INCOME TAXES The Company files a consolidated U.S. income tax return that includes its more than 80%-owned U.S. subsidiaries. The amounts provided for income taxes are as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | |
| | |
| | |
|
U.S. Federal | $ | 28,271 |
| | $ | 29,185 |
| | $ | 40,542 |
|
State | 3,458 |
| | 7,407 |
| | 13,886 |
|
| $ | 31,729 |
| | $ | 36,592 |
| | $ | 54,428 |
|
Deferred: | |
| | |
| | |
|
U.S. Federal | $ | (31,049 | ) | | $ | 10,076 |
| | $ | (9,943 | ) |
State | (2,262 | ) | | 2,495 |
| | (3,252 | ) |
| (33,311 | ) | | 12,571 |
| | (13,195 | ) |
Total | $ | (1,582 | ) | | $ | 49,163 |
| | $ | 41,233 |
|
The tax effect of temporary differences which give rise to a significant portion of deferred tax assets and liabilities is as follows:
|
| | | | | | | |
| December 31, 2017 | | December 31, 2016 |
Deferred tax assets: | | | |
Employee benefit accruals | $ | 11,621 |
| | $ | 17,335 |
|
Impairment of investments | 1,834 |
| | 1,534 |
|
Impact of timing of settlement payments | 14,367 |
| | 28,266 |
|
Various U.S. state tax loss carryforwards | 6,556 |
| | 6,551 |
|
Other | 1,110 |
| | 2,803 |
|
| 35,488 |
| | 56,489 |
|
Less: Valuation allowance | (3,664 | ) | | (4,439 | ) |
Net deferred tax assets | $ | 31,824 |
| | $ | 52,050 |
|
| | | |
Deferred tax liabilities: | | | |
Excess of tax basis over book-basis non-consolidated entities | $ | (5,388 | ) | | $ | (7,494 | ) |
Book/tax differences on fixed and intangible assets | (36,712 | ) | | (54,776 | ) |
Capitalized interest expense | (6,069 | ) | | (8,673 | ) |
Book/tax differences on inventory | (11,357 | ) | | (16,143 | ) |
Book/tax differences on long-term investments | (15,521 | ) | | (23,937 | ) |
Impact of accounting for convertible debt | (12,776 | ) | | (27,362 | ) |
Book/tax differences on available for sale securities | (2,802 | ) | | (6,750 | ) |
| $ | (90,625 | ) | | $ | (145,135 | ) |
| | | |
Net deferred tax liabilities | $ | (58,801 | ) | | $ | (93,085 | ) |
Vector Tobacco had tax-effected state and local net operating loss carryforwards of $6,556 and $6,551, respectively, at December 31, 2017 and 2016, expiring through tax year 2027. The Company records a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The valuation allowance of $3,664 and $4,439 at December 31, 2017 and 2016, respectively, primarily relates to a reserve against Vector Tobacco’s state and local net operating loss carryforwards. The valuation allowance was decreased in 2017 and 2016, respectively, as a result of changes in estimates in Vector Tobacco’s ability to utilize state tax net operating losses in future years because of changes in state tax apportionment and projected taxable income.
The consolidated balance sheets of the Company include deferred income tax assets and liabilities, which represent temporary differences in the application of accounting rules established by generally accepted accounting principles (“US GAAP”) and income tax laws. The provisional amount of tax benefit related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was $28,845.
On December 22, 2017, the Tax Act was enacted and made significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017 and limits interest expense deductions to 30% of taxable income before interest, depreciation and amortization from 2018 to 2021 and then taxable income before interest thereafter. The Tax Act permits disallowed interest expense to be carried forward indefinitely. The Company has calculated its best estimate of the impact of the Tax Act in its year-end income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date of this filing. The Company’s estimate of the provisional amount related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was $28,845 at December 31, 2017. The provisional estimates are based on the Company’s initial analysis of the Tax Act. Given the significant complexity of the Tax Act, anticipated guidance from the U.S. Treasury about implementing the Tax Act, and the potential for additional guidance from the Securities and Exchange Commission or the Financial Accounting Standards Board related to the Tax Act, these estimates may be adjusted during 2018.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of US 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 Tax Act. In accordance with SAB 118, the Company has determined that the deferred tax benefit of $28,845 recorded in connection with the remeasurement of certain deferred tax assets and liabilities is a provisional amount and a reasonable estimate at December 31, 2017.
