NOTE 16. INCOME TAXES

The tax effects of principal temporary differences between the carrying amounts of assets and liabilities and their tax basis are summarized below. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income in the appropriate jurisdiction to realize deferred tax assets, net of valuation allowances. In arriving at this conclusion, we considered the profit before tax generated for the years 2022 through 2024, future reversals of existing taxable temporary differences, and projections of future profit before tax.

We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax assets is assessed quarterly. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard for all periods, we consider all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses and forecasts of future profitability, the duration of statutory carryforward periods, and our experience with operating loss and tax credit carryforward expirations. A history of cumulative losses is a significant piece of negative evidence used in our assessment. If a history of cumulative losses is incurred for a tax jurisdiction, forecasts of future profitability are not used as positive evidence related to the realization of the deferred tax assets in the assessment.

As of December 31, 2024 and 2023, we had $622.9 million and $646.7 million, respectively, of gross state net operating loss (“NOL”) carryforwards expiring between 2025 and 2043. As of December 31, 2024 and 2023, we had capital loss carryforwards of $5.6 million that expire between 2025 and 2036.

As of December 31, 2024 and 2023, we had valuation allowances of $36.3 million and $49.1 million, respectively. As of December 31, 2024, our valuation allowance consisted of $27.8 million for state deferred tax assets related to net operating loss carryforwards, $5.6 million for federal and state deferred tax assets related to capital loss carryforwards and $2.9 million for state deferred tax assets related to state tax credits.

We estimate we will need to generate future taxable income of approximately $168.8 million for state income tax purposes during the respective realization periods (ranging from 2025 to 2043) to be able to fully realize the net deferred income tax assets discussed above. We estimate we will need to generate capital gain income of $22.6 million to fully realize our federal capital loss carryforwards before they expire between 2025 and 2026. We estimate we will need to generate capital gain income of $168.1 million to fully realize our state capital loss carryforwards before they expire between 2025 and 2036. Our ability to utilize deferred tax assets may be impacted by certain future events, such as changes in tax legislation or insufficient future taxable income prior to expiration of certain deferred tax assets.

The unremitted earnings of our foreign subsidiaries are not permanently reinvested. Accordingly, as of December 31, 2024 and 2023, we have recorded deferred income taxes for foreign withholding taxes of $0.9 million on approximately $18.2 million and $17.5 million of net undistributed earnings of foreign subsidiaries, respectively.

We recognize the tax benefits of an uncertain tax position only if those benefits are more likely than not to be sustained based on existing tax law. Additionally, we establish a reserve for tax positions that are more likely than not to be sustained based on existing tax law, but for which we are uncertain in the ultimate benefit to be sustained upon examination by the relevant taxing authorities. Unrecognized tax benefits are subsequently recognized at the time the more likely than not recognition threshold is met, the tax matter is effectively settled or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired, whichever is earlier.

We had $24.5 million of Unrecognized Tax Benefits (“UTB”) as of December 31, 2024, $11.6 million ($10.5 million, net of federal benefit) of this amount, if recognized in future periods, would impact the reported effective tax rate.

It is reasonably possible that certain UTB’s may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities. Over the next twelve months we estimate that UTB’s may decrease by $0.8 million related to state statutes expiring.

We account for all interest and penalties on uncertain income tax positions as income tax expense. We have $2.8 million and $2.3 million of interest and penalties accrued in non-current income tax payable in the Consolidated Balance Sheets as of December 31, 2024 and 2023, respectively.

We file income tax returns in the U.S. and various states and international jurisdictions. In the normal course of business, we are subject to examination by taxing authorities in Canada and the U.S. Generally, we have open tax years subject to tax audit on average of between three years and six years. The statute of limitations is no longer open for U.S. federal returns before 2021, with the exception of our 2018 and 2019 returns, whose statutes of limitations have been extended to November 30, 2025 due to ongoing audits. With few exceptions, the statute of limitations is no longer open for state or non-U.S. income tax examinations for years before 2020. Excluding the statute of limitation extensions for our 2018 and 2019 U.S. federal income tax returns, we have not significantly extended any open statutes of limitation for any major jurisdiction and have reviewed and accrued for, where necessary, tax liabilities for open periods.