Ingevity Corp

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Note 17: Income Taxes

Domestic and foreign components of Income (loss) before income taxes are shown below:

The provision (benefit) for income taxes consisted of:

We recorded zero, $4.5 million, and $4.2 million of deferred tax provision (benefit) expense within components of other comprehensive income during the years ended December 31, 2023, 2022, and 2021, respectively.

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The following table summarizes the major differences between taxes computed at the U.S. federal statutory rate and the actual income tax provision attributable to operations:

(1) GILTI is defined as Global Intangible Low Tax Income

The increase in our effective tax rate from 2022 to 2023 was mainly driven by the mix of earnings, with U.S. losses, primarily due to the restructuring activities during the year (see Note 15), driving an overall global loss and tax benefit for the year. Furthermore, significant decline in U.S. taxable earnings drove a decrease in the foreign derived intangible income benefit as compared to prior years skewing the effective tax rate.

The decrease in our effective tax rate from 2021 to 2022 was primarily driven by the recognition of the UK'ssix percent legislative rate increase in 2021. During 2022, our effective tax rate benefited from reduced taxes at our China manufacturing plant associated with the purchases of our sustainably sourced raw material feedstock. This reduction was partially offset by an increase in foreign earnings deemed taxable in the U.S. mainly due to final U.S. foreign tax credit regulations modifying the definition of what foreign taxes qualify as creditable taxes, denying Brazilian taxes paid as qualifying taxes.

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The significant components of deferred tax assets and liabilities are as follows:

(1) Presentation in the table above is on a gross basis, however, due to jurisdictional netting, our net deferred tax asset and liability recorded on the consolidated balance sheets is $11.6 million and $70.9 million, respectively, as of December 31, 2023, and $5.7 million and $106.5 million, respectively, as of December 31, 2022.

Our net deferred tax liability decreased $41.5 million at December 31, 2023 as compared to December 31, 2022. As part of Tax Cuts and Jobs Act ("TCJA") enacted in December 2017 under Internal Revenue Code ("IRC") Section 174, beginning in 2022 we were required to capitalize and amortize research and experimental expenditures. This requirement continued to increase the deferred tax asset for 2023. Also as modified by TCJA, IRC Section 163(j) limits U.S. business interest expense deductions as a function of adjusted taxable income. In 2023 due to a reduction in taxable income, Ingevity was subject to these limitations creating a new deferred tax asset for 2023, labeled above as interest limitation. The increase in the LIFO reserve in 2023 flipped our 2022 deferred tax liability to a deferred tax asset in 2023. Further acceleration of book amortization on intangibles drove a decline in the overall deferred tax liability for the year.

We have deferred tax assets, including net operating loss and state tax credit carryforwards, which are available to offset future taxable income. A valuation allowance has been provided where management has determined that it is more likely than not that the deferred tax assets will not be realized. In 2023, we recognized tax expense of $1.3 million due to our expected inability to recognize the benefit associated with state tax credits prior to their expiration.

At December 31, 2023, foreign net operating loss carryforwards totaled $32.9 million; of this total, $0.1 million will expire in 1 year and $32.8 million has no expiration date.

Due to the global nature of our operations, a portion of our cash is held outside the U.S. The cash and cash equivalent balance at December 31, 2023 included $90.7 million held by our foreign subsidiaries. At December 31, 2023, 2022, and 2021, no deferred income taxes have been provided for our share of undistributed net earnings of foreign operations due to management’s intent to reinvest such amounts indefinitely. The determination of the amount of taxes that may be due if

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earnings are remitted is not practicable because such liability, if any, is dependent on circumstances that exist if and when remittance occurs. The circumstances that would affect the calculations include the source location and amount of the distribution, the underlying tax rate already paid on the earnings, foreign withholding taxes, the opportunity to use foreign tax credits, and the potential impact of future tax reform. Positive undistributed earnings considered to be indefinitely reinvested totaled $90.0 million at December 31, 2023.

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

(1) Included in "Other liabilities" on the consolidated balance sheet.

As of December 31, 2023, 2022, and 2021, $1.4 million, $0.9 million, and $0.4 million, respectively, of unrecognized tax benefit, including penalties and interest, would, if recognized, impact our effective tax rate. We recognize interest accrued related to unrecognized tax benefits and penalties as income tax expense.