Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Note 9 - Income Taxes

The provision for income taxes is as follows (in thousands):

	Year Ended December 31,
	2021			2020		2019
Current:
Federal	$	9,527		$	2,943	$	8,806
State		3,408			396		1,381
		12,935			3,339		10,187
Deferred:
Federal		143			4,156		(774	)
State		(496	)		1,336		3,433
		(353	)		5,492		2,659
Total provision	$	12,582		$	8,831	$	12,846

Deferred income tax assets and liabilities consist of the following components (in thousands):

	December 31,
	2021			2020
Deferred income tax assets:
Workers' compensation claims liabilities	$	7,870		$	9,946
Deferred compensation		6,109			2,235
Operating lease liability		5,870			6,107
Other		1,388			1,154
Payroll tax deferral		749			1,668
Equity based compensation		678			555
State credit carryforward		329			518
MCC accrual		167			1,062
Customer incentives		12			54
		23,172			23,299
Less: valuation allowance		163			163
		23,009			23,136
Deferred income tax liabilities:
Tax amortization of goodwill		(10,120	)		(10,375	)
Tax depreciation in excess of book depreciation		(7,433	)		(7,187	)
Operating lease right-of-use		(5,527	)		(5,766	)
Other		(1,223	)		(1,455	)
Tax effect of unrealized gains, net		(393	)		(2,871	)
		(24,696	)		(27,654	)
Net deferred income taxes	$	(1,687	)	$	(4,518	)

The effective tax rate differed from the U.S. statutory federal tax rate due to the following:

	Year Ended December 31,
	2021				2020				2019
Statutory federal tax rate		21.0		%		21.0		%		21.0		%
State taxes, net of federal benefit		4.5				3.2				6.2
Adjustment for final positions on filed returns		0.9				0.6				(0.2	)
Nondeductible expenses and other, net		0.5				0.7				1.3
Federal and state tax credits		(2.1	)			(4.9	)			(7.5	)
Other, net		—				0.1				0.2
		24.8		%		20.7		%		21.0		%

Under ASC 740, “Income Taxes,” management evaluates the realizability of the deferred tax assets on a quarterly basis under a “more-likely-than-not” standard. As part of this evaluation, management reviews all evidence both positive and negative to determine if a valuation allowance is needed. One component of this analysis is to determine whether the Company was in a cumulative loss position for the most recent 12 quarters. The Company was in a cumulative income position for the 12 quarters ended at both December 31, 2021 and December 31, 2020.

The Company’s realization of a portion of net deferred tax assets is based in part on our estimates of the timing of reversals of certain temporary differences and on the generation of taxable income before such reversals.

The Company is subject to income taxes in U.S. federal and multiple state and local tax jurisdictions. The Internal Revenue Service is examining the Company’s federal tax returns for the years ended December 31, 2011 through 2014 and 2017 through 2019. In July 2020, BBSI received notice that the IRS intends to disallow certain wage-based tax credits claimed for years 2011 to 2014, which would result in an estimated total additional tax due of approximately $2.3 million for the tax years 2012 through 2015, including the impact on carryover tax attributes. In November 2021, BBSI received notice that the IRS intends to disallow certain wage-based tax credits claimed for the year 2017, which could result in an estimated total additional taxes and penalties due of $1.7 million for 2017. Years 2018 and 2019 remain under audit, however, disallowance of similar wage-based credits for these years would result in additional estimated tax due of $1.7 million and $1.6 million for 2018 and 2019, respectively. The Company disagrees with the IRS determination to disallow certain wage-based credits taken by the Company and believes that the Company has the technical merits to defend its position. Based on management’s more-likely-than-not assessment that the position is sustainable, no reserve for the aforementioned IRS notice of disallowance of wage-based tax credits or underpayment penalties has been recorded in the financial statements. 

In the major jurisdictions where it operates, the Company is generally no longer subject to income tax examinations by tax authorities for the 2015 and 2016 tax years and tax years before 2011. As of December 31, 2021, 2020 and 2019, the Company had no material unrecognized tax benefits.

A portion of the consolidated income the Company generates is not subject to state income tax. Depending on the percentage of this income as compared to total consolidated income, the Company's state effective tax rate could fluctuate from expectations.

At December 31, 2021, the Company had no state operating loss carryforwards. At December 31, 2021, the Company did not have a federal general business tax credit carryforward or an alternative minimum tax credit carryforward.