INCOME TAXES

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

INCOME TAXES

12. INCOME TAXES

The following table sets forth the components of income before income taxes by jurisdiction:

	Year Ended December 31,
	2021		2020		2019
			(In thousands)
United States	$	396,769	$	26,031	$	198,566
Foreign	185,143		96,811		83,495
Income before income taxes	$	581,912	$	122,842	$	282,061

The following table sets forth the components of the provision for income taxes:

	Year Ended December 31,
	2021		2020		2019
			(In thousands)
Current income taxes:
Federal	$	107,919	$	25,605	$	31,695
State	30,206		11,322		8,616
Foreign	55,670		19,414		6,347
Total current income taxes	193,795		56,341		46,658
Deferred income taxes:
Federal	(62,302)		(17,913)		6,774
State	(12,327)		(7,264)		1,846
Foreign	(3,656)		(8,361)		4,585
Total deferred income taxes	(78,285)		(33,538)		13,205
Provision for income taxes	$	115,510	$	22,803	$	59,863

The following table sets forth the reconciliation between the federal statutory income tax rate and the effective tax rate:

	Year Ended December 31,
	2021		2020		2019
Federal statutory rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal income tax benefit	2.0		1.4		3.1
Deemed repatriation of undistributed foreign earnings	—		—		(1.3)
Tax effect of intercompany financing	(3.2)		(13.4)		(5.5)
Unrecognized tax benefits	2.5		2.1		(0.4)
Nondeductible expenses	0.6		5.7		0.7
Change in valuation allowance	(2.8)		1.8		0.6
Other	(0.2)		—		3.0
Effective tax rate	19.9	%	18.6	%	21.2	%

The undistributed earnings of the Company's foreign subsidiaries amounted to approximately $1,851.6 million at December 31, 2021. Most of these earnings have been taxed in the U.S. under either the one-time transition tax or the GILTI tax regime imposed by the TCJA. Future distributions of previously taxed earnings by the Company's foreign subsidiaries should, therefore, result in minimal U.S. taxation. Wesco has elected to pay the transition tax in installments over eight years. As of December 31, 2021, the Company's liability for the transition tax was $60.7 million, which is recorded as components of other current and noncurrent liabilities in the Consolidated Balance Sheet. The Company continues to assert that the remaining undistributed earnings of its foreign subsidiaries are indefinitely reinvested. The distribution of earnings by Wesco's foreign subsidiaries in the form of dividends, or otherwise, may be subject to additional taxation. The Company estimates that additional taxes of approximately $82.2 million would be payable upon the remittance of all previously undistributed foreign earnings as of December 31, 2021, based upon the laws in effect on that date. The Company believes that it is able to maintain sufficient liquidity for its domestic operations and commitments without repatriating cash from Wesco's foreign subsidiaries.

The following table sets forth deferred tax assets and liabilities:

	As of December 31,
	2021				2020
			(In thousands)
	Assets		Liabilities		Assets		Liabilities
Accounts receivable	$	18,612	$	—	$	17,560	$	—
Inventories	13,302		—		14,793		—
Depreciation of property, buildings and equipment	—		45,397		—		60,687
Operating leases	142,964		141,686		134,377		136,477
Amortization of intangible assets	—		549,536		—		540,520
Employee benefits	36,410		—		53,040		—
Stock-based compensation	12,281		—		14,061		—
Prepaid royalty payments	34,866		—		—		—
Disallowed business interest expense(1)	11,163		—		2,755		—
Tax loss carryforwards	39,876		—		36,923		—
Foreign tax credit carryforwards	51,632		—		55,637		—
Other(1)	26,666		8,137		24,888		6,286
Deferred income taxes before valuation allowance	387,772		744,756		354,034		743,970
Valuation allowance	(46,269)		—		(60,629)		—
Total deferred income taxes	$	341,503	$	744,756	$	293,405	$	743,970

(1)    The deferred income tax asset of $2.8 million related to disallowed business interest expense as of December 31, 2020 was previously reported as a component of Other. This amount has been reclassified to conform to the current period's presentation.

Wesco had deferred tax assets of $35.5 million and $34.5 million as of December 31, 2021 and 2020, respectively, related to foreign net operating loss carryforwards. These net operating loss carryforwards expire beginning in 2022 through 2041, while some may be carried forward indefinitely. The Company has determined that certain foreign net operating loss carryforwards will not be realized before they expire. Accordingly, the Company has recorded a valuation allowance of $22.1 million and $22.3 million against deferred tax assets related to certain foreign net operating loss carryforwards at December 31, 2021 and 2020, respectively. Additionally, these foreign jurisdictions had deferred tax assets of $6.9 million and $8.2 million as of December 31, 2021 and 2020, respectively, related to other future deductible temporary differences. The Company has recorded a full valuation allowance against these amounts as of December 31, 2021 and 2020, respectively.

