Ameresco, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

The components of income before income taxes are as follows:



	Year Ended December 31,
	2019		2018			2017
Domestic	$	34,700	$	46,542		$	29,792
Foreign	1,853		(4,152		)	(1,075		)
Income before (benefit) provision for income taxes	$	36,553	$	42,390		$	28,717

The components of the (benefit) provision for income taxes are as follows:



	Year Ended December 31,
	2019			2018			2017
Current:
Federal	$	109		$	(1,888	)	$	(1,055	)
State	474			1,176			671
Foreign	(1		)	30			161
	582			(682		)	(223		)
Deferred:
Federal	(4,794		)	2,662			(6,683		)
State	202			2,530			1,853
Foreign	262			303			262
	$	(4,330	)	$	5,495		$	(4,568	)
	$	(3,748	)	$	4,813		$	(4,791	)

The Company’s deferred tax assets and liabilities result primarily from temporary differences between financial reporting and tax recognition of depreciation, energy efficiency and NOL carryforwards.

Deferred tax assets and liabilities consist of the following:



	December 31,
	2019			2018
Deferred tax assets:
Compensation accruals	$	1,745		$	3,489
Reserves	2,739			2,940
Other	9,398			127
Net operating losses	14,355			10,010
Interest rate swaps	1,604			666
Energy efficiency	35,939			28,911
Interest limitation	5,148			3,292
Deferred revenue	1,635			1,943
Gross deferred income tax assets	72,563			51,378
Valuation allowance	(8,583		)	(7,931		)
Total deferred income tax assets	$	63,980		$	43,447
Deferred tax liabilities:
Depreciation	$	(51,579	)	$	(37,107	)
Deferred effect of derivative liability and ASU 2016-09 adoption	(328		)	(475		)
Canadian capital cost, allowance and amortization	(2,919		)	(1,974		)
United Kingdom goodwill amortization	(781		)	(755		)
Outside basis difference	(8,488		)	(7,488		)
Total deferred income tax liabilities	(64,095		)	(47,799		)
Deferred income tax liabilities, net	$	(115	)	$	(4,352	)

The Company recorded a valuation allowance in the amount of $8,583 and $7,931 as of December 31, 2019 and 2018, respectively, related to the following items: 1) The Company recorded a valuation allowance on a deferred tax asset relating to interest rate swaps in the amount of $122 and $184 as of December 31, 2019 and 2018, respectively. The deferred tax asset represents a future capital loss which can only be recognized for income tax purposes to the extent of capital gain income. Although the Company anticipates sufficient future taxable income, it is more likely than not that it will not be of the appropriate character to allow for the recognition of the future capital loss. 2) As of December 31, 2019 and 2018, the Company recorded a valuation allowance on a deferred tax asset relating to a foreign net operating loss in the amount of $8,169 and $7,500, respectively. It is more likely than not that the Company will not generate sufficient taxable income at the foreign subsidiary level to utilize the net operating loss. 3) The Company recorded a valuation allowance on a deferred tax asset relating to a state net operating loss of $292 and $247 at one of its subsidiaries as of December 31, 2019 and 2018, respectively. It is more likely than not that the Company will not generate sufficient taxable income at the subsidiary level to utilize the net operating loss.

The provision for income taxes is based on the various rates set by federal and local authorities and is affected by permanent and temporary differences between financial accounting and tax reporting requirements.

The principal reasons for the difference between the statutory rate and the estimated annual effective rate for 2019 related to the Company’s recognizing a tax benefit of approximately $29.7 million associated with energy related credits and deductions available under the U.S. Tax Code for 2019 as well as a deduction available under Section 179D of the Tax Code for 2019 and 2018. In December 2019, the Code Section 179D Commercial Buildings Energy Efficiency Tax Deduction was retroactively extended for 2018 and 2019, and through the end of 2020. Because of the timing of the extension the impact of the 2018 Section 179D deduction was not reflected in the 2018 tax provision but was instead reflected in 2019.

The following is a reconciliation of the effective tax rates:



	Year Ended December 31,
	2019			2018			2017
Income before (benefit) provision for income taxes	$	36,553		$	42,390		$	28,717
Federal statutory tax expense	$	7,676		$	8,902		$	10,048
State income taxes, net of federal benefit	2,140			3,071			1,584
Net state impact of deferred rate change	(53		)	174			327
Non deductible expenses	150			982			1,473
Impact of reserve for uncertain tax positions	(925		)	879			42
Stock-based compensation expense	(169		)	(441		)	116
Energy efficiency preferences	(12,699		)	(8,636		)	(6,416		)
Foreign items and rate differential	56			(41		)	139
Redeemable non-controlling interests	1,101			70			1,579
Tax rate change	—			—			(13,948		)
Valuation allowance	205			641			424
Miscellaneous	(1,230		)	(788		)	(159		)
	$	(3,748	)	$	4,813		$	(4,791	)
Effective tax rate:
Federal statutory rate expense	21.0		%	21.0		%	35.0		%
State income taxes, net of federal benefit	5.9		%	7.2		%	5.5		%
Net state impact of deferred rate change	(0.1		)%	0.4		%	1.1		%
Non deductible expenses	0.4		%	2.3		%	5.1		%
Impact of reserve for uncertain tax positions	(2.5		)%	2.1		%	0.1		%
Stock-based compensation expense	(0.5		)%	(1.0		)%	0.4		%
Energy efficiency preferences	(34.7		)%	(20.4		)%	(22.3		)%
Foreign items and rate differential	0.2		%	(0.1		)%	0.5		%
Redeemable non-controlling interests	3.0		%	0.2		%	5.5		%
Tax rate change	—		%	—		%	(48.6		)%
Valuation allowance	0.6		%	1.5		%	1.5		%
Miscellaneous	(3.6		)%	(1.8		)%	(0.5		)%
	(10.3		)%	11.4		%	(16.7		)%

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:



	Year Ended December 31,
	2019			2018
Balance, beginning of year	$	1,600		$	600
Additions for current year tax positions	—			300
Additions for prior year tax positions	—			900
Settlements paid to tax authorities	—			—
Reductions of prior year tax positions	(1,200		)	(200		)
Balance, end of year	$	400		$	1,600

At December 31, 2019 and 2018, the Company had approximately $400 and $1,600, respectively, of total gross unrecognized tax benefits.

Of the total gross unrecognized tax benefits as of December 31, 2019 and 2018, $80 and $705, respectively, (both net of the federal benefit on state amounts) represent the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods.

At December 31, 2019 the Company had a federal net operating loss carryforwards of approximately $34,090 which has an indefinite life, state net operating loss carryforwards of approximately $45,260, which will expire from 2018 through 2034 and an interest deduction carryforward of approximately $19,659 which has an indefinite life. At December 31, 2019 the Company had Canadian net operating loss carryforwards of approximately $25,939, which will expire for tax years 2018 through 2028.

The Company does not accrue U.S. tax for foreign earnings that it considers to be permanently reinvested outside the United States. Consequently, the Company has not provided any withholding tax on the unremitted earnings of its foreign subsidiaries. As of December 31, 2019, the amount of earnings for which no repatriation tax has been provided is estimated to be $0.

At December 31, 2019 the company had a federal tax credit carryforward of approximately $35,024 which will expire at various times through 2039.

The tax years 2015 through 2019 remain open to examination by major taxing jurisdictions. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes. The (decrease) increase included in tax expense for the years end December 31, 2019, 2018 and 2017 was $19, $(50) and $60, respectively.