Deferred federal income tax expense differs in 2017, 2016 and 2015. The deferred tax benefit in 2017 results primarily from the remeasurement of deferred tax assets and liabilities due to the enactment of the Tax Act. The deferred tax expense in 2016 results primarily from the recognition of temporary differences (related to litigation accruals) at the Tobacco segment and from the capitalization of interest expense on the Company’s equity method real estate investments. The deferred tax expense in 2015 results primarily from the capitalization of interest expense on the Company’s equity method real estate investments.
Differences between the amounts provided for income taxes and amounts computed at the federal statutory tax rate are summarized as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income before income taxes | $ | 89,168 |
| | $ | 126,429 |
| | $ | 107,705 |
|
Federal income tax expense at statutory rate | 31,209 |
| | 44,250 |
| | 37,697 |
|
Increases (decreases) resulting from: | | | |
| | |
|
State income taxes, net of federal income tax benefits | 3,833 |
| | 6,991 |
| | 6,862 |
|
Impact of non-controlling interest | (2,162 | ) | | (2,148 | ) | | (2,516 | ) |
Non-deductible expenses | 2,146 |
| | 2,569 |
| | 2,941 |
|
Impact of domestic production deduction | (2,960 | ) | | (2,603 | ) | | (3,436 | ) |
Impact of Tax Cuts and Jobs Act of 2017 | (28,845 | ) | | — |
| | — |
|
Excess tax benefits on stock-based compensation (1) | (1,143 | ) | | — |
| | — |
|
Tax credits | (2,683 | ) | | (359 | ) | | (265 | ) |
Other | (155 | ) | | (1,202 | ) | | 152 |
|
Inclusion of tax liabilities from unincorporated entities | (47 | ) | | 1,126 |
| | 831 |
|
Changes in valuation allowance, net of equity and tax audit adjustments | (775 | ) | | 539 |
| | (1,033 | ) |
Income tax (benefit) expense | $ | (1,582 | ) | | $ | 49,163 |
| | $ | 41,233 |
|
| | | | | |
(1) Due to the adoption of ASU 2016-09, all excess tax benefits and deficiencies are recognized as income tax expense in the Company’s Consolidated Statement of Operations. This will result in increased volatility in the Company’s effective tax rate. |
The following table summarizes the activity related to the unrecognized tax benefits:
|
| | | |
Balance at January 1, 2015 | $ | 1,744 |
|
Additions based on tax positions related to prior years | 265 |
|
Settlements | (132 | ) |
Expirations of the statute of limitations | (354 | ) |
Balance at December 31, 2015 | 1,523 |
|
Additions based on tax positions related to prior years | 72 |
|
Settlements | (119 | ) |
Expirations of the statute of limitations | (961 | ) |
Balance at December 31, 2016 | 515 |
|
Additions based on tax positions related to prior years | 208 |
|
Settlements | — |
|
Expirations of the statute of limitations | (95 | ) |
Balance at December 31, 2017 | $ | 628 |
|
In the event the unrecognized tax benefits of $628 and $515 at December 31, 2017 and 2016, respectively, were recognized, such recognition would impact the annual effective tax rates. During 2017, the accrual for potential penalties and interest related to these unrecognized tax benefits was increased by $23, and in total, as of December 31, 2017, a liability for potential penalties and interest of $168 has been recorded. During 2016, the accrual for potential penalties and interest related to these unrecognized tax benefits was decreased by $74, and in total, as of December 31, 2016, a liability for potential penalties and interest of $145 has been recorded.
It is reasonably possible the Company may recognize up to approximately $203 of currently unrecognized tax benefits over the next 12 months, primarily pertaining to expiring statutes of limitations on prior state and local income tax return positions. The Company files U.S. and state and local income tax returns in jurisdictions with varying statutes of limitations.