Income taxes
The provision (benefit) for income taxes from continuing operations consists of the following (in thousands):
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| | | | | | | | | | | |
|
2017 | Current | | Deferred | | Total |
Federal | $ | 81,355 |
| | $ | (214,539 | ) | | $ | (133,184 | ) |
State and other | 7,981 |
| | (12,043 | ) | | (4,062 | ) |
Total | $ | 89,336 |
| | $ | (226,582 | ) | | $ | (137,246 | ) |
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| | | | | | | | | | | |
|
2016 | Current | | Deferred | | Total |
Federal | $ | 155,558 |
| | $ | (4,323 | ) | | $ | 151,235 |
|
State and other | 5,792 |
| | (16,856 | ) | | (11,064 | ) |
Total | $ | 161,350 |
| | $ | (21,179 | ) | | $ | 140,171 |
|
|
| | | | | | | | | | | |
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2015 | Current | | Deferred | | Total |
Federal | $ | 72,291 |
| | $ | 47,547 |
| | $ | 119,838 |
|
State and other | 3,984 |
| | (7,762 | ) | | (3,778 | ) |
Total | $ | 76,275 |
| | $ | 39,785 |
| | $ | 116,060 |
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Income from continuing operations before income taxes attributable to TEGNA Inc. consists entirely of domestic income.
The provision for income taxes varies from the U.S. federal statutory tax rate as a result of the following differences:
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| | | | | |
| 2017 | | 2016 | | 2015 |
U.S. statutory tax rate | 35.0% | | 35.0% | | 35.0% |
Increase (decrease) in taxes resulting from: | | | | | |
State taxes (net of federal income tax benefit) | 2.4 | | 2.4 | | 2.5 |
Domestic manufacturing deduction | (3.0) | | (3.3) | | (2.1) |
Uncertain tax positions, settlements and lapse of statutes of limitations | (0.9) | | (0.5) | | 0.6 |
Net deferred tax write offs and deferred tax rate adjustments | (6.3) | | (2.4) | | (3.6) |
Enactment of the Tax Cuts and Jobs Act | (70.9) | | — | | — |
Non-deductible transactions costs | 1.2 | | 0.8 | | 1.0 |
Non-deductible goodwill | — | | — | | 0.7 |
Net excess benefits on share-based payments | (0.4) | | (1.4) | | — |
Other, net | (1.3) | | 0.6 | | (0.5) |
Effective tax rate | (44.2%) | | 31.2% | | 33.6% |
Deferred income taxes reflect temporary differences in the recognition of revenue and expense for tax reporting and financial statement purposes. Deferred tax liabilities and assets are adjusted for changes in tax laws or tax rates of the various tax jurisdictions as of the enacted date. The federal tax rate used to calculate deferred tax liabilities and assets as of December 31, 2016 was 35%. Pub. L. No. 115-97, commonly referred to as the Tax Cuts and Jobs Act or the Act, was enacted into law as of December 22, 2017. Among other provisions, the Act reduced the federal tax rate to 21% effective for us as of January 1, 2018. The December 31, 2017 deferred tax assets and liabilities were recorded using the 21% tax rate.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Act. The accounting is expected to be complete when the 2017 U.S. federal and state corporate income tax returns are filed in late 2018.
Deferred tax liabilities and assets were composed of the following at the end of December 31, 2017 and December 31, 2016 (in thousands):
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| | | | | | | |
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| Dec. 31, 2017 | | Dec. 31, 2016 |
Liabilities | | | |
Accelerated depreciation | $ | 40,568 |
| | $ | 79,986 |
|
Accelerated amortization of deductible intangibles | 420,301 |
| | 658,651 |
|
Partnership investments including impairments | — |
| | 40,907 |
|
Other | 5,255 |
| | 3,924 |
|
Total deferred tax liabilities | 466,124 |
| | 783,468 |
|
Assets | | | |
Accrued compensation costs | 15,133 |
| | 31,929 |
|
Pension and postretirement medical and life | 39,769 |
| | 78,318 |
|
Loss carryforwards | 132,214 |
| | 197,812 |
|
Other | 33,116 |
| | 36,428 |
|
Total deferred tax assets | 220,232 |
| | 344,487 |
|
Valuation allowance | 136,418 |
| | 209,939 |
|
Total net deferred tax (liabilities) | $ | (382,310 | ) | | $ | (648,920 | ) |
As of December 31, 2017, we had approximately $488.8 million of capital loss carryforwards for federal and state purposes which can only be utilized to the extent capital gains are recognized. Losses of $361.5 million will expire if not used prior to 2020, while the remaining losses will expire if not used prior to 2023. As of December 31, 2017, we also had approximately $22.7 million of state net operating loss carryovers that, if not utilized, will expire in various amounts beginning in 2018 through 2037.
