Income Taxes

12 Months Ended

Dec. 27, 2020

IAA's income taxes for the periods after the Separation are computed and reported on a stand-alone basis. For tax periods ended on or before the Separation, IAA has been included in the consolidated income tax returns of KAR and IAA’s income taxes are computed and reported herein under the “separate return method” as if IAA were a separate taxpayer. Use of the separate return method requires significant judgment and may result in differences when the sum of the amounts presented in stand-alone tax provisions are compared with amounts presented in consolidated financial statements. In that event, the related current and deferred tax assets and liabilities could be significantly different from those presented herein. Taxes, as computed under this separate taxpayer approach, may not be indicative of the income tax expense or income tax to be paid had IAA operated as a stand-alone company.

The components of income before income taxes and the provision for income taxes are as follows (in millions):


	Fiscal Years Ended
	December 27, 2020		December 29, 2019		December 30, 2018
Income before income taxes:
Domestic	$	233.9	$	229.1	$	218.0
Foreign	23.1		33.1		28.2
Total	$	257.0	$	262.2	$	246.2
Income tax expense (benefit):
Current:
Federal	$	45.0	$	46.4	$	45.2
Foreign	5.1		10.1		8.3
State	10.1		11.9		11.9
Total current provision	60.2		68.4		65.4
Deferred:
Federal	2.1		1.5		(1.3)
Foreign	0.2		(0.8)		(0.5)
State	(0.3)		(0.1)		(1.1)
Total deferred provision	2.0		0.6		(2.9)
Income tax expense	$	62.2	$	69.0	$	62.5

The provision for income taxes was different from the U.S. federal statutory rate applied to income before taxes and is reconciled as follows:


	Fiscal Years Ended
	December 27, 2020		December 29, 2019		December 30, 2018
Statutory rate	21.0	%	21.0	%	21.0	%
State and local income taxes, net	3.2	%	3.3	%	3.3	%
Reserves for tax exposures	0.2	%	0.2	%	0.3	%
International operations	0.5	%	1.1	%	0.9	%
Stock-based compensation	(0.2)	%	(0.2)	%	(0.2)	%
Impact of law and rate change	—	%	0.1	%	—	%
Other, net	(0.5)	%	0.8	%	0.1	%
Effective rate	24.2	%	26.3	%	25.4	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.

The Company offsets all deferred tax assets and liabilities by jurisdiction, as well as any related valuation allowance, and presents them as a single non-current deferred income tax liability. Deferred tax assets and deferred tax liabilities are comprised of the following: (in millions):


	December 27, 2020		December 29, 2019
Gross deferred tax assets:
Right-of-use liabilities	$	229.8	$	197.6
Allowances for accounts receivable	1.8		0.9
Accruals and liabilities	3.9		2.3
Employee benefits and compensation	4.4		2.8
Other	2.6		1.8


Total	242.5		205.4
Gross deferred tax liabilities:
Right-of-use assets	(216.6)		(185.8)
Property and equipment	(14.6)		(8.8)
Goodwill and intangible assets	(64.8)		(62.9)
Other	(12.2)		(11.6)
Total	(308.2)		(269.1)
Net deferred tax liabilities	$	(65.7)	$	(63.7)

Permanently reinvested undistributed earnings of the Company's foreign subsidiaries were approximately $119.1 million at December 27, 2020. Because these amounts have been or will be permanently reinvested in properties and working capital, the Company has not recorded the deferred taxes associated with these earnings. If the undistributed earnings of foreign subsidiaries were to be remitted, state and local income tax expense and withholding tax expense would need to be recognized, net of any applicable foreign tax credits. It is not practical for the Company to determine the additional tax that would be incurred upon remittance of these earnings.

Tax payments for fiscal years ended December 27, 2020, December 29, 2019, and December 30, 2018, were $59.7 million, $71.8 million, and $65.4 million, respectively. For tax periods ended on or before June 28, 2019, tax payments were made by KAR on IAA's behalf.

The Company applies the provisions of ASC 740, Income Taxes. ASC 740 clarifies the accounting and reporting for uncertainty in income taxes recognized in an enterprise's financial statements. These provisions prescribe a comprehensive model for the

financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken on income tax returns.

A reconciliation of the beginning and ending amount of unrecognized tax benefits from uncertain tax positions is as follows (in millions):


	December 27, 2020		December 29, 2019
Balance at beginning of period	$	3.5	$	3.0
Increase in prior year tax positions	0.1		—

Increase in current year tax positions	1.2		1.1
Lapse in statute of limitations	(0.7)		(0.6)
Balance at end of period	$	4.1	$	3.5

The total amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate was $3.5 million and $3.0 million at December 27, 2020, and December 29, 2019.

The Company records interest and penalties associated with the uncertain tax positions within the Company's provision for income taxes on the consolidated statements of income. The Company had reserves totaling $0.2 million and $0.2 million at December 27, 2020, and December 29, 2019, respectively, associated with interest and penalties, net of tax.

The provision for income taxes involves management judgment regarding the interpretation of relevant facts and laws in the jurisdictions in which the Company operates. Future changes in applicable laws, projected levels of taxable income, and tax planning could change the effective tax rate and tax balances recorded by us. In addition, U.S. and non-U.S. tax authorities periodically review income tax returns filed by us and can raise issues regarding the Company's filing positions, timing and amount of income or deductions, and the allocation of income among the jurisdictions in which the Company operates. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenue authority with respect to that return. In the normal course of business, the Company is subject to examination by taxing authorities in the U.S., Canada, and the United Kingdom. In general, the examination of our material tax returns is complete for the years prior to 2017.

Based on the potential outcome of the Company's tax examinations and the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the currently remaining unrecognized tax benefits will change within the next 12 months. The associated net tax impact on the reserve balance is estimated to be in the range of a $0.5 million to $1.0 million decrease.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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