Income Taxes
On December 22, 2017, the President of the United States (“U.S.”) signed into law the Tax Cuts and Jobs Act (the “Tax Reform Act”), which enacts significant changes to U.S. tax laws. Some of the provisions of the new tax law affecting corporations include, but are not limited to lowering the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, immediate expensing of certain qualified capital expenditures, implementing a territorial tax system and imposing a one-time transitional toll tax on deferred foreign earnings. As a result of the Tax Reform Act, the Company recorded the provisional tax effects, including a tax charge of $1.0 million due to the remeasurement of deferred tax assets and liabilities in the fourth quarter of 2017. The Company has also estimated a tax liability of $6.1 million due to the transition toll tax on the deemed repatriation of deferred foreign earnings of non-U.S. operations, which the Company believes will be fully offset by foreign tax credits. The final amounts recorded in subsequent financial statements may differ from these provisional amounts due to, among other things, additional analysis related to foreign deferred earnings, changes in interpretations of the Tax Reform Act and related assumptions of the Company and additional regulatory guidance that may be issued.
On December 22, 2017, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 118 (“SAB 118”). This guidance allows registrants a “measurement period”, not to exceed one year from the date of enactment, to complete their accounting for the tax effects of the Tax Reform Act. SAB 118 further directs that during the measurement period, registrants who are able to make reasonable estimates for the tax effects of the Tax Reform Act should include those amounts in their financial statements as “provisional” amounts. Registrants should reflect adjustments over subsequent periods as they are able to refine their estimates and complete their accounting for the tax effects of the Tax Reform Act. The provisional amounts computed by the Company are expected to be finalized when the U.S. corporate income tax return for 2017 is filed in 2018, but in no event later than one year from the enactment date.
Other provisions of the Tax Reform Act include a new minimum tax on certain foreign earnings (the Global Intangibles Low-taxed Income, or “GILTI”), a new tax on certain payments to foreign related parties (the Base Erosion Anti-Avoidance tax, or “BEAT”), a new incentive for Foreign-derived Intangibles Income (“FDII”), repealing the deduction for domestic production activities, changes to the limitation on the deductibility of certain executive compensation, and new limitations on the deductibility of interest expense. Generally, the tax effect of these other provisions will begin for the Company in the year ending December 31, 2018.
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Q. | Income Taxes (continued) |
Income before income taxes was attributable to the following sources:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | 38,800 |
| | $ | 35,867 |
| | $ | 32,807 |
|
Canada | (806 | ) | | 1,377 |
| | 2,451 |
|
Total | $ | 37,994 |
| | $ | 37,244 |
| | $ | 35,258 |
|
The provision for income taxes follows:
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Currently payable: | | | | | |
Federal | $ | 9,914 |
| | $ | 12,216 |
| | $ | 13,337 |
|
State | 2,469 |
| | 2,286 |
| | 2,487 |
|
Canadian | (262 | ) | | 398 |
| | 611 |
|
Total current | 12,121 |
| | 14,900 |
| | 16,435 |
|
Deferred taxes | 3,753 |
| | 60 |
| | (2,975 | ) |
Total taxes on income | $ | 15,874 |
| | $ | 14,960 |
| | $ | 13,460 |
|
A reconciliation of the expected statutory U.S. federal rate to our actual effective income tax rate follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Statutory U.S. federal tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal benefit | 4.9 |
| | 4.0 |
| | 3.7 |
|
Effect of Canadian income taxes | .3 |
| | (.2 | ) | | (.5 | ) |
Nondeductible expenses | 2.2 |
| | 2.2 |
| | 2.3 |
|
ESOP dividend deduction | (.6 | ) | | (.7 | ) | | (.8 | ) |
Uncertain tax adjustments and audit settlement | (.2 | ) | | .2 |
| | 1.5 |
|
Valuation allowance | — |
| | — |
| | (2.2 | ) |
Income tax reform | 2.5 |
| | — |
| | — |
|
All other, net | (2.3 | ) | | (.3 | ) | | (.8 | ) |
Effective income tax rate | 41.8 | % | | 40.2 | % | | 38.2 | % |
Deferred income taxes reflect the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is recorded when it is more-likely-than-not that an income tax benefit will not be realized.