Included in total deferred tax assets are valuation allowances of approximately $136.4 million as of December 31, 2017 and $209.9 million as of December 31, 2016, primarily related to federal and state capital losses and state net operating losses available for carry forward to future years. This $73.5 million change in the valuation allowance was the result of: a $40.2 million increase primarily due to the generation of additional capital loss deferred tax assets for which a valuation allowance was needed; a $42.9 million decrease as the result of the removal of CareerBuilder, LLC deferred tax assets from our balance sheet; and a $70.8 million decrease due to the revaluation of deferred tax assets to reflect the Act’s reduced 21% U.S. federal tax rate. If, in the future, we believe that it is more-likely-than-not that these deferred tax benefits will be realized, the valuation allowances will be reversed in the Consolidated Statement of Income.
Realization of deferred tax assets for which valuation allowances have not been established is dependent upon generating sufficient future taxable income. We expect to realize the benefit of these deferred tax assets through future reversals of our deferred tax liabilities, through the recognition of taxable income in the allowable carryback and carryforward periods, and through implementation of future tax planning strategies. Although realization is not assured, we believe it is more likely than not that all deferred tax assets for which valuation allowances have not been established will be realized.
Tax Matters Agreements
Prior to the May 31, 2017 spin-off of the Cars.com business and the June 29, 2015 spin-off of our publishing businesses, we entered into a Tax Matters Agreement with each of Cars.com Inc. and Gannett Co. Inc. that governs each company’s respective rights, responsibilities, and obligations with respect to tax liabilities and benefits, tax attributes, tax contests and other matters regarding income taxes, non-income taxes and related tax returns. Each agreement provides that we will generally indemnify the spun-off business (Cars.com Inc. or Gannett Co. Inc. as applicable) against taxes attributable to assets or operations for all tax periods or portions thereof prior to the spin-off date including separately-filed U.S. federal, state, and foreign taxes.
Uncertain Tax Positions
The following table summarizes the activity related to unrecognized tax benefits, excluding the federal tax benefit of state tax deductions (in thousands):
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| | | | | | | | | | | |
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| 2017 | | 2016 | | 2015 |
Change in unrecognized tax benefits | | | | | |
Balance at beginning of year | $ | 17,300 |
| | $ | 19,491 |
| | $ | 58,886 |
|
Additions based on tax positions related to the current year | 156 |
| | 213 |
| | 6,095 |
|
Additions for tax positions of prior years | 11 |
| | 162 |
| | 853 |
|
Reductions for tax positions of prior years | (636 | ) | | (1,214 | ) | | (24,858 | ) |
Settlements | (852 | ) | | — |
| | — |
|
Reductions for transfers to Gannett Co., Inc. | — |
| | — |
| | (18,804 | ) |
Reductions due to lapse of statutes of limitations | (936 | ) | | (1,352 | ) | | (2,681 | ) |
Balance at end of year | $ | 15,043 |
| | $ | 17,300 |
| | $ | 19,491 |
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The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $10.7 million as of December 31, 2017, and $10.8 million as of December 31, 2016. This amount includes the federal tax benefit of state tax deductions.
We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. We also recognize interest income attributable to overpayment of income taxes and from the reversal of interest expense previously recorded for uncertain tax positions which are subsequently released as a component of income tax expense. We recognized income from interest for uncertain tax positions of $0.3 million in 2017 while recording expense of $0.7 million in 2016 and income of $0.4 million in 2015. The amount of accrued interest expense and penalties payable related to unrecognized tax benefits was $1.6 million as of December 31, 2017 and $1.5 million as of December 31, 2016.
We file income tax returns in the U.S. and various state jurisdictions. The 2013 through 2017 tax years remain subject to examination by the Internal Revenue Service and state authorities. Tax years before 2013 remain subject to examination by certain states due to ongoing audits.
It is reasonably possible that the amount of unrecognized benefit with respect to certain of our unrecognized tax positions will increase or decrease within the next 12 months. These changes may be the result of settlement of ongoing audits, lapses of statutes of limitations or other regulatory developments. At this time, we estimate the amount of our gross unrecognized tax positions may decrease by up to approximately $3.9 million within the next 12 months primarily due to lapses of statutes of limitations and settlement of ongoing audits in various jurisdictions.