As of December 31, 2021 and 2020, Wesco had deferred tax assets of $4.4 million and $2.4 million, respectively, related to state net operating loss carryforwards. These carryforwards expire beginning in 2024 through 2040, while some may be carried forward indefinitely. The deferred tax assets related to disallowed business interest expense as of December 31, 2021 includes $4.7 million and $6.4 million for Federal and state income tax purposes, respectively. The carryforward period for disallowed business interest expense is indefinite.

As of December 31, 2021 and 2020, Wesco had deferred tax assets of $51.6 million and $55.6 million, respectively, related to foreign tax credit carryforwards. The foreign tax credit carryforwards expire beginning in 2027 through 2031. The Company has determined that certain foreign tax credit carryforwards will not be realized before they expire. Accordingly, the Company has recorded a valuation allowance of $17.3 million and $30.1 million against these deferred tax assets at December 31, 2021

and 2020, respectively. Wesco’s ability to realize its deferred tax assets related to foreign tax credit carryforwards may be impacted by U.S. tax legislation, our ability to generate sufficient foreign source taxable income, and tax planning strategies that the Company may implement. The impact of these items, if any, on Wesco's assessment of the realizability of these deferred tax assets will be recorded as a discrete item in the period in which the Company's assessment changes.

The Company is under examination by tax authorities in various jurisdictions and remains subject to examination until the applicable statutes of limitation expire. The statutes of limitation for the material jurisdictions in which the Company files income tax returns remain open as follows:

United States — Federal	2017 and forward
United States — Material States	2017 and forward
Canada	2012 and forward
UK	2016 and forward
Australia	2017 and forward

The following table sets forth the reconciliation of gross unrecognized tax benefits:

	As of December 31,
	2021		2020		2019
	(In thousands)
Beginning balance January 1	$	68,075	$	54	$	1,293
Additions for current year tax positions	39,841		14,009		—
Additions for prior year tax positions	8,422		—		—
Additions for acquired tax positions	—		68,048		—
Reductions for prior year tax positions	(3,853)		(43)		—
Settlements	(118)		—		(1,290)
Lapse in statute of limitations	(3,837)		(15,886)		—
Foreign currency exchange rate changes	(1,239)		1,893		51
Ending balance December 31	$	107,291	$	68,075	$	54

The total amount of unrecognized tax benefits were $107.3 million and $68.1 million as of December 31, 2021 and 2020, respectively. The amount of unrecognized tax benefits that would affect the effective tax rate if recognized in the consolidated financial statements for the years ended December 31, 2021, 2020 and 2019 were $36.1 million, $29.1 million, and $0.1 million, respectively. Within the next twelve months, the amount of unrecognized tax benefits is expected to decrease by $14.3 million due to the expiration of statutes of limitation. Such change would result in a $3.2 million reduction in income tax expense.

The Company classifies interest related to unrecognized tax benefits as a component of interest expense, net in the Consolidated Statement of Income and Comprehensive Income. The Company recognized interest expense on unrecognized tax benefits of $0.9 million and $0.3 million for the years ended December 31, 2021 and 2020, respectively. In 2019, the Company recognized interest income on unrecognized tax benefits of $0.8 million. As of December 31, 2021 and 2020, Wesco had a liability of $6.4 million and $5.5 million, respectively, for interest expense related to unrecognized tax benefits. The Company classifies penalties related to unrecognized tax benefits as part of income tax expense. For the year ended December 31, 2021, penalties recorded in income tax expense were $3.4 million. Penalties recorded in income tax expense for 2020 and 2019 were immaterial. As of December 31, 2021 and 2020, Wesco had a liability of $4.9 million and $1.5 million, respectively, for penalties related to unrecognized tax benefits.

On October 22, 2021, one of the Company's Mexican affiliates received a tax assessment from the Mexican tax authorities related to its 2012 income tax return in the amount of approximately $26.0 million. The Company believes the assessment is without merit and has appealed it. The Company expects any potential liability remaining after availing itself of available administrative and judicial appeals to be immaterial to its consolidated financial statements and, accordingly, has not recorded a reserve.