Income Taxes
The following table summarizes the domestic and foreign components of our income before income taxes for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(Amounts in thousands) | 2017 | | 2016 | | 2015 |
Domestic | $ | 301,322 |
| | $ | 216,205 |
| | $ | 238,416 |
|
Foreign | 27,730 |
| | 17,061 |
| | 24,808 |
|
Income before income taxes | $ | 329,052 |
| | $ | 233,266 |
| | $ | 263,224 |
|
The following table summarizes the components of income tax expense (benefit) from continuing operations for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | |
(Amounts in thousands) | Current | | Deferred | | Total |
2017: | | | | | |
U.S. federal | $ | (72 | ) | | $ | (6,774 | ) | | $ | (6,846 | ) |
Foreign | 11,840 |
| | (2,231 | ) | | 9,609 |
|
State and local | 5,829 |
| | 7,434 |
| | 13,263 |
|
Income tax expense (benefit) | $ | 17,597 |
| | $ | (1,571 | ) | | $ | 16,026 |
|
2016: | | | | | |
U.S. federal | $ | (41 | ) | | $ | 57,950 |
| | $ | 57,909 |
|
Foreign | 6,206 |
| | (427 | ) | | 5,779 |
|
State and local | 7,088 |
| | 5,763 |
| | 12,851 |
|
Income tax expense | $ | 13,253 |
| | $ | 63,286 |
| | $ | 76,539 |
|
2015: | | | | | |
U.S. federal | $ | (119 | ) | | $ | 61,583 |
| | $ | 61,464 |
|
Foreign | 9,656 |
| | (2,399 | ) | | 7,257 |
|
State and local | 6,336 |
| | (4,688 | ) | | 1,648 |
|
Income tax expense | $ | 15,873 |
| | $ | 54,496 |
| | $ | 70,369 |
|
Recorded income tax expense differed from amounts computed by applying the U.S. federal income tax rate of 35% to income before income taxes as a result of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(Amounts in thousands) | 2017 | | 2016 | | 2015 |
Computed "expected" federal income tax expense | $ | 115,168 |
| | $ | 81,643 |
| | $ | 92,128 |
|
Effect of noncontrolling interest income distribution | (13,724 | ) | | (13,449 | ) | | (13,358 | ) |
Change in valuation allowance | 413 |
| | 648 |
| | 896 |
|
Effect of state and local income taxes, net of federal tax benefit | 10,767 |
| | 8,353 |
| | 1,072 |
|
Deductible compensation in excess of book | (13,757 | ) | | — |
| | — |
|
Nondeductible compensation | 2,201 |
| | 2,127 |
| | 435 |
|
Effect of foreign income taxes | 2,367 |
| | 380 |
| | 741 |
|
Effect of foreign earnings earned and remitted in the same year | 4,402 |
| | 6,000 |
| | 5,155 |
|
Effect of foreign tax credits | (5,357 | ) | | (9,405 | ) | | (4,432 | ) |
Effect of change in accounting method related to recoverable bankruptcy costs | — |
| | — |
| | (9,603 | ) |
Effect of Tax Reform, including change in valuation allowance of $20,824 | (84,599 | ) | | — |
| | — |
|
Other, net | (1,855 | ) | | 242 |
| | (2,665 | ) |
Income tax expense | $ | 16,026 |
| | $ | 76,539 |
| | $ | 70,369 |
|
In connection with emergence from Chapter 11, the Company's prepetition debt securities, primarily the prepetition notes issued by Six Flags, Inc. (which changed its corporate name to Six Flags Entertainment Corporation (Holdings) upon emergence from bankruptcy in 2010) and SFO, were extinguished. Absent an exception, a debtor recognizes cancellation of debt income ("CODI") upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The Internal Revenue Code ("IRC") provides that a debtor in a bankruptcy case may exclude CODI from income but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is the adjusted issue price of any indebtedness discharged less the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued and (iii) the fair market value of any other consideration, including equity, issued. As a result of the market value of our equity upon emergence from Chapter 11 bankruptcy proceedings, we were able to retain a significant portion of our federal NOLs and state NOLs (collectively, the "Tax Attributes") after reduction of the Tax Attributes for CODI realized on emergence from Chapter 11. As a result of emergence from Chapter 11, the Company's NOLs were reduced by approximately $804.8 million of CODI.
Sections 382 and 383 of the IRC impose an annual limitation on the utilization of NOLs and other favorable Tax Attribute carryforwards that a corporation has at the time of a so-called "ownership change" within the meaning of IRC Section 382. The Company's issuance of stock pursuant to its reorganization under Chapter 11 resulted in such an ownership change. The limitation amount is the product of the value of the Company, computed under special rules that apply to a bankruptcy reorganization, and a published rate that applied for the month the Company emerged from Chapter 11. The Company's limitation amount is approximately $32.5 million for each year to which NOLs and other Tax Attribute carryforwards that existed at emergence are carried, increased by the portion of the net built-in income and gain that existed at emergence and that IRS pronouncements permit a taxpayer to treat as recognized during the five year period following the ownership change. This has allowed the Company to increase its annual limitation by approximately $696.0 million through the end of 2015. Annual limitation amounts accumulate for future use to the extent they are not utilized in a given year. As a result of the Section 382 limitation, the Company may have a cash tax liability in future years even though its deferred tax assets have not been exhausted. A subsequent ownership change could further limit the Company's utilization of NOLs and other Tax Attributes if a smaller limitation resulted from the subsequent ownership change or applied to NOLs and other Tax Attributes accumulated after emergence from Chapter 11.
Substantially all of our future taxable temporary differences (deferred tax liabilities) relