Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes

Income Taxes

7. Income Taxes

Income Tax Expense

The components of income tax expense (benefit) in continuing operations for the following years ended December 31 were as follows (in thousands):

	2018		2019		2020
Income taxes currently payable:
Federal	$	8,918	$	2,051	$	(31,567)
State		3,241		27		(5,238)
		12,159		2,078		(36,805)
Deferred income taxes (benefits):
Federal		(912)		5,378		(5,903)
State		210		1,706		(1,823)
		(702)		7,084		(7,726)
Total income tax expense (benefit)	$	11,457	$	9,162	$	(44,531)

Total income tax expense in continuing operations for the years ended December 31 was different from the amount computed using the statutory federal income tax rate in effect for each respective year for the following reasons (in thousands):

	2018		2019		2020
Income tax expense (benefit) at federal statutory rate	$	7,063	$	4,569	$	(8,501)
State income taxes (benefit), net of federal income tax benefit		3,407		1,285		(1,632)
State contingencies added		2,287		944		1,519
Tax contingencies reversed due to statute closings		(2,500)		(2,860)		(1,762)
Change in valuation allowances		(691)		584		(924)
Share-based compensation		(4,750)		1,715		2,982
Qualified research credit		(1,584)		(1,418)		(2,424)
Non-deductible executive compensation		3,052		3,153		2,717
Non-deductible HIF fees		3,236		—		3,263
Sale of MCC Business		—		—		(39,819)
Other-net		1,937		1,190		50
Total income tax expense	$	11,457	$	9,162	$	(44,531)

Deferred Income Taxes

The significant components of deferred tax assets and liabilities at December 31 were as follows (in thousands):

	2019		2020
Deferred tax assets:
Net operating loss carryforwards	$	3,824	$	3,760
Share-based compensation		9,167		4,365
Other accrued compensation		10,697		17,037
Claims reserves		5,355		2,241
Deferred revenue		4,122		4,491
Accrued severance		1,244		3,505
Other non-deductible accrued liabilities		1,210		1,224
Indirect tax benefits		1,867		2,247
Operating lease--right-of-use liabilities		18,603		13,564
Other deferred tax assets		111		1,962
Total deferred tax assets		56,200		54,396
Valuation allowances		(1,828)		(905)
Deferred tax assets after valuation allowances		54,372		53,491
Deferred tax liabilities:
Depreciation		(20,479)		(29,967)
Amortization of goodwill and intangible assets		(12,569)		(15,670)
Operating lease--right-of-use assets		(15,893)		(7,091)
Other deferred tax liabilities		(5,562)		(6,023)
Total deferred tax liabilities		(54,503)		(58,751)
Net deferred tax liabilities from continued operations	$	(131)	$	(5,260)

As a result of the MCC Sale, $13.4 million of the Company’s state and local net operating loss carryforwards (“NOLs”) and all of its remaining $1.3 million of federal NOLs were assumed by Molina and therefore the related deferred tax assets were reversed against continuing operations income tax expense in 2020.

The Company and its subsidiaries have $75.0 million of NOLs available to reduce state and local taxable income at certain subsidiaries in 2021 and subsequent years. Most of these NOLs will expire in 2021 through 2039 if not used and are subject to examination and adjustment by the respective tax authorities. In addition, the Company’s utilization of certain of these NOLs is subject to limitations as to the timing and use. Other than those considered in determining the valuation allowances discussed below, the Company does not believe these limitations will restrict the

Company’s ability to use any of these state and local NOLs before they expire.

The Company’s valuation allowances against deferred tax assets were $1.8 million and $0.9 million as of December 31, 2019 and 2020. The change in valuation allowances of $0.9 million was reflected as a decrease to continuing operations income tax expense. These valuation allowances mostly relate to uncertainties regarding the eventual realization of certain state NOLs.

Reversals of valuation allowances are recorded in the period they occur, typically as reductions to income tax expense. Determination of the amount of deferred tax assets considered realizable requires significant judgment and estimation regarding the forecasts of future taxable income which are consistent with the plans and estimates the Company uses to manage the underlying businesses. Although consideration is also given to potential tax planning strategies which might be available to improve the realization of deferred tax assets, none were identified which were both prudent and reasonable. The Company believes taxable income expected to be generated in the future will be sufficient to support realization of the Company’s deferred tax assets, as reduced by valuation allowances. This determination is based upon earnings history and future earnings expectations.

