FEDERAL AND STATE INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the provision for income taxes for the years ended November 30, are as follows (in thousands):
|
| | | | | | | | | | | | |
| | 2015 | | 2016 | | 2017 |
Current tax expense (benefit): | | | | | | |
Federal | | $ | 46,095 |
| | $ | (27,061 | ) | | $ | 6,888 |
|
State | | 3,891 |
| | 1,856 |
| | 1,440 |
|
Deferred tax expense (benefit): | | | | | | |
Federal | | (15,164 | ) | | 70,186 |
| | (10,912 | ) |
State | | (514 | ) | | 2,750 |
| | (3,041 | ) |
Provision (benefit) for income taxes | | $ | 34,308 |
| | $ | 47,731 |
| | $ | (5,625 | ) |
The reconciliation of income tax expense (benefit) computed at the federal statutory tax rates to income tax expense (benefit) for the years ended November 30, is as follows (percent of pre-tax income):
|
| | | | | | | | | |
| | 2015 | | 2016 | | 2017 |
Income tax computed at federal statutory rates | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal tax benefit | | 2.5 |
| | 3.2 |
| | 3.2 |
|
Investment in MA | | — |
| | — |
| | (43.8 | ) |
Other, net | | 0.2 |
| | 0.3 |
| | 0.3 |
|
Effective income tax rate | | 37.7 | % | | 38.5 | % | | (5.3 | )% |
The principal causes of the decreased effective income tax rate, as compared to the statutory income tax rate, for the fiscal years ended November 30, 2015 and 2016 is due to reductions in certain state tax rates. The principal cause of the decreased effective income tax rate, as compared to the statutory income tax rate, for the fiscal year ended November 30, 2017 is due to a non-recurring tax benefit associated with the worthlessness of our investment in Motorsports Authentics, Inc. ("MA"), discussed below.
The components of the net deferred tax assets (liabilities) at November 30, are as follows (in thousands):
|
| | | | | | | | |
| | 2016 | | 2017 |
Loss carryforwards | | $ | 15,477 |
| | $ | 13,739 |
|
Deferred revenues | | 1,529 |
| | 1,249 |
|
Accruals | | 2,946 |
| | 2,251 |
|
Compensation related | | 4,065 |
| | 3,294 |
|
Interest | | 2,740 |
| | 2,084 |
|
Equity investment | | — |
| | 860 |
|
Deferred tax assets | | 26,757 |
| | 23,477 |
|
Valuation allowance | | (7,031 | ) | | (2,116 | ) |
Deferred tax assets, net of valuation allowance | | 19,726 |
| | 21,361 |
|
Amortization and depreciation | | (428,828 | ) | | (417,127 | ) |
Equity investment | | (180 | ) | | — |
|
Other | | (303 | ) | | (280 | ) |
Deferred tax liabilities | | (429,311 | ) | | (417,407 | ) |
Net deferred tax liabilities | | $ | (409,585 | ) | | $ | (396,046 | ) |
At November 30, 2017 the Company has deferred tax assets related to various state loss carryforwards totaling approximately $13.7 million that expire in varying amounts beginning in fiscal 2019. The valuation allowance at November 30, 2016 and 2017 was primarily related to state loss carryforwards that, in the judgment of management, are more likely than not to expire before realized. In evaluating the Company’s ability to recover its deferred income tax assets it considers all available evidence both positive and negative, including operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis.
Federal returns for fiscal years 2013 through 2016 remain open and subject to examination by the Internal Revenue Service. The Company files and remits state income taxes in various states where the Company has determined it is required to file state income taxes. The Company’s filings with those states remain open for audit for the fiscal years 2012 through 2016.
A reconciliation of the beginning and ending amount of unrecognized tax liability is as follows (in thousands):
|
| | | |
Balance at December 1, 2016 | $ | 311 |
|
Reductions for tax positions of prior years | (40 | ) |
Balance at November 30, 2017 | $ | 271 |
|
During the fiscal year ended November 30, 2017, the Company determined its stock investment in MA had become worthless in accordance with U.S. federal income tax rules. During the fiscal year ended November 30, 2009 the Company had previously reduced its carrying value of the investment to nil. However operations continued until August 2017. In August of 2017 management and the board of MA decided to cease operations and liquidate MA.
In the third quarter of fiscal 2017, the Company recorded a deferred tax asset of $48.2 million representing the tax benefit associated with the basis in the shares of MA that was not previously required to be recorded in the deferred assets, as it represents the outside basis difference in the shares of a subsidiary not previously held for sale. The basis in MA used to calculate the tax benefit is approximately $122.2 million.
In the fourth quarter of fiscal 2017, the Company completed its analysis and determined the loss qualifies as an ordinary loss for federal income tax purposes. As a result of the worthlessness of MA stock and this analysis, the Company recognized an income tax benefit of approximately $48.2 million for the period ending November 30, 2017. Management believes that it is more likely than not that the Company has sufficient taxable income to fully utilize these tax losses.
In fiscal 2017, the Company also impaired $2.1 million of deferred tax assets, resulting in a charge to income tax expense, related to federal loss carryforwards.
In December 2015, Congress passed the Protecting Americans from Tax Hikes Act (the "Act"), which included a retroactive renewal back to January 1, 2015 of the previously expired tax legislation. The Act extended accelerated depreciation on qualified capital investments placed into service. This bonus depreciation provision is 50.0 percent for qualifying assets placed into service from 2015 through 2017, 40.0 percent for qualifying assets placed into service in 2018, and 30.0 percent for qualifying assets placed into service in 2019. The impact of this tax legislation did not affect the Company's fiscal 2016 and 2017 effective tax rate.
On December 22, 2017, Congress signed into law the Tax Cut and Jobs Act of 2017. The tax law includes significant changes to the U.S. corporate tax systems including a rate reduction from 35.0 percent to 21.0 percent beginning in January of 2018, the elimination of the corporate alternative minimum tax, and the acceleration of depreciation for US tax purposes. In accordance with ASC 740, "Income Taxes", the impact of a change in tax law is recorded in the period of enactment. During the first quarter of 2018, the Company expects to record a material, non-cash, change in its deferred income tax liability with a material income tax benefit.