relates to the State of New Jersey. These NOLs expire between 2034 and 2041.

 

The Company has a full valuation allowance on its deferred tax assets in the U.S. which results in there being no U.S. deferred tax assets or liabilities recorded on the consolidated balance sheets, other than the deferred tax liability related to the amortization of goodwill.