| Income Taxes | 1 4 .
Historically, the Company had elected to be taxed under the provisions of Subchapter “S” of the Internal Revenue Code for federal tax purposes. As a result, income was not subject to U.S. federal income taxes or state income taxes in those states where the “S” Corporation status is recognized. Therefore, previously, no provision or liability for federal or state income tax had been provided in the consolidated financial statements except for those states where the “S” Corporation status was not recognized, or where states imposed a tax on “S” Corporations. In connection with the Company’s IPO on May 8, 2019, the “S” Corporation status was terminated, and the Company is now treated as a “C” Corporation under the Internal Revenue Code. The termination of the “S” Corporation status was treated as a change in tax status under Accounting Standards Codification 740, Income Taxes. These rules require that the deferred tax effects of a change in tax status to be recorded to income from continuing operations on the date the “S” Corporation status terminates. The termination of the “S” Corporation election has had a material impact on the Company’s results of operations, financial condition, and cash flows as reflected in the December 31, 2021, December 31, 2020 and December 31, 2019 consolidated financial statements. Income tax expense was impacted in 2019 primarily due to a tax benefit recorded for the revaluation of our deferred tax assets and liabilities as a result of our conversion from “S” Corporation to a “C” Corporation. The effective tax rate has increased, and net income has decrease d as compared to the Company’s “S” Corporation tax years, since the Company is now subject to both U.S. federal and state corporate income taxes on its earnings. Treasury and the Internal Revenue Service on December 28, 2021 released final regulations that significantly restrict the ability to credit certain foreign taxes. While the 2021 Final Regulations are effective on March 7, 2022, certain provisions are applicable to periods beginning before that date. The final regulations provide additional guidance on a wide range of topics, including the definition of a foreign income tax, the disallowance of a credit or deduction for certain foreign income taxes, the allocation and apportionment of foreign income taxes, when foreign income taxes accrue, and related rules under the Internal Revenue Code. The final regulations generally follow the proposed regulations, published on November 12, 2020, but include notable changes. Among other things, the final regulations overhaul the requirements which a foreign tax must satisfy to be claimed as a credit. The most significant change is that a foreign tax must satisfy a new "attribution requirement" for the tax to be creditable under Internal Revenue Code Sections 901 or 903. Under the attribution requirement, foreign taxes are not generally creditable unless the foreign tax law requires a sufficient nexus between the foreign country and the taxpayer’s activities or investments. The Company believes these regulations may restrict the amount of future foreign tax credits the Company is eligible to claim on its US Federal income tax return and as such, may have an impact on the Company’s future effective tax rate. The following table presents the components of our income from continuing operations before income taxes (in thousands):
2021
2020
2019
United States earnings
$
24,687
$
64,810
$
6,762
Foreign earnings
87,901
96,603
60,480
$
112,588
$
161,413
$
67,242
The income tax expense (benefit) attributable to income from continuing operations for the years ended December 31, 2021, December 31, 2020 and December 31, 2019 consists of the following (in thousands):
2021
2020
2019
Current
Federal
$
653
$
15,663
$
22,865
State
6,830
9,024
10,428
Foreign
19,621
16,534
20,159
Total current income tax expense
27,104
41,221
53,452
Deferred
Federal
1,624
(186
)
(97,299
)
State
(1,263
)
(1,785
)
(27,432
)
Foreign
(3,829
)
3,242
1,393
Total deferred tax expense (benefit)
(3,468
)
1,271
(123,338
)
Total income tax expense (benefit)
$
23,636
$
42,492
$
(69,886
) Income tax expense (benefit) was different from the amount computed by applying the United States federal statutory rate to pre-tax income from continuing operations as a result of the following (in thousands):
2021
2020
2019
Income before income tax expense (benefit)
$
112,588
$
161,413
$
67,242
Tax at federal statutory tax rate
23,644
21.0
%
33,897
21.0
%
14,121
21.0
%
S- corporation exclusion
—
0.0
%
—
0.0
%
(4,875
)
(7.0
)%
State taxes, net of federal tax benefit
4,192
3.7
%
4,838
3.0
%
3,223
5.0
%
Change in tax status
—
0.0
%
3,897
2.4
%
(93,878
)
(140.0
)%
Change in valuation allowance
3,865
3.4
%
6,850
4.2
%
4,502
7.0
%
Change in uncertain tax positions
(80
)
-0.1
%
883
0.6
%
4,118
6.0
%
Foreign tax rate differential
(388
)
-0.3
%
(128
)
-0.1
%
4,886
7.0
%
Foreign tax credits
(5,151
)
-4.6
%
(47
)
0.0
%
(1,313
)
(2.0
)%
Transaction costs
540
0.5
%
61
0.0
%
1,052
1.0
%
Noncontrolling interests
(5,225
)
-4.6
%
(4,280
)
-2.6
%
(2,282
)
(3.0
)%
Federal research credits
(2,538
)
-2.2
%
(2,206
)
-1.4
%
—
(—
)%
Executive compensation
2,352
2.1
%
80
0.0
%
—
(—
)%
Other, net
2,425
2.1
%
(1,353
)
-0.9
%
560
1.1
%
Total income tax expense (benefit)
$
23,636
21.0
%
$
42,492
26.3
%
$
(69,886
)
(103.9
)% The effective tax rate in 2021 decreased to 21.0% from 26.3% in 2020. The change in the effective tax rate was due primarily to an increase in untaxed income attributable to noncontrolling interests, release of a valuation allowance on foreign tax credits utilized on the 2020 federal return, a change in jurisdictional earnings, and a release of uncertain tax positions, partially offset by a write down of a foreign tax receivable and an increase in executive compensation subject to IRC Section 162(m) limitations The effective rate in 2020 increased to 26.3% from (104%) in 2019. The change in the effective rate was due primarily to the nonrecurring tax benefit items included in 2019 for the remeasurement of its U.S. deferred tax assets and liabilities due to the change in tax status from an S Corporation to a C Corporation. The effective tax rate for the year ended December 31, 2021 differs from the federal statutory tax rate primarily due to state income taxes, and an increase in executive compensation subject to IRC Section 162(m) limitations . The effective tax rate for the year ended December 31, 2020 differs from the federal statutory tax rate primarily due to state income taxes and a recorded allowance on foreign tax credit carryovers, partially offset by benefits related to untaxed income attributable to noncontrolling interests, and federal research tax credits. The components of deferred tax assets and liabilities consists of the following at December 31, 2021 and December 31, 2020 (in thousands):
2021
2020
Deferred tax assets
Project and non-project reserves
$
24,668
$
33,824
Employee compensation and benefits
60,397
61,260
Revenue and cost recognition
28,930
25,312
Insurance accruals
16,661
17,724
Net operating losses
11,589
9,674
Lease liabilities
54,926
62,994
Tax credit carryforwards
21,818
15,566
Other
3,323
3,296
Valuation allowance
(27,348
)
(23,878
)
Total deferred tax assets
194,964
205,772
Deferred tax liabilities
Intangible assets
(16,542
)
(15,620
)
Right of use assets
(48,993
)
(56,099
)
Other
(6,436
)
(16,138
)
Total deferred tax liabilities
(71,971
)
(87,857
)
Net deferred tax asset
$
122,993
$
117,915
The Company assesses the realizability of its deferred tax assets each reporting period through an analysis of potential sources of taxable income, including prior year taxable income available to absorb a carryback of tax losses, reversals of existing taxable temporary differences, tax planning strategies, and forecasts of taxable income. The Company considers all negative and positive evidence, including the weight of the evidence, to determine if a valuation allowance against deferred tax assets is required. A valuation allowance is recorded against deferred tax assets to reflect the amount of deferred tax assets that is determined to be more-likely-than-not to be realized. The Company is not asserting that any of the earnings of the foreign subsidiaries will be permanently reinvested. Therefore, the Company has recorded a deferred tax liability for the undistributed earnings net of applicable foreign tax credits. As of December 31, 2021, and December 31, 2020, the Company’s valuation allowance against deferred tax assets was $27.3 million and $23.9 million, respectively. The Company has recorded a valuation allowance against certain tax attributes that the Company has determined are not more-likely-than-not to be realized, including certain foreign net operating loss carryforwards, foreign tax credit carryforwards, and capital loss carryforwards. From December 31, 2020 to December 31, 2021, the Company’s valuation allowance increased by $3.4 million. Of this increase, $4.1 million relates to deferred tax assets recorded for foreign tax credit carryforwards offset in part by a decrease in valuation allowance related to net operating loss carryforwards. The valuation allowance is recorded because the Company does not expect to have sufficient foreign source income to support the foreign tax credit carryforwards before they expire. As of December 31, 2021, the Company has NOLs of $1.7 million, $42.9 million, and $38.9 million for U.S. Federal, U.S. states and foreign jurisdictions, respectively. The utilization of the U.S. federal and U.S. state NOLs are subject to certain annual limitations. Of these amounts, $0.4 million, $32.6 million and $24.0 million in U.S. Federal, U.S. states and foreign jurisdictions, respectively, do not expire. The remaining amounts of NOLs in U.S. states and in foreign jurisdictions will expire if not used between 2022 and 2042 As of December 31, 2021, the Company has foreign tax credit carryforwards of $19.6 million. The Company has provided a valuation allowance of $19.6 million as the Company considers that these credits will not be realized. These foreign tax credits start expiring in the year 2029. A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows (in thousands):
2021
2020
2019
Beginning of year
$
16,395
$
15,526
$
7,845
Increases—current year tax positions
6,203
950
7,531
Increases—prior year tax positions
1,512
1,951
1,379
Decreases—prior year tax positions
(2,929
)
(1,366
)
(991
)
Settlements
—
(666
)
(124
)
Lapse of statute of limitations
—
—
(114
)
End of year
$
21,181
$
16,395
$
15,526
At December 31, 2021, and December 31, 2020, there are $19.5 million and $15.8 million of unrecognized tax benefits that if recognized would affect the Company’s effective tax rate. The Company recognizes interest and penalties related to unrecognized tax benefits as part of its income tax expense. During the years ended December 31, 2021, December 31, 2020, and December 31, 2019, the Company recognized approximately $(0.9) million, $1.1 million, and $1.3 million in interest and penalties, respectively, in the consolidated statements of income. The Company conducts business globally and, as a result, the Company or one or more of its subsidiaries file income tax returns in the U.S. federal jurisdiction, various U.S. states, and foreign jurisdictions. The Company is subject to examination by tax authorities in several jurisdictions, including major jurisdictions such as Canada, Mexico, Qatar, Saudi Arabia and the United States. As of December 31, 2021, the Company’s U.S. federal income tax returns for tax years 2018 and forward remain subject to examination. U.S. states and foreign income tax returns remain subject to examination based on varying local statutes of limitations. The Company estimates that, within 12 months, it may decrease its uncertain tax positions by approximately $1.9 million as a result of concluding various tax audits and closing tax years. Although the Company believes its reserves for its tax positions are reasonable, the final outcome of tax audits could be significantly different, both favorably and unfavorably. It is reasonably possible that these audits may conclude in the next 12 months and that the unrecognized tax benefits the Company has recorded in relation to these tax years may change compared to the liabilities recorded for these periods. However, it is not currently possible to estimate the amount, if any, of such change. |