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Q. | Income Taxes (continued) |
Significant components of our noncurrent net deferred tax assets and liabilities at December 31, were as follows:
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| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Self-insurance accruals | $ | 14,186 |
| | $ | 21,967 |
|
Accrued compensated absences | 1,747 |
| | 3,540 |
|
Accrued expenses and other liabilities | 798 |
| | 1,394 |
|
Accrued stock compensation | 1,571 |
| | 2,502 |
|
Defined benefit pension plans | 2,289 |
| | 4,019 |
|
Foreign tax credit carryforward | 605 |
| | 575 |
|
Other future deductible amounts, net | 3,661 |
| | 4,213 |
|
| 24,857 |
| | 38,210 |
|
Deferred tax liabilities: | |
| | |
|
Intangibles | 969 |
| | 297 |
|
Prepaid expenses | 2,300 |
| | 3,510 |
|
Property and equipment | 16,773 |
| | 23,274 |
|
| 20,042 |
| | 27,081 |
|
Net deferred tax assets--noncurrent | $ | 4,815 |
| | $ | 11,129 |
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We treat all of our Canadian subsidiary earnings through December 31, 2017 as permanently reinvested and have not provided any U.S. federal or state tax thereon. As of December 31, 2017, approximately $30,329 of undistributed earnings attributable to our Canadian operations was considered to be indefinitely invested. Presently, our intention is to reinvest the earnings permanently.
If, in the future, these earnings are distributed to the U.S. in the form of dividends or otherwise, or if the Company determines such earnings will be remitted in the foreseeable future, the Company would be subject to Canadian withholding taxes. It is not practicable to estimate the amount of taxes that would be payable upon remittance of these earnings given the various tax planning alternatives that we could employ should we decide to repatriate those earnings.
As of December 31, 2015, we released a valuation allowance that had been recorded in prior years related to the foreign tax credit carryforward that arose in 2010--wherein we repatriated earnings in 2010 of our Canadian operations due to capital in Canada in excess of current and future projected needs. Management presently believes that it is more-likely-than-not that the deferred tax asset, related to the foreign tax credits that expires in 2020 and 2027, will be realized. The criteria considered in making the determination included the ability to utilize tax-planning strategies, historical and projected operating results, and the period of time over which the foreign tax credit can be utilized.
The amount of income taxes that we pay is subject to audit by U.S. federal, state, local and Canadian tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. Uncertain tax positions are recognized only if they are more-likely-than-not to be upheld during examination based on their technical merits. The measurement of the uncertain tax position is based on the largest benefit amount that is more-likely-than-not (determined on a cumulative probability basis) to be realized upon settlement of the matter. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate settlement, a further charge to expense may result.
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Q. | Income Taxes (continued) |
The balance of unrecognized benefits and the amount of related interest and penalties at December 31, were as follows:
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| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Unrecognized tax benefits | $ | 2,581 |
| | $ | 2,532 |
|
Portion, if recognized, would reduce tax expense and effective tax rate | 1,948 |
| | 2,053 |
|
Accrued interest on unrecognized tax benefits | 128 |
| | 107 |
|
We recognize interest accrued related to unrecognized tax benefits in income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense.
The Company is routinely under audit by U.S. federal, state, local and Canadian authorities in the area of income tax. These audits include questioning the timing and the amount of income and deductions and the allocation of income and deductions among various tax jurisdictions. During the fourth quarter 2017, the U.S. Internal Revenue Service initiated an audit of the Company's U.S. income tax returns for 2015. With the exception of U.S. state jurisdictions, the Company is no longer subject to examination by tax authorities for the years through 2013. As of December 31, 2017, we believe it is reasonably possible that the total amount of unrecognized tax benefits will not significantly increase or decrease.
The changes in our unrecognized tax benefits are summarized in the table below:
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Balance, beginning of year | $ | 2,532 |
| | $ | 2,557 |
| | $ | 1,949 |
|
Additions based on tax positions related to the current year | 650 |
| | 402 |
| | 642 |
|
Additions for tax positions of prior years | (21 | ) | | 51 |
| | 52 |
|
Reductions for tax positions of prior years | — |
| | (39 | ) | | (63 | ) |
Lapses in statutes of limitations | (580 | ) | | (439 | ) | | (23 | ) |
Balance, end of year | $ | 2,581 |
| | $ | 2,532 |
| | $ | 2,557 |
|