Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.4
Income Taxes
 12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The provision for income taxes for continuing operations - benefit (expense) consists of the following:
Year Ended December 31,
2020 2019 2018
(In thousands)
Current:
Federal $ (33,819) $ (62,016) $ (37,028)
State (16,549) (12,563) (7,411)
Total current (50,368) (74,579) (44,439)
Deferred 34,468  19,471  21,517 
Total provision for income taxes for continuing operations - benefit (expense) $ (15,900) $ (55,108) $ (22,922)
The reconciliation of the U.S. statutory federal income tax rate with our federal and state overall effective income tax rate from continuing operations is as follows:
Year Ended December 31,
2020 2019 2018
U.S. statutory federal income tax rate 21.00  % 21.00  % 21.00  %
Effective state income tax rate (8.44) % 4.10  % 4.60  %
Valuation allowance adjustments 7.45  % (0.18) % 0.20  %
Uncertain tax positions (0.63) % (0.45) % 0.17  %
Effect of goodwill impairment (60.22) % 0.00  % 0.00  %
Non-deductible compensation (7.13) % 1.48  % 3.06  %
Tax credits 7.37  % 0.00  % 0.00  %
Other (5.13) % 1.65  % 1.41  %
Effective income tax rate (45.73) % 27.60  % 30.44  %
Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Significant components of our deferred tax assets and liabilities are as follows:
December 31, 2020 December 31, 2019
(In thousands)
Deferred tax assets:
Accruals and reserves $ 32,920  $ 27,271 
State net operating loss carryforwards 8,965  10,771 
Basis difference in property and equipment 9,941  20,923 
Interest and state taxes associated with the liability for uncertain income tax positions 987  938 
Fair value of interest rate swaps and interest rate caps 1,354  1,153 
Basis difference in liabilities related to right-of-use assets 98,447  93,808 
Basis difference in inventories 427  — 
Other 1,904  2,146 
Total deferred tax assets 154,945  157,010 
Deferred tax liabilities:
Basis difference in inventories —  (804)
Basis difference in goodwill (24,497) (61,397)
Basis difference in right-of-use assets (95,078) (90,679)
Other (1,603) (2,316)
Total deferred tax liabilities (121,178) (155,196)
Valuation allowance (5,184) (7,775)
Net deferred tax asset (liability) $ 28,583  $ (5,961)
Net long-term deferred tax asset balances were approximately $28.9 million and $3.0 million at December 31, 2020 and 2019, respectively, and are recorded in other assets on the accompanying consolidated balance sheets. Net long-term deferred tax liability balances were approximately $0.3 million and $8.9 million at December 31, 2020 and 2019, respectively, and are recorded in deferred income taxes on the accompanying consolidated balance sheets.
We have approximately $203.5 million in gross state net operating loss carryforwards that will expire between 2021 and 2039. Management reviews these carryforward positions, the time remaining until expiration and other opportunities to realize these carryforwards in making an assessment as to whether it is more likely than not that these carryforwards will be realized. The results of future operations, regulatory framework of the taxing authorities and other related matters cannot be predicted with certainty and, therefore, differences from the assumptions used in the development of management’s judgment could occur. As of December 31, 2020, we had recorded a valuation allowance amount of approximately $5.2 million related to certain state net operating loss carryforward deferred tax assets as we determined that we would not be able to generate sufficient state taxable income in the related entities to realize the accumulated net operating loss carryforward balances.
At January 1, 2020, we had liabilities of approximately $4.4 million recorded related to unrecognized tax benefits. Included in the liabilities related to unrecognized tax benefits at January 1, 2020, was approximately $0.5 million related to interest and penalties which we have estimated may be paid as a result of our tax positions. It is our policy to classify the expense related to interest and penalties to be paid on underpayments of income taxes within income tax expense. A summary of the changes in the liability related to our unrecognized tax benefits is presented below.
2020 2019 2018
(In thousands)
Unrecognized tax benefit liability, January 1 (1) $ 3,839  $ 4,901  $ 4,645 
New positions —  —  — 
Prior period positions:
Increases 1,749  1,795  7 
Decreases (2,230) (2,697) (199)
Increases from current period positions 774  582  714 
Settlements —  (653) — 
Lapse of statute of limitations (8) (8) (69)
Other (89) (81) (197)
Unrecognized tax benefit liability, December 31 (2) $ 4,035  $ 3,839  $ 4,901 
(1)Excludes accrued interest and penalties of $0.5 million, $0.6 million and $0.6 million at January 1, 2020, 2019 and 2018, respectively.
(2)Excludes accrued interest and penalties of $0.5 million, $0.5 million and $0.6 million at December 31, 2020, 2019 and 2018, respectively.
Approximately $4.0 million and $3.8 million of the unrecognized tax benefits as of December 31, 2020 and 2019, respectively, would ultimately affect the income tax rate if recognized. Included in the December 31, 2020 recorded liability is approximately $0.5 million related to interest and penalties which we have estimated may be paid as a result of our tax positions. We do not anticipate any significant changes in our unrecognized tax benefit liability within the next 12 months.
Sonic and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Sonic’s 2017 through 2020 U.S. federal income tax returns remain open to examination by the U.S. Internal Revenue Service. Sonic and its subsidiaries’ state income tax returns remain open to examination by state taxing authorities for years ranging from 2015 to 2020.