Income Taxes
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the U.S. tax code by, among other items, reducing the federal corporate tax rate from its highest rate of 35% to a single rate of 21%, providing for the full expensing of certain depreciable property, limiting the deductibility of interest expense, further limiting the deductibility of certain executive compensation, and limiting the use of net operating loss carryforwards created in tax years beginning after December 31, 2017.
Generally accepted accounting principles require companies to record the impact of the Tax Act in their financial statements for the period during which the Tax Act becomes law, even if provisions of the Tax Act become effective at a future date. The Securities and Exchange Commission (“SEC”) staff recently issued Staff Accounting Bulletin (“SAB”) 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, which provides guidance on accounting for the effects and includes a measurement period that ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting of the Tax Act which cannot extend beyond one year. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740, Income Taxes, is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
The Company’s accounting for the following elements of the Tax Act are complete. However, these estimates may be affected by additional analysis and are subject to change due to a variety of factors, including, among others: (i) management’s further assessment of the Tax Act and related regulatory guidance; (ii) further guidance that may be issued by the Treasury, Financial Accounting Standards Board, SEC, Internal Revenue Service, or state, local or other taxing authorities; and (iii) actions the Company may take as a result of the Tax Act.
Re-measurement of Net Deferred Tax Liability: As a result of the Company’s net deferred tax liability position, a one-time income tax benefit of $2.5 million for the year ended December 31, 2017 was recorded as a result of the reduction in the federal corporate tax rate.
Cost Recovery: The Company has completed a full analysis of its 2017 capital expenditures that qualify for immediate expensing and has recorded a benefit for bonus depreciation that resulted in a decrease of approximately $140,000 to current income taxes and a corresponding increase in our deferred tax liabilities (after considering the effects of the reduction in the federal corporate tax rate). The full expensing was only effective for certain depreciable property placed in service after September 27, 2017.
The Company believes the impact of certain provisions in the Tax Act, such as the limitation on interest expense deductibility, the limitation on the deductibility of certain executive compensation and net operating loss carryforwards will be immaterial.
The following table presents the income tax provision from continuing operations for the years ended December 31 as indicated:
|
| | | | | | | |
| 2017 | | 2016 |
Current | | | |
Federal | $ | 3,863,151 |
| | $ | 6,157,900 |
|
State | 558,993 |
| | 1,014,213 |
|
| 4,422,144 |
| | 7,172,113 |
|
Deferred | | | |
Federal | (3,270,928 | ) | | 570,770 |
|
State | (115,219 | ) | | 66,885 |
|
| (3,386,147 | ) | | 637,655 |
|
Total | $ | 1,035,997 |
| | $ | 7,809,768 |
|
The following table presents the total income tax provision for the years ended December 31 as indicated:
|
| | | | | | | |
| 2017 | | 2016 |
Income tax provision | $ | 1,035,997 |
| | $ | 7,809,768 |
|
Discontinued operations | (164,235 | ) | | (66,077 | ) |
Total | $ | 871,762 |
| | $ | 7,743,691 |
|
The following table presents the temporary differences and carryforwards, which give rise to deferred tax assets and liabilities as of December 31 as indicated:
|
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets | | | |
Accrued vacation | $ | 113,893 |
| | $ | 146,215 |
|
Acquisition costs capitalized | 58,886 |
| | 98,484 |
|
Accrued remediation costs | 130,168 |
| | 80,100 |
|
Accrued payables | 174,674 |
| | 122,235 |
|
Percentage completed contract method for tax | 276,413 |
| | — |
|
Accrued workers’ compensation | 159,237 |
| | 127,033 |
|
Capitalized bidding costs | 121,227 |
| | 8,846 |
|
Inventory adjustments | 139,565 |
| | 133,991 |
|
Accrued lease expense | 17,902 |
| | 32,683 |
|
Accrued contract losses | 50,220 |
| | 89 |
|
Other | 4,103 |
| | 5,214 |
|
Total deferred tax assets | 1,246,288 |
| | 754,890 |
|
Deferred tax liabilities | | | |
Tax amortization in excess of financial statement amortization | (10,850 | ) | | (12,156 | ) |
Tax depreciation in excess of financial statement depreciation | (5,934,158 | ) | | (8,947,058 | ) |
Total deferred tax liabilities | (5,945,008 | ) | | (8,959,214 | ) |
Total net deferred tax liabilities | $ | (4,698,720 | ) | | $ | (8,204,324 | ) |
As of December 31, 2017, the non-current deferred tax liabilities decreased to $4.7 million from $8.2 million as of December 31, 2016 due to the re-measurement of the Company’s net deferred tax liability position at the new tax rate of 21% under the Tax Act.
The carrying amounts of deferred tax assets are reduced by a valuation allowance, if based on the available evidence, it is more likely than not such assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the deferred tax assets are expected to be recovered or settled. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability and tax planning alternatives. If the Company determines it will not be able to realize all or part of the deferred tax assets, a valuation allowance would be recorded to reduce deferred tax assets to the amount that is more likely than not to be realized.
Based on assumptions with respect to forecasts of future taxable income and tax planning strategies, among others, the Company anticipates being able to generate sufficient taxable income to utilize the deferred tax assets. Therefore, the Company has not recorded a valuation allowance against deferred tax assets. The minimum amount of future taxable income required to be generated to fully realize the deferred tax assets, applying the new Tax Act federal rate of 21%, as of December 31, 2017 is approximately $5.0 million.
The following table presents the differences between the Company’s effective income tax rate and the federal statutory rate on income from continuing operations for the years ended December 31 as indicated:
|
| | | |
| 2017 | | 2016 |
Federal statutory rate | 34.0% | | 35.0% |
State tax rate, net of federal tax | 3.1 | | 3.3 |
Nondeductible expenses | 3.6 | | 1.6 |
Domestic production activities deduction | (4.0) | | (3.2) |
Tax Act rate change | (26.0) | | — |
Other | 0.1 | | 0.6 |
Total | 10.8% | | 37.3% |
The Company had gross unrecognized tax benefits of $5,000 as of both December 31, 2017 and 2016. The Company believes that it is reasonably possible that the liability for unrecognized tax benefits related to certain state income tax matters may be settled within the next twelve months. The federal statute of limitation has expired for tax years prior to 2014 and relevant state statutes vary. The Company is currently not under any income tax audits or examinations and does not expect the assessment of any significant additional tax in excess of amounts provided.
The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years as indicated:
|
| | | | | | | |
| 2017 | | 2016 |
Balance as of January 1 | $ | 4,723 |
| | $ | 4,723 |
|
Increase from current year tax positions | — |
| | — |
|
Decrease from settlements with taxing authority | — |
| | — |
|
Balance as of December 31 | $ | 4,723 |
| | $ | 4,723 |
|
The Company accrues interest and penalties related to unrecognized tax benefits as interest expense and other general and administrative expenses, respectively, and not as a component of income taxes. Decreases in interest and penalties are due to settlements with taxing authorities and expiration of statutes of limitation. During the years ended December 31, 2017 and 2016, the Company recognized $1,000 each year in interest and penalties. The Company had accrued as a current liability $9,000 and $8,000 for the future payment of interest and penalties as of December 31, 2017 and 2016, respectively.