Priority Technology Holdings Inc

12. Income Taxes

Components of consolidated income tax (benefit) expense were as follows:

The Company's consolidated effective income tax rate was 118.3% for the year ended December 31, 2023, compared to a consolidated effective income tax rate of 167.2% for the year ended December 31, 2022. For the year ended December 31, 2021, the Company's consolidated effective income tax benefit rate was 135.9%. The effective rate for 2023 differed from the statutory rate of 21% primarily due to: 1)an increase in the valuation allowance against certain business interest carryover deferred tax assets. The effective rate for December 31, 2022 differed from the statutory federal rate of 21% primarily due to: 1) an increase in the valuation allowance against certain business interest carryover deferred tax assets; 2) non-deductible transaction costs incurred in the acquisition of Finxera; 3) the finalization of prior estimates on the sale of the assets of PRET's real estate services business impacting amounts attributable to noncontrolling partners; and 4) an increase in the tax basis of certain intangible assets resulting from a change in a subsidiary's entity status. The effective rate for December 31, 2021, differed from the statutory federal rate of 21% primarily due to earnings attributable to noncontrolling interests and valuation allowance changes against certain business interest carryover deferred tax assets.

The following table provides a reconciliation of the consolidated income tax (benefit) expense at the statutory U.S. federal tax rate to actual consolidated income tax (benefit) expense:

Deferred income taxes reflect the expected future tax consequences of temporary differences between the financial statement carrying amount of the Company's assets and liabilities, tax credits and their respective tax bases, and loss carry forwards. The significant components of consolidated deferred income taxes were as follows:

In accordance with the provisions of ASC 740, Income Taxes, the Company provides a valuation allowance against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The assessment considers all available positive and negative evidence and is measured quarterly. As of December 31, 2023 and 2022, the Company had a consolidated valuation allowance of approximately $19.4 million and $15.5 million, respectively, against certain deferred income tax assets related to business interest deduction carryovers and business combination costs that the Company believes are not more likely than not to be realized.

The Company recognizes the tax effects of uncertain tax positions only if such positions are more likely than not to be sustained based solely upon its technical merits at the reporting date. The Company refers to the difference between the tax benefit recognized in its financial statements and the tax benefit claimed in the income tax return as an "unrecognized tax benefit."A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

As of December 31, 2023 and 2022, the balance of unrecognized tax benefits that, if recognized, affect our effective tax rate was $0.0 million and $0.1 million, respectively. The Company continually evaluates the uncertain tax benefit associated with its uncertain tax positions. It is reasonably possible that the liability for uncertain tax benefits could decrease during the next 12 months by up to $0.1 million due to the expiration of statutes of limitations.

The Company is subject to U.S. federal income tax and income tax in multiple state jurisdictions. Tax periods for December 31, 2020 and all years thereafter remain open to examination by the federal and state taxing jurisdictions and tax periods for December 31, 2019 and all years thereafter remain open for certain state taxing jurisdictions to which the Company is subject.

At December 31, 2023 and December 31, 2022, the Company had state NOL carryforwards of approximately $17.9 million and $13.4 million, respectively, with expirations dates ranging from 2023 to 2043.

The Company has historically been impacted by the new interest deductibility rule under the Tax Act. This rule disallows interest expense to the extent it exceeds 30% of ATI, as defined. In March 2020, the CARES Act was enacted, which among other provisions, provides for the increase of the 163(j) ATI limitation from 30% to 50% for tax years 2019 and 2020. As of December 31, 2023, the Company had interest deduction limitation carryforwards of $78.1 million.