Income Taxes

12 Months Ended

Dec. 31, 2022

7. INCOME TAXES

The Company is, or has been, subject to federal, state and local income taxes in the U.S., as well as income taxes in Canada, Mexico and other foreign jurisdictions. The domestic (U.S.) and foreign components of the Company's income (loss) before income taxes were as follows:


	Year Ended December 31,
(in millions)	2022		2021		2020
Domestic (U.S.)	$	410.3	$	173.9	$	30.8
Foreign	21.6		23.6		12.2
Income (loss) before income taxes	$	431.9	$	197.5	$	43.0

Income tax expense (benefit) on the Consolidated Statements of Operations consisted of the following:


	Year Ended December 31,
(in millions)	2022		2021		2020
Current Provision:
U.S. Federal	$	53.6	$	32.7	$	4.7
U.S. State	17.6		8.5		3.9
Foreign	5.7		2.5		2.0
Total current income tax expense	$	76.9	$	43.7	$	10.6

Deferred, net:
U.S. Federal	$	13.8	$	3.9	$	(2.6)
U.S. State	3.2		1.5		(0.4)
Foreign	0.1		3.8		1.2
Total deferred, net	$	17.1	$	9.2	$	(1.8)
Provision for income tax expense	$	94.0	$	52.9	$	8.8

Reconciliation between the federal statutory rate and the effective tax rate is as follows (see Note 8, Related Party Transactions, for additional information related to the Tax Receivable Agreement ("TRA")):


	Year Ended December 31,
(in millions)	2022			2021			2020
Income (loss) before income taxes	$	431.9		$	197.5		$	43.0
Statutory U.S. income tax rate	21.0		%	21.0		%	21.0		%
Tax expense (benefit) using statutory U.S. income tax rate	$	90.7		$	41.5		$	9.0
Foreign income tax rate differential	1.2			1.3			0.6
State tax (net of federal benefit)	17.1			8.8			2.6
Non-deductible expenses	10.3			3.5			2.3
Global Intangible Low Taxed Income	—			1.8			(1.5)
Foreign-Derived Intangible Income	(1.6)			(1.5)			—
TRA	—			—			(3.7)
Tax credits	(1.9)			(2.8)			(1.9)


Impact of CARES Act	—			—			(2.4)
Stock compensation vesting	(14.4)			(1.0)			2.1
Sale of foreign subsidiary	(26.1)			—			—
Change in valuation allowance - U.S. Federal	16.9			—			—
Change in valuation allowance - Foreign	0.1			0.2			—

Foreign taxes	1.3			1.2			1.6

Other	0.4			(0.1)			0.1
Income tax provision	$	94.0		$	52.9		$	8.8
Effective income tax rate	21.8		%	26.8		%	20.5		%

The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was signed into law on March 27, 2020 and makes significant economic stimulus changes and additional changes to the U.S. tax code, including, but not limited to, allowing the carryback of net operating losses ("NOLs" or "NOL") occurring in 2018, 2019 and 2020 to the prior five years and eliminating the taxable income limitation, changes to the interest expense limitation, a technical correction for qualified improvement property depreciation and providing additional employee retention credits.

Components of deferred income tax assets and liabilities were as follows:


	As of December 31,
	2022				2021
(in millions)	U.S.		Non-U.S.		U.S.		Non-U.S.
Deferred income tax assets:
Accrued compensation	$	39.4	$	—	$	41.8	$	0.0
Finance leases	7.4		—		8.9		9.4

Lease obligations	83.2		4.4		91.2		15.6


Net operating losses and credit carryforwards	22.0		1.3		23.7		1.1
Capital loss carryforward	19.8		—		—		—
Allowance for credit losses	7.0		0.2		9.5		0.2
Other	4.3		2.0		5.4		1.0
Gross deferred income tax assets	183.1		7.9		180.5		27.3
Less valuation allowance	(19.9)		(1.1)		(0.1)		(1.1)
Total deferred tax asset	$	163.2	$	6.8	$	180.4	$	26.2


	As of December 31,
	2022				2021
(in millions)	U.S.		Non-U.S.		U.S.		Non-U.S.
Deferred income tax liabilities:
Property and equipment, net	$	(21.5)	$	—	$	(20.1)	$	(8.4)
Lease assets	(77.1)		(4.4)		(84.6)		(14.9)
Inventory reserve	(25.4)		—		(20.5)		—



Other	(12.6)		—		(11.0)		—
Total deferred tax liability	$	(136.6)	$	(4.4)	$	(136.2)	$	(23.3)
Net deferred income tax asset	$	26.6	$	2.4	$	44.2	$	2.9

