16. INCOME TAXES

For the years ended December 31, 2020 and 2019, the Company estimated its income tax provision based upon the annual pre-tax loss. Although the Company is forecasting a return to profitability, it incurred cumulative losses which make realization of a deferred tax asset difficult to support in accordance with ASC 740. Accordingly, a valuation allowance has been recorded against all federal and state deferred tax assets as of December 31, 2020 and December 31, 2019, with the exception of a net deferred tax liability relating to the amortization of intangibles for tax purposes.

As of December 31, 2017, the accumulated undistributed earnings and profits (“E&P”) of our foreign affiliates became taxable in the U.S. under Section 965. This accumulated foreign E&P was absorbed against our U.S. net operating losses and, hence, no transition tax was paid. From January 1, 2018 forward, the annual adjusted earnings and profits of our foreign affiliates pass through to the U.S. as federal and state taxable income under the Global Intangible Low-Taxed Income (“GILTI”) regime - passed as part of the 2017 Tax Cuts & Jobs Act. For the tax years ended December 31, 2020 and 2019, the net GILTI from our foreign affiliates was absorbed against our current year U.S. consolidated loss. For state tax purposes, the Company’s foreign earnings may be taxable depending on each individual state’s legislative stance on the recent tax reform legislation. The activity in the deferred tax valuation allowance was as follows for the years ended December 31, 2020 and 2019:

The adjustments/true-ups for 2019 primarily represent the deferred tax effect of the Company’s adoption of ASC 606. Accordingly, additional valuation allowances needed to be provided. Since a full valuation allowance is recorded on the Company’s deferred tax assets, there was no effect on the Company’s consolidated balance sheet.

The loss before tax for financial reporting purposes during the years ended December 31, 2020 and 2019 consisted of the following:

The provision for income taxes for the years ended December 31, 2020 and 2019 consisted of the following:

The components of the Company’s deferred income taxes as of December 31, 2020 and 2019 are as follows:

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss carryforwards. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years.

The Company has recorded goodwill as a result of its acquisitions. Goodwill is generally not amortized for financial reporting purposes. For tax purposes, goodwill from asset acquisitions is tax deductible and amortized over 15 years. As such, deferred income tax expense and a deferred tax liability arise as a result of the tax-deductibility of this indefinitely lived asset (also known as a naked credit). The resulting deferred tax liability, which is expected to continue to increase over the amortization period, will have an indefinite life. As a result of the Company incurring tax losses for 2020 and 2019 which have an indefinite life under the recent tax reform legislation, the federal deferred tax liability resulting from the amortization of goodwill was offset against these indefinite federal operating net loss deferred tax assets to the extent allowable. This resulted in a deferred tax benefit of approximately $84,000 in 2020. The remaining deferred tax liability could remain on the Company’s consolidated balance sheet indefinitely unless there is an impairment of goodwill (for financial reporting purposes) or a portion of the business is sold.

Due to the fact that the aforementioned deferred tax liability could have an indefinite life, it is not netted against the Company’s deferred tax assets when determining the required valuation allowance in accordance with ASC 740 guidelines. Doing so would result in the understatement of the valuation allowance and related deferred income tax expense.

A reconciliation of the federal statutory income tax rate (21%) for 2020 and 2019 to the Company’s effective income tax rate (determined in dollars) for the years ended December 31, 2020 and 2019 is as follows:

At December 31, 2020 and 2019, the Company did not record any uncertain tax positions based on the technical merits. Therefore, a tabular roll forward was excluded and there has been no accrued interest and penalties. The Company is subject to taxation in the United States, various states, Pakistan and Sri Lanka. As of December 31, 2020, tax years 2017 through 2019 remain open to examination in the United States by major taxing jurisdictions in which the Company is subject to tax. The Pakistan Federal Board of Revenue issued a tax holiday, which precludes the Pakistan subsidiary from being subject to income taxes through June 2025. It is the Company’s policy that any assessed penalties and interest on uncertain tax positions would be charged to income tax expense.

The Pakistan tax holiday does not have a significant impact on the Company’s effective tax rate as all of its earnings in Pakistan have been fully included in the U.S. federal tax rate of 21% for 2020 and 2019. The Pakistan statutory corporate tax rate is 29% before consideration of the aforementioned tax holiday.

As of December 31, 2020, the Company has a total federal NOL carry forward of approximately $270.9 million of which approximately $198.8 million will expire between 2029 and 2037, and the balance of approximately $72.1 million has an indefinite life. Out of the total federal NOL carry forward, approximately $237.6 million is from the CareCloud and Meridian acquisitions and is subject to the federal Section 382 NOL annual usage limitations. The Company has state NOL carry forwards of approximately $161.0 million, of which $85.8 million relates to the State of New Jersey. These NOLs expire between 2034 and 2040.

The Company has a full valuation allowance on its deferred tax assets in the U.S. which results in there being no U.S. deferred tax assets or liabilities recorded on the consolidated balances sheet, other than the deferred tax liability related to the amortization of goodwill.

The Appropriations Act was signed into law on December 27, 2020 and contains many tax-related provisions. Some of the more notable provisions are (1) clarifying the tax treatment of expenses paid with Paycheck Protection Program (PPP) loan proceeds, (2) temporarily providing for a 100% deduction of business meal expenses, (3) modifying the Employee Retention Tax Credit previously enacted under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), (4) extending the repayment period of certain deferred payroll taxes, and (5) extending the tax credits available to employers under the Families First Coronavirus Response Act (FFCRA) and Section 45S of the Internal Revenue Code of 1986, as amended (the Code) for employer-paid family and medical leave. The Company believes these new provisions will not have a significant impact on the consolidated financial statements.