Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

v3.21.1
INCOME TAXES
12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes INCOME TAXESIn connection with the Business Combination as disclosed in Note 1, Nature of Business and Accounting Policies, the partnership tax status was terminated on July 25, 2018. Under the former partnership status, Priority Holdings, LLC was a dual member limited liability company and as such its financial statements reflected no income tax provisions as a pass-through entity. As a result of the Business Combination, for income tax purposes Priority Holdings, LLC became a disregarded subsidiary of the Company, the successor entity to MI Acquisitions, Inc., whereby its operations became taxable. For all periods subsequent to the Business Combination, the income tax provision reflects the taxable status of the Company as a corporation. The initial net deferred tax asset from the Business Combination is the result of the difference between initial tax basis, generally substituted tax basis, and the reflective carrying amounts of the assets and liabilities for financial statement purposes. The net deferred tax asset as of July 25, 2018 was approximately $47.5 million, which was recorded and classified on the Company's consolidated balance sheet in accordance with ASU 2015-17 and as an adjustment to Additional Paid-In Capital in
the Company's consolidated statement of changes in stockholders' deficit. In addition, the Company's consolidated financial statement for the year ended December 31, 2018 presented herein reflects unaudited pro-forma income tax disclosure amounts to illustrate the income tax effects had the Company been subject to federal and state income taxes for the full year 2018.
Components of consolidated income tax expense (benefit) for the years ended December 31, 2020, 2019, and 2018 was as follows:
For the Year Ended December 31,
(in thousands) 2020 2019 2018
U.S. current income tax expense (benefit)
    Federal $ 4,766  $ (11) $ 29 
    State and local 3,173  75  418 
    Total current income tax expense $ 7,939  $ 64  $ 447 
U.S. deferred income tax expense (benefit)
    Federal $ 3,875  $ 1,920  $ (2,541)
    State and local (915) (1,154) (396)
    Total deferred income tax expense (benefit) $ 2,960  $ 766  (2,937)
    Total income tax expense (benefit) $ 10,899  $ 830  $ (2,490)

The Company's consolidated effective income tax rate was 13.3% for the year ended December 31, 2020, compared to an consolidated effective income tax benefit rate of 2.5% for the year ended December 31, 2019. For the year ended December 31, 2018, the Company's consolidated effective income tax rate was 12.5%. The effective rate for 2020 differed from the statutory rate of 21% primarily due to earnings attributable to noncontrolling interests and valuation allowance changes against certain business interest carryover deferred tax assets. The effective rate for 2019 differed from the statutory federal rate of 21% primarily due to valuation allowance changes against certain business interest carryover deferred tax assets. The effective rate for 2018 differed from the statutory federal rate of 21% primarily due to the partnership status of Priority Holdings, LLC. for periods prior to July 25, 2018. The following table provides a reconciliation of the consolidated income tax expense (benefit) at the statutory U.S. federal tax rate to actual consolidated income tax expense (benefit) for the years ended December 31, 2020, 2019 and 2018:
For the Year Ended December 31,
(in thousands) 2020 2019 2018
U.S. federal statutory (benefit) $ 17,211  $ (6,879) $ (4,268)
Non-controlling interests (5,626) —  — 
Earnings as dual-member LLC —  —  1,643 
State and local income taxes, net 1,140  (1,564) (2)
Excess tax benefits pursuant to ASU 2016-09 (37) 309  140 
Valuation allowance changes (2,945) 9,302  (66)
Intangible assets 1,056  —  — 
Nondeductible items 233  125  86 
Tax credits (283) (323) (123)
Other, net 150  (140) 100 
Income tax expense (benefit) $ 10,899  $ 830  $ (2,490)
Deferred income taxes reflect the expected future tax consequences of temporary differences between the financial statement carrying amount of the Company's assets and liabilities, tax credits and their respective tax bases, and loss carry forwards. The significant components of consolidated deferred income taxes were as follows:
As of December 31,
(in thousands) 2020 2019
Deferred Tax Assets:
Accruals and reserves $ 1,499  $ 1,566 
Intangible assets 49,558  53,600 
Net operating loss carryforwards 436  4,114 
Interest limitation carryforwards 6,295  9,266 
Other 2,115  1,877 
Gross deferred tax assets 59,903  70,423 
     Valuation allowance (7,200) (10,144)
     Total deferred tax assets 52,703  60,279 
Deferred Tax Liabilities:
Prepaid assets (973) (521)
Investments in partnership (19) (5,408)
Property and equipment (5,014) (4,693)
Total deferred tax liabilities (6,006) (10,622)
Net deferred tax assets $ 46,697  $ 49,657 


In accordance with the provisions of ASC 740, Income Taxes ("ASC 740"), the Company provides a valuation allowance against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The assessment considers all available positive and negative evidence and is measured quarterly. As of December 31, 2020 and 2019, the Company had a consolidated valuation allowance of approximately $7.2 million and $10.1 million, respectively, against certain deferred income tax assets related to business interest deduction carryovers and Business Combination costs that the Company believes are not more likely than not to be realized.
The Company recognizes the tax effects of uncertain tax positions only if such positions are more likely than not to be sustained based solely upon its technical merits at the reporting date. The Company refers to the difference between the tax benefit recognized in its financial statements and the tax benefit claimed in the income tax return as an "unrecognized tax benefit." As of December 31, 2020 and 2019, the net amounts of our unrecognized tax benefits were not material.

The Company is subject to U.S. federal income tax and income tax in multiple state jurisdictions. Tax periods for 2017 and all years thereafter remain open to examination by the federal and state taxing jurisdictions and tax periods for 2016 and all years thereafter remain open for certain state taxing jurisdictions to which the Company is subject.

At December 31, 2020, the Company has utilized all of its federal NOL carryforwards of approximately $26.5 million. Also, at December 31, 2020 and 2019, the Company had state NOL carryforwards of approximately $6.2 million and $19.5 million, respectively, with expirations dates ranging from 2023 to 2044.

On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Act") was enacted. The Tax Act included a number of changes to existing U.S. tax laws. The most notable provisions of the Tax Act that impacted the Company included a reduction of the U.S. corporate income tax rate from 35% to 21% and the limitations on interest deductibility, both effective January 1, 2018, as well as immediate expensing for certain assets placed into service after September 27, 2017. The Company did not experience any material impacts of the provisions of the Tax Act for the year ended December 31, 2018 other than the impact of the reduction
of the U.S. corporate rate from 35% to 21% and the limitation on interest deductibility. As of December 31, 2018, the Company had completed the accounting for the income tax effects of all elements of the Tax Act in accordance with the SEC's Staff Accounting Bulletin No. 118. The Company has historically been impacted by the new interest deductibility rule under the Tax Act. This rule disallows interest expense to the extent it exceeds 30% of adjusted taxable income “ATI”, as defined. In March 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted, which among other provisions, provides for the increase of the 163(j) ATI limitation from 30% to 50% for tax years 2019 and 2020. As a result of its earnings and the enactment of the CARES Act during 2020, the Company has fully utilized its federal, and the majority of its state, interest deduction limitation carryforwards of $21.2 million and $11.0 million for the years ended December 31, 2019 and 2018, respectively.