| Income Taxes | 8. Income Taxes Our income before income taxes consisted of the following:
(in thousands) Year ended September 30,
2022 2021 2020
Domestic $ 97,460 $ 41,199 $ ( 73,865 )
Foreign 299,638 350,556 208,571
Total income before income taxes $ 397,098 $ 391,755 $ 134,706 Our provision (benefit) for income taxes consisted of the following:
(in thousands) Year ended September 30,
2022 2021 2020
Current:
Federal $ 767 $ 4,774 $ 2,187
State 6,675 1,609 1,266
Foreign 33,612 66,554 25,199
41,054 72,937 28,652
Deferred:
Federal 25,730 ( 152,311 ) ( 26,811 )
State ( 3,177 ) ( 27,228 ) ( 4,063 )
Foreign 20,410 21,434 6,233
42,963 ( 158,105 ) ( 24,641 )
Provision (benefit) for income taxes $ 84,017 $ ( 85,168 ) $ 4,011 Taxes computed at the statutory federal income tax rates are reconciled to the provision (benefit) for income taxes as follows:
(in thousands) Year ended September 30,
2022 2021 2020
Statutory federal income tax rate $ 83,391 21 % $ 82,268 21 % $ 28,288 21 %
Change in valuation allowance — — ( 134,695 ) ( 34 )% ( 16,489 ) ( 12 )%
State income taxes, net of federal tax benefit 6,518 2 % ( 28,768 ) ( 8 )% ( 2,998 ) ( 2 )%
Federal research and development credits ( 7,477 ) ( 2 )% ( 5,764 ) ( 2 )% ( 5,483 ) ( 4 )%
Uncertain tax positions 2,418 1 % 3,398 1 % 3,072 2 %
Foreign tax credit ( 9,078 ) ( 2 )% ( 35,368 ) ( 9 )% — —
Foreign rate differences ( 8,982 ) ( 2 )% ( 34,584 ) ( 9 )% ( 22,074 ) ( 16 )%
Foreign tax on U.S. provision 9,078 2 % 5,931 2 % 4,523 3 %
Excess tax benefits from restricted stock ( 8,278 ) ( 2 )% ( 6,141 ) ( 2 )% ( 1,743 ) ( 1 )%
Audits and settlements — — 33,370 9 % — —
U.S. permanent items 15,304 3 % 18,389 5 % 6,590 5 %
Base Erosion Anti-Abuse Tax (BEAT) — — 2,936 1 % ( 1,759 ) ( 1 )%
GILTI, net of foreign tax credits 2,705 1 % 18,217 4 % 14,899 11 %
Foreign-Derived Intangible Income (FDII) ( 6,848 ) ( 2 )% ( 4,428 ) ( 1 )% ( 2,461 ) ( 2 )%
Sale of a portion of the PLM services business 6,844 2 % — — — —
Other, net ( 1,578 ) ( 1 )% 71 — ( 354 ) ( 1 )%
Provision (benefit) for income taxes $ 84,017 21 % $ ( 85,168 ) ( 22 )% $ 4,011 3 % In 2022, 2021, and 2020, our effective tax rate is impacted by our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and the Cayman Islands. In 2022, 2021, and 2020, the foreign rate differential predominantly relates to these earnings. In addition to the foreign rate differential, our tax rate differed from the U.S. statutory federal income tax due to the net effects of the Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) regimes (together referred to as U.S. Tax reform), and the excess tax benefit related to stock-based compensation. Additionally in 2022, our results include tax expense relating to the book over tax basis difference in goodwill disposed of as part of the sale of a portion of the PLM services business. As a result of the net effect of these items in 2022, our effective tax rate did not differ significantly from the U.S. federal income tax rate. In 2021, our tax rate includes a benefit due to the release of the valuation allowance on the majority of our U.S. net deferred tax assets. In 2020, we recorded benefits for the reduction of the U.S. valuation allowance as a result of the Onshape acquisition. A further reduction to the valuation allowance was also recorded to reflect the impact from the scheduling of the reversal of existing temporary differences resulting in deferred tax liabilities that cannot be offset against deferred tax assets. At September 30, 2022 and 2021, income taxes payable and income tax accruals recorded on the accompanying Consolidated Balance Sheets were $ 17.3 million ($ 5.1 million in Accrued income taxes, $ 5.6 million in Other current liabilities and $ 6.6 million in Other liabilities) and $ 15.7 million ($ 5.0 million in Accrued income taxes, $ 0.8 million in Other current liabilities and $ 9.9 million in Other liabilities), respectively. At September 30, 2022 and 2021, prepaid taxes recorded in Prepaid expenses on the accompanying Consolidated Balance Sheets were $ 25.8 million and $ 15.4 million, respectively. We made net income tax payments of $ 55.0 million, $ 56.0 million and $ 52.6 million in 2022, 2021 and 2020, respectively. The significant temporary differences that created deferred tax assets and liabilities are shown below:
(in thousands) September 30,
2022 2021
Deferred tax assets:
Net operating loss carryforwards $ 40,419 $ 65,383
Foreign tax credits 14,527 36,287
Capitalized research and development 23,274 27,546
Pension benefits 7,639 14,097
Prepaid expenses 15,886 12,540
Deferred revenue 2,146 2,274
Stock-based compensation 19,486 15,822
Other reserves not currently deductible 14,689 16,796
Amortization of intangible assets 130,825 147,385
Research and development and other tax credits 78,862 74,846
Lease liabilities 46,672 51,471
Fixed assets 78,249 53,025
Capital loss carryforward 3,955 35,156
Other 1,256 2,269
Gross deferred tax assets 477,885 554,897
Valuation allowance $ ( 22,283 ) ( 52,085 )
