Marcus & Millichap, 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, 2020

13.	Income Taxes

The components of income from continuing operations before provision for income taxes consisted of the following (in thousands):


	Years Ended December 31,
	2020			2019			2018
United States	$	62,206		$	112,425		$	119,446
Foreign		(2,842	)		(4,913	)		(2,226	)

	$	59,364		$	107,512		$	117,220

The provision for income taxes consisted of the following (in thousands):


	Years Ended December 31,
	2020		2019			2018
Federal:
Current	$	12,437	$	22,638		$	24,101
Deferred		310		665			(268	)

		12,747		23,303			23,833

State:
Current		3,616		7,718			6,004
Deferred		163		(507	)		162

		3,779		7,211			6,166

Foreign:
Current		—		—			—
Deferred		—		68			(36	)

		—		68			(36	)

	$	16,526	$	30,582		$	29,963

Significant components of the Company’s deferred tax assets, net consisted of the following (in thousands):


	December 31,
	2020			2019
Deferred Tax Assets:
Accrued expenses and bonuses	$	3,078		$	2,481
Bad debt and other reserves		4,889			2,744
Deferred compensation		12,536			13,346
Operating lease ROU assets, net		21,125			21,761
Stock-based compensation		7,403			7,847
Net operating and capital loss carryforwards		3,932			3,612
State taxes		(163	)		139
Amortizable intangibles and other		1,070			328

Deferred tax assets before valuation allowance		53,870			52,258
Valuation allowance		(4,418	)		(3,921	)

Deferred Tax Assets		49,452			48,337

Deferred Tax Liabilities:
Fixed assets		(6,814	)		(4,422	)
Operating lease liabilities		(19,357	)		(20,117	)
Prepaid expenses		(533	)		(940	)
Other comprehensive income		(800	)		(552	)
Goodwill and other		(574	)		(184	)

Deferred Tax Liabilities		(28,078	)		(26,215	)

Deferred Tax Assets, Net	$	21,374		$	22,122

As of December 31, 2020, and 2019, the Company had state and Canadian net operating loss carryforwards of approximately $15.4 million and $14.0 million, respectively, principally all of which will begin to expire in 2033.

A valuation allowance is required when it is more-likely-than not that all or a portion of a deferred tax asset will not be realized. Realization of a deferred tax asset is dependent upon taxable income in prior carryback years, estimates of future taxable income, tax planning strategies and reversals of existing taxable temporary differences. The Company determined that as of December 31, 2020 and 2019, $4.4 million and $3.9 million, respectively, of the deferred tax assets related to state and Canadian losses do not satisfy the recognition criteria. The Company has therefore recorded a valuation allowance for this amount. The valuation allowance for deferred tax assets was increased by $497,000, $1.4 million and $677,000 during 2020, 2019 and 2018, respectively. The increases are primarily related to the Company’s Canadian operations.

The provision for income taxes differs from the amount computed by applying the statutory federal corporate income tax rate to income before provision for income taxes and consisted of the following (dollars in thousands):


	Years Ended December 31,
	2020					2019						2018
	Amount		Rate			Amount			Rate			Amount			Rate
Income tax expense at the federal statutory rate	$	12,466		21.0	%	$	22,578			21.0	%	$	24,616			21.0	%
State income tax expense, net of federal benefit		2,983		5.0	%		5,698			5.3	%		4,550			3.9	%
Windfall tax benefits, net related to stock-based compensation		240		0.4	%		(196	)		(0.2	)%		(1,535	)		(1.3	)%
Change in valuation allowance		497		0.8	%		1,351			1.3	%		677			0.6	%
Permanent and other items (1)		340		0.6	%		1,151			1.0	%		1,655			1.4	%

	$	16,526		27.8	%	$	30,582			28.4	%	$	29,963			25.6	%

(1)	Permanent items relate principally to compensation charges, qualified transportation fringe benefits, reversal of uncertain tax positions and meals and entertainment.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits consisted of the following (in thousands):


	Years Ended December 31,
	2020			2019			2018
Beginning balance	$	775		$	1,246		$	—
Gross increase (decrease) as a result of positions taken:
Prior periods		—			—			1,246
Current period		—			—			—
Settlement with tax authorities		—			—			—
Expiration of applicable statutes of limitation		(720	)		(471	)		—

Ending balance	$	55		$	775		$	1,246

It is reasonably possible that the unrecognized tax benefits balance may decrease by $55,000 during the next 12 months due to the expiration of the statute of limitations. During the years ended December 31, 2020 and 2019, penalties of $13,000 and $136,000, respectively, were recorded relating to unrecognized tax benefits.

The Company is subject to tax in various jurisdictions and, as a matter of ordinary course, the Company may be subject to income tax examinations by the federal, state and foreign taxing authorities for the tax years 2016 to 2020.

The Company is not currently under income tax examination by any taxing authority.

The Company has not provided for U.S. taxes on unremitted earnings of its foreign subsidiary as this subsidiary is operating at a loss and has no earnings and profits to remit. As a result, deferred taxes were not provided related to the cumulative translation adjustments.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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