Entity information:
INCOME TAXES

The provision for income taxes for continuing operations for the years ended December 31, 2017, 2016 and 2015 consists of the following:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Current tax expense (benefit):
 

 
 

 
 

Federal
$
(4
)
 
$
12

 
$
(2
)
State
23

 
14

 
28

 
19

 
26

 
26

Deferred tax expense (benefit):
 

 
 

 
 

Federal
202

 
34

 
24

State
(2
)
 
7

 
18

 
200

 
41

 
42

 
$
219

 
$
67

 
$
68



A reconciliation between the amount of reported income tax expense (benefit) and the amount computed by multiplying income (loss) from continuing operations before income taxes by the statutory federal income tax rate is shown below. State income tax expense for the year ended December 31, 2017 includes $28 million of expense related to the write off of expired or worthless unutilized state net operating loss carryforwards and other deferred tax assets for which a full valuation allowance had been provided in prior years. A corresponding tax benefit of $28 million is included for the year ended December 31, 2017 to reflect the reduction in the valuation allowance. Foreign pre-tax loss for the years ended December 31, 2017 and 2016 was $70 million and $16 million, respectively.
 
Years Ended December 31,
 
2017
 
2016
 
2015
Tax expense (benefit) at statutory federal rate of 35%
$
(35
)
 
$
87

 
$
50

State income taxes, net of federal income tax benefit
4

 
16

 
18

Expired state net operating losses, net of federal income tax benefit
28

 
35

 
11

Tax attributable to noncontrolling interests
(113
)
 
(106
)
 
(59
)
Nondeductible goodwill
109

 
29

 
22

Nontaxable gains
—

 
(11
)
 
(11
)
Nondeductible litigation costs
—

 
37

 
44

Nondeductible acquisition costs
1

 
1

 
4

Nondeductible health insurance provider fee
—

 
2

 
2

Impact of decrease in federal tax rate on deferred taxes
246

 
—

 
—

Reversal of permanent reinvestment assumption for foreign subsidiary
(30
)
 
—

 
—

Stock based compensation tax deficiencies
15

 
—

 
—

Changes in valuation allowance (including impact of decrease in federal tax rate)
—

 
(25
)
 
4

Change in tax contingency reserves, including interest
(6
)
 
(9
)
 
7

Amendment of prior-year tax returns
—

 
—

 
(17
)
Prior-year provision to return adjustments and other changes in deferred taxes
4

 
12

 
(12
)
Other items
(4
)
 
(1
)
 
5

 
$
219

 
$
67

 
$
68



On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits and deductions for individuals and businesses. For businesses, the Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to, (1) reducing the corporate federal tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018, (2) repealing the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits may be realized, (3) creating a new limitation on the deductibility of interest expense, (4) allowing full expensing of certain capital expenditures, and (5) denying deductions for performance based compensation paid to certain key executives. International provisions in the Tax Act are not expected to have a material impact on the Company’s taxes.

As a result of the reduction in the corporate income tax rate from 35% to 21% under the Tax Act, we revalued our net deferred tax assets at December 31, 2017, resulting in a reduction in the value of our net deferred tax assets by approximately $252 million. The reduction was recorded as additional income tax expense in the accompanying Consolidated Statement of Operations for the year ended December 31, 2017. Approximately $6 million of the total $252 million increase in income tax expense is included in the net change in valuation allowance, with the remaining $246 million shown in the table above.

The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. 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 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.

While we are able to make a reasonable estimate of the impact of the reduction in the corporate tax rate, the revaluation of our net deferred tax assets is subject to further revision based on our actual 2017 federal and state income tax filings. In addition, our valuation allowance analysis is affected by various aspects of the Tax Act, including the new limitation on the deductibility of interest expense. As a result, the actual impact on the net deferred tax assets may vary from the provisional estimate due to changes in our estimates of 2017 taxable income and due to revisions in our estimates of the impact of the limitation on the deductibility of interest expense.

Deferred income taxes reflect the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. The following table discloses those significant components of our deferred tax assets and liabilities, including any valuation allowance:
 
December 31, 2017
 
December 31, 2016
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Depreciation and fixed-asset differences
$
—

 
$
411

 
$
—

 
$
683

Reserves related to discontinued operations and restructuring charges
15

 
—

 
13

 
—

Receivables (doubtful accounts and adjustments)
134

 
—

 
231

 
—

Deferred gain on debt exchanges
—

 
6

 
—

 
21

Accruals for retained insurance risks
225

 
—

 
351

 
—

Intangible assets
—

 
330

 
—

 
548

Other long-term liabilities
97

 
—

 
141

 
—

Benefit plans
268

 
—

 
457

 
—

Other accrued liabilities
42

 
—

 
60

 
—

Investments and other assets
—

 
79

 
—

 
130

Net operating loss carryforwards
399

 
—

 
653

 
—

Stock-based compensation
27

 
—

 
45

 
—

Other items
142

 
32

 
118

 
23

 
1,349

 
858

 
2,069

 
1,405

Valuation allowance
(72
)
 
—

 
(72
)
 
—

 
$
1,277

 
$
858

 
$
1,997

 
$
1,405



Below is a reconciliation of the deferred tax assets and liabilities and the corresponding amounts reported in the accompanying Consolidated Balance Sheets.
 