Total deferred tax assets 455,602 502,812
Deferred tax liabilities:
Acquired intangible assets not deductible $ ( 118,360 ) ( 108,746 )
Lease assets ( 36,940 ) ( 37,273 )
Pension prepayments ( 2,622 ) ( 2,834 )
Deferred revenue ( 35,193 ) ( 2,662 )
Depreciation ( 6,937 ) ( 7,121 )
Unbilled accounts receivable - ( 6,391 )
Deferred income ( 5,991 ) ( 21,744 )
Prepaid commissions ( 13,356 ) ( 16,990 )
Other ( 8,508 ) ( 5,427 )
Total deferred tax liabilities ( 227,907 ) ( 209,188 )
Net deferred tax assets $ 227,695 $ 293,624 We reassess our valuation allowance requirements each financial reporting period. We assess available positive and negative evidence to estimate whether sufficient future taxable income will be generated to use our existing deferred tax assets. In the assessment for the period ended September 30, 2021, we concluded that it was more likely than not that our deferred tax assets related to U.S. federal and state income would be realizable, and therefore, the U.S. federal and the majority of the state valuation allowances were released, which resulted in non-cash federal and state tax benefits of $ 109.4 million and $ 24.8 million, respectively, to earnings in 2021. That determination was based, in part, on the Company’s cumulative profits before tax and permanent differences from the past three years, which became profitable during 2021, and projections of profits before tax and permanent differences in future years. In 2022, we continue to maintain this conclusion. For U.S. tax return purposes, net operating loss (NOL) carryforwards and tax credits are generally available to be carried forward to future years, subject to certain limitations. At September 30, 2022, we had U.S. federal tax effected NOL carryforwards from acquisitions of $ 22.5 million, of which $ 1.6 million expire in 2023 to 2034. The remaining carryforwards of $ 20.9 million do not expire. The use of these NOL carryforwards is limited as a result of the change in ownership rules under Internal Revenue Code Section 382. As of September 30, 2022, we had federal R&D credit carryforwards of $ 60.9 million, which expire beginning in 2025 and ending in 2042, and Massachusetts R&D credit carryforwards of $ 26.1 million, which expire beginning in 2023 and ending in 2037. We also had foreign tax credits of $ 14.5 million, which expire beginning in 2027 and ending in 2032. We also have tax effected NOL carryforwards in non-U.S. jurisdictions totaling $ 7.2 million, the majority of which do not expire, and non-U.S. tax credit carryforwards of $ 4.0 million that expire beginning in 2030 and ending in 2041 . Additionally, we have tax effected amortization carryforwards of $ 118.5 million in a foreign jurisdiction. There are limitations imposed on the use of such attributes that could restrict the recognition of any tax benefits. As of September 30, 2022, we have a valuation allowance of $ 17.8 million against net deferred tax assets in the United States and a valuation allowance of $ 4.5 million against net deferred tax assets in certain foreign jurisdictions. The $ 17.8 million U.S. valuation allowance relates to Massachusetts tax credit carryforwards which we do not expect to realize a benefit from prior to expiration. The valuation allowance recorded against net deferred tax assets of certain foreign jurisdictions is established primarily for our capital loss carryforwards, the majority of which do not expire. However, there are limitations imposed on the utilization of such capital losses that could restrict the recognition of any tax benefits. The changes to the valuation allowance were primarily due to the following:
(in thousands) Year ended September 30,
2022 2021 2020
Valuation allowance, beginning of year $ 52,085 $ 205,423 $ 177,663
Net release of valuation allowance (1) — ( 134,235 ) —
Net increase (decrease) in deferred tax assets with a full valuation allowance (2) ( 29,802 ) ( 19,103 ) 27,760
Valuation allowance, end of year $ 22,283 $ 52,085 $ 205,423 (1) In 2021, this is attributable to the release in the United States. (2) In 2022, this change included the loss of foreign attributes upon liquidation of a foreign subsidiary. In 2021, this change includes the loss of state attributes upon merger of two wholly-owned subsidiaries. In 2020, this change is largely attributed to the Onshape acquisition, the adoption of ASC 842 and the impact to the change in scheduling of the reversal of existing temporary differences. Our policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of our income tax provision. In 2022, 2021 and 2020 we recorded interest expense of $ 0.2 million, $ 2.2 million and $ 0.3 million, respectively. In 2022 and 2020 we had no penalty expenses in our income tax provision. In 2021 we had $ 2.0 million tax penalty expense in our income tax provision. As of September 30, 2022 and 2021, we had accrued $ 0.9 million and $ 0.7 million of net estimated interest expense, respectively. We had no accrued tax penalties as of September 30, 2022, 2021 or 2020.