Other than deferred tax benefits attributable to operating loss carryforwards, there are no time constraints within which the Company’s deferred tax assets must be realized. Future changes in the estimated realizability of deferred tax assets could materially affect the Company’s financial condition and results of operations.

Uncertain Tax Positions

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

	2018		2019		2020
Balance as of beginning of period	$	10,411	$	10,823	$	9,010
Additions for current year tax positions		2,925		1,180		3,316
Additions for tax positions of prior years		397		699		29
Reductions for tax positions of prior years		(44)		(472)		(85)
Reductions due to lapses of applicable statutes of limitations		(2,906)		(3,177)		(1,826)
Changes due to Tax Act		339		—		—
Reductions due to settlements with taxing authorities		(299)		(43)		—
Balance as of end of period	$	10,823	$	9,010	$	10,444

If these unrecognized tax benefits had been realized as of December 31, 2019 and 2020, $7.6 million and $6.2 million, respectively, would have reduced income tax expense from continuing operations.

The Company continually performs a comprehensive review of its tax positions and accrues amounts for tax contingencies related to uncertain tax positions. Based upon these reviews, the status of ongoing tax audits and the expiration of applicable statutes of limitations, accruals are adjusted as necessary. The tax benefit from an uncertain tax position is recognized when it is more likely than not that, based on the technical merits, the position will be sustained upon examination, including resolution of any related appeals or litigation processes.

The Company also adjusts these liabilities for unrecognized tax benefits when its judgment changes as a result of the evaluation of new information not previously available. However, the ultimate resolution of a disputed tax position following an examination by a taxing authority could result in a payment that is materially different from that accrued by the Company. These differences are typically reflected as increases or decreases to income tax expense in the period in which they are determined.

The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2016 expired during 2020. As a result, $1.8 million of tax contingency reserves recorded as of December 31, 2019 were reversed in 2020, of which $1.4 million was reflected as a reduction to income tax expense continuing operations and $0.4 million as a decrease to deferred tax assets. Additionally, $0.1 million of accrued interest was reversed in 2020 and reflected as a reduction to income tax expense from continuing operations due to the closing of statutes of limitations on tax assessments.

The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2015 expired during 2019. As a result, $3.2 million of tax contingency reserves recorded as of December 31, 2018 were reversed in 2019, of which $2.5 million was reflected as a reduction to income tax expense from continuing operations and $0.7 million as a decrease to deferred tax assets. Additionally, $0.3 million of accrued interest was reversed in 2019 and reflected as a reduction to income tax expense from continuing operations due to the closing of statutes of limitations on tax assessments.

The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2014 expired during 2018. As a result, $2.9 million of tax contingency reserves recorded as of December 31, 2017 were reversed in 2018, of which $2.3 million was reflected as a reduction to income tax expense from continuing operations and $0.6 million as a decrease to deferred tax assets. Additionally, $0.2 million of accrued interest was reversed in 2018 and reflected as a reduction to income tax expense from continuing operations due to the closing of statutes of limitations on tax assessments.

With few exceptions, the Company is no longer subject to income tax assessments by tax authorities for years ended prior to 2017. Further, it is reasonably possible the statutes of limitations regarding the assessment of federal and most state and local income taxes for 2017 could expire during 2021. Up to $1.3 million of unrecognized tax benefits recorded as of December 31, 2020 could be reversed during 2021 as a result of statute expirations, of which $1.1 million would be reflected as a reduction to income tax expense and $0.2 million as a decrease to deferred tax assets. All reversals from statute expirations would be reflected as discrete adjustments during the quarter in which the respective event occurs. As of December 31, 2019 and 2020, the Company had accrued approximately $0.3 million and $0.3 million, respectively, for the potential payment of interest and penalties. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. During the years ended December 31, 2018, 2019 and 2020, the Company recorded approximately $0.1 million, $0.1 million and $0.0 million, respectively, in interest and penalties.