Deferred income tax asset valuation allowance is as follows:


(in millions)	U.S.		Non-U.S.		Total
Balance at December 31, 2020	$	1.3	$	1.0	$	2.3
Additions	—		0.2		0.2
Subtractions	(1.2)		—		(1.2)
Currency translation adjustments	—		(0.1)		(0.1)
Balance at December 31, 2021	0.1		1.1		1.2
Additions	19.8		0.1		19.9
Subtractions	0.0		—		0.0
Currency translation adjustments	—		(0.1)		(0.1)
Balance at December 31, 2022	$	19.9	$	1.1	$	21.0

The Merger resulted in a significant change in the ownership of the Company, which, pursuant to the Internal Revenue Code Section 382, imposes annual limits on the Company's ability to utilize its U.S. federal and state NOL carryforwards. The Company's NOLs will continue to be available to offset taxable income (until such NOLs are either utilized or expire) subject to the Section 382 annual limitation. If the annual limitation amount is not fully utilized in a particular tax year, then the unused portion from that particular tax year will be added to the annual limitation in subsequent years.

In connection with the sale of the Company's Canadian operations in 2022, Veritiv generated a capital loss of approximately $98.5 million. The capital loss generated was partially offset by capital gains generated by the Company during the current and prior years. As of December 31, 2022, Veritiv does not expect to generate any additional capital gains before the capital loss expires and, therefore, has recorded a full valuation allowance on the remaining carryforward. To the extent additional capital gains are generated during the remaining carryforward period, the tax benefits relating to the reversal of any or all of the valuation allowance will be recognized as a benefit to income tax expense.

In general, it is the practice and intention of Veritiv to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of December 31, 2022, Veritiv's tax basis exceeded its financial reporting basis in certain investments in non-U.S. subsidiaries. The Company does not believe these temporary differences will reverse in the foreseeable future and, therefore, no deferred tax asset has been recognized with respect to these basis differences. Additionally, no deferred tax liability has been recognized for income and withholding tax liabilities associated with investments in non-U.S. subsidiaries where book basis exceeds tax basis. The amount of such temporary differences totaled approximately $33.9 million as of December 31, 2022. The income and withholding tax liability associated with these temporary differences was not significant.

Veritiv applies a "more likely than not" threshold to the recognition and de-recognition of uncertain tax positions. A change in judgment related to prior years' uncertain tax positions is recognized in the period of such change.

The Company accrues interest and penalties, if incurred, on unrecognized tax benefits as a component of income tax expense. Total gross unrecognized tax benefits as of December 31, 2022, 2021 and 2020, as well as activity within each of the years, was not material.

In the U.S., Veritiv is generally subject to examination by the IRS for fiscal years 2016 and later and certain states for fiscal years 2018 and later; however, it may be subject to IRS and state tax authority adjustments for years prior to 2016 to the extent of losses or other tax attributes carrying forward from the earlier years.

As of December 31, 2022, Veritiv has federal, state and foreign income tax NOLs available to offset future taxable income of $89.9 million, $54.3 million and $5.0 million, respectively. Federal NOLs begin expiring in 2024. State and foreign NOLs will expire at various dates from 2023 through 2042, with the exception of certain foreign NOLs that do not expire, some of which have a full valuation allowance.

- 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.

+ References

Reference 1: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section 50
-Paragraph 21
-URI https://asc.fasb.org/extlink&oid=121826272&loc=d3e32857-109319

Reference 2: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section S99
-Paragraph 2
-Subparagraph (SAB Topic 11.C)
-URI https://asc.fasb.org/extlink&oid=122134291&loc=d3e330215-122817

Reference 3: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section 50
-Paragraph 17
-Subparagraph (b)
-URI https://asc.fasb.org/extlink&oid=121826272&loc=d3e32809-109319

Reference 4: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section S99
-Paragraph 1
-Subparagraph (SAB TOPIC 6.I.5.Q1)
-URI https://asc.fasb.org/extlink&oid=122134291&loc=d3e330036-122817

Reference 5: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section 50
-Paragraph 14
-URI https://asc.fasb.org/extlink&oid=121826272&loc=d3e32705-109319

Reference 6: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 270
-Section 50
-Paragraph 1
-URI https://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338

Reference 7: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-URI https://asc.fasb.org/topic&trid=2144680

Reference 8: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 30
-Section 50
-Paragraph 2
-Subparagraph (a)
-URI https://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331

Reference 9: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 235
-SubTopic 10
-Section S99
-Paragraph 1
-Subparagraph (SX 210.4-08(h)(2))
-URI https://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690

+ Details

Veritiv Corp 10-K