Year ended September 30,
Unrecognized tax benefits (in thousands) 2022 2021 2020
Unrecognized tax benefit, beginning of year $ 21,166 $ 16,107 $ 11,484
Tax positions related to current year:
Additions 3,144 4,844 2,173
Tax positions related to prior years:
Additions 785 30,130 2,452
Reductions ( 1,172 ) ( 478 ) ( 2 )
Settlements — ( 29,437 ) —
Unrecognized tax benefit, end of year $ 23,923 $ 21,166 $ 16,107 If all of our unrecognized tax benefits as of September 30, 2022 were to become recognizable in the future, we would record a benefit to the income tax provision of $ 23.9 million (which would be partially offset by an increase in the U.S. valuation allowance of $ 5.2 million). Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We believe it is reasonably possible that within the next 12 months the amount of unrecognized tax benefits related to the resolution of multi-jurisdictional tax positions could be reduced by up to $ 5 million as audits close and statutes of limitations expire. Our results for the year ended September 30, 2021 include a charge of $ 37.3 million related to the effects of a tax matter in the Republic of Korea (South Korea) of $ 34.4 million, and the resulting impact on U.S. income taxes of $ 2.9 million, and additional payments of approximately $ 20 million to South Korea in settlement of the amounts previously accrued. In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the IRS in the United States. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, transfer pricing, limitations on net operating losses and tax credits. Although we believe our tax estimates are appropriate, the final d etermination of tax audits and any related litigation could result in material changes in our estimates. A s of September 30, 2022 , we remained subject to examination in the following major tax jurisdictions for the tax years indicated:
Major Tax Jurisdiction Open Years
United States 2018 through 2022
Germany 2015 through 2022
France 2019 through 2022
Japan 2017 through 2022
Ireland 2018 through 2022 Additionally, net operating loss and tax credit carryforwards from certain earlier periods in these jurisdictions may be subject to examination to the extent they are used in later periods. We incurred expenses related to stock-based compensation in 2022, 2021 and 2020 of $ 174.9 million, $ 177.3 million and $ 115.1 million, respectively. Accounting for the tax effects of stock-based awards requires that we establish a deferred tax asset as the compensation is recognized for financial reporting prior to recognizing the tax deductions. The tax benefit recognized in the Consolidated Statements of Operations related to stock-based compensation totaled $ 27.1 million, $ 39.9 million and $ 13.4 million in 2022, 2021 and 2020, respectively. Upon vesting of the stock-based awards, the actual tax deduction is compared with the cumulative financial reporting compensation cost and any excess tax deduction is considered a windfall tax benefit and is recorded to the tax provision. In 2022, 2021 and 2020, net windfall tax benefits of $ 5.2 million, $ 9.9 million and $ 1.3 million were recorded to the tax provision. Prior to the passage of the U.S. Tax Cuts and Jobs Act in December of 2017 (the Tax Act), we asserted that substantially all of the undistributed earnings of our foreign subsidiaries were considered indefinitely reinvested and accordingly, no deferred taxes were provided. Pursuant to the provisions of the U.S. Tax Act, these earnings were subjected to U.S. federal taxation via a one-time transition tax, and there is therefore no longer a material cumulative basis difference associated with the undistributed earnings. We maintain our assertion of our intention to permanently reinvest these earnings outside the United States unless repatriation can be done substantially tax-free, with the exception of a foreign holding company formed in 2018 and our Taiwan subsidiary. If we decide to repatriate any additional non-U.S. earnings in the future, we may be required to establish a deferred tax liability on such earnings. The amount of unrecognized deferred tax liability on the undistributed earnings would not be material. |