December 31,
 
2017
 
2016
Deferred income tax assets
$
455

 
$
871

Deferred tax liabilities
(36
)
 
(279
)
Net deferred tax asset
$
419

 
$
592

 

During the year ended December 31, 2017, we had no net change in the valuation allowance, but there was a decrease of $28 million due to the expiration or worthlessness of unutilized state net operating loss carryovers, an increase of $6 million due to the decrease in the federal tax rate, and an increase of $22 million due to changes in expected realizability of deferred tax assets. The remaining balance in the valuation allowance at December 31, 2017 was $72 million. During the year ended December 31, 2016, the valuation allowance decreased by $24 million primarily due to the expiration or worthlessness of unutilized state net operating loss carryovers. The balance in the valuation allowance as of December 31, 2016 was $72 million. During the year ended December 31, 2015, the valuation allowance increased by $9 million, $5 million due to the acquisition of USPI and $4 million due to changes in expected realizability of deferred tax assets.

We account for uncertain tax positions in accordance with ASC 740-10-25, which prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The table below summarizes the total changes in unrecognized tax benefits during the year ended December 31, 2017. The additions and reductions for tax positions include the impact of items for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductions. Such amounts include unrecognized tax benefits that have impacted deferred tax assets and liabilities at December 31, 2017, 2016 and 2015.
 
Continuing
Operations
 
Discontinued
Operations
 
Total
Balance At December 31, 2014
$
38

 
$
—

 
$
38

Additions for prior-year tax positions
1

 
—

 
1

Additions for current-year tax positions
5

 
—

 
5

Reductions due to a lapse of statute of limitations
(4
)
 
—

 
(4
)
Balance At December 31, 2015
$
40

 
$
—

$
—

$
40

Additions for prior-year tax positions
2

 
—

 
2

Additions for current-year tax positions
—

 
—

 
—

Reductions due to a lapse of statute of limitations
(7
)
 
—

 
(7
)
Balance At December 31, 2016
$
35

 
$
—

 
$
35

Additions for prior-year tax positions
31

 
—

 
31

Reductions for tax positions of prior years
(15
)
 
—

 
(15
)
Additions for current-year tax positions
—

 
—

 
—

Reductions due to a lapse of statute of limitations
(5
)
 
—

 
(5
)
Balance At December 31, 2017
$
46

 
$
—

 
$
46



The total amount of unrecognized tax benefits as of December 31, 2017 was $46 million, of which $44 million, if recognized, would affect our effective tax rate and income tax expense (benefit) from continuing operations. Income tax expense in the year ended December 31, 2017 includes a benefit of $5 million in continuing operations attributable to a decrease in our estimated liabilities for uncertain tax positions, net of related deferred tax effects. The total amount of unrecognized tax benefits as of December 31, 2016 was $35 million, of which $32 million, if recognized, would affect our effective tax rate and income tax expense (benefit) from continuing operations. Income tax expense in the year ended December 31, 2016 includes a benefit of $9 million in continuing operations attributable to a decrease in our estimated liabilities for uncertain tax positions, net of related deferred tax effects. The total amount of unrecognized tax benefits as of December 31, 2015 was $40 million, of which $37 million, if recognized, would affect our effective tax rate and income tax expense (benefit) from continuing operations. Income tax expense in the year ended December 31, 2015 includes expense of $2 million in continuing operations attributable to an increase in our estimated liabilities for uncertain tax positions, net of related deferred tax effects.

Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense in our consolidated statements of operations. Approximately $1 million of interest and penalties related to accrued liabilities for uncertain tax positions related to continuing operations are included in the accompanying Consolidated Statement of Operations for the year ended December 31, 2017. Total accrued interest and penalties on unrecognized tax benefits as of December 31, 2017 were $3 million, all of which related to continuing operations.

The Internal Revenue Service (“IRS”) has completed audits of our tax returns for all tax years ended on or before December 31, 2007, and of Vanguard’s tax returns for fiscal years ended on or before October 1, 2013. All disputed issues with respect to these audits have been resolved and all related tax assessments (including interest) have been paid. Our tax returns for years ended after December 31, 2007 and USPI’s tax returns for years ended after December 31, 2013 remain subject to audit by the IRS.

As of December 31, 2017, approximately $1 million of unrecognized federal and state tax benefits, as well as reserves for interest and penalties, may decrease in the next 12 months as a result of the settlement of audits, the filing of amended tax returns or the expiration of statutes of limitations.

At December 31, 2017, our carryforwards available to offset future taxable income consisted of (1) federal net operating loss (“NOL”) carryforwards of approximately $1.6 billion pre-tax expiring in 2025 to 2034, (2) general business credit carryforwards of approximately $29 million expiring in 2023 through 2037, and (3) state NOL carryforwards of approximately $3.0 billion expiring in 2018 through 2037 for which the associated deferred tax benefit, net of valuation allowance and federal tax impact, is $12 million. Our ability to utilize NOL carryforwards to reduce future taxable income may be limited under Section 382 of the Internal Revenue Code if certain ownership changes in our company occur during a rolling three-year period. These ownership changes include purchases of common stock under share repurchase programs (see Note 2), the offering of stock by us, the purchase or sale of our stock by 5% shareholders, as defined in the Treasury regulations, or the issuance or exercise of rights to acquire our stock. If such ownership changes by 5% shareholders result in aggregate increases that exceed 50 percentage points during the three-year period, then Section 382 imposes an annual limitation on the amount of our taxable income that may be offset by the NOL carryforwards or tax credit carryforwards at the time of ownership change. On August 31, 2017, we entered into a rights agreement as a measure intended to deter the above-referenced ownership changes in order to preserve our NOL carryforwards (see Note 2).