Note I - Income Taxes

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note I - Income Taxes

Coronavirus Aid, Relief and Economic Security Act

In response to the COVID-

19

pandemic, the CARES Act was signed into law in

March 2020.

The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of

2017

(

“2017

Tax Act”). Corporate taxpayers

may

carryback net operating losses (“ NOLs”) originating during

2018

through

2020

for up to

five

years, which was

not

previously allowed under the

2017

Tax Act. The CARES Act also eliminates the

80%

of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in

2018,

2019

or

2020.

Taxpayers

may

generally deduct interest up to the sum of

50%

of adjusted taxable income plus business interest income (

30%

limit under the

2017

Tax Act) for tax years beginning

January 1, 2019

and

2020.

The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in

2020

for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the

2017

Tax Act. In addition, the CARES Act raises the corporate charitable deduction limit to

25%

of taxable income and makes qualified improvement property generally eligible for

15

-year cost-recovery and

100%

bonus depreciation. 

Our income tax benefit of

$1.5

million for the

three

months ended

June 30, 2020

resulted in an effective income tax rate of

19.6%.

 Our income tax benefit of

$12.8

 million for the

six

 months ended

June 30, 2020

resulted in an effective income tax rate of 

92.0%.

The effective income tax rate for the

three

and

six

months ended

June 30, 2020

differs from the federal statutory rate of

21.0%

,

primarily due to the change in valuation allowances recorded on our deferred tax assets for federal net operating losses incurred as a result of the enactment of the CARES Act during the

three

and

six

months ended

June 30, 2020.

These losses will be carried back to tax years when the federal statutory rate was

35%,

resulting in an additional tax benefit.

Our income tax benefit of

$52

thousand for the

three

months ended

June 

30,

2019

resulted in an effective income tax rate of

1.3%.

Our income tax expense of

$0.7

 million for the

six

 months ended 

June 30, 2019

resulted in a negative income tax rate of

4.4%.

The effective income tax rate for the

three

and

six

 months ended

June 30, 2019

differs from the federal statutory rate of

21.0%

,

primarily due to valuation allowances recorded on our deferred tax assets for current period federal net operating losses incurred, as we have concluded that it is more likely than

not

that these deferred tax assets will

not

be realized.

We have in general historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full calendar year to ordinary income or loss for the reporting period. However, we have used a discrete effective tax rate method to calculate income taxes for the

six

months ended

June 30, 2020

and

June 30, 2019

because we determined that our ordinary income or loss cannot be reliably estimated and small changes in estimated ordinary income would result in significant changes in the estimated annual effective tax rate.

Effective

January 1, 2019

we adopted ASU

2018

-

02

which allows a reclassification from accumulated other comprehensive income to retained earnings of stranded tax effects resulting from the reduction of the U.S. federal statutory income tax rate from

35%

to

21%

due to the enactment of the Tax Reform Act. As a result of the adoption, we reclassified

$11.4

million of stranded tax effects from accumulated other comprehensive income to retained earnings.

Harte Hanks, or

one

of our subsidiaries, files income tax returns in the U.S. federal, U.S. state, and foreign jurisdictions. For U.S. state returns, we are

no

longer subject to tax examinations for tax years prior to

2014.

For U.S. federal and foreign returns, we are

no

longer subject to tax examinations for tax years prior to

2016

.

We have elected to classify any interest expense and penalties related to income taxes within income tax expense in our Condensed Consolidated Statements of Comprehensive Income (Loss). We did

not

have a significant amount of interest or penalties accrued at

June 30, 2020

or

December 31, 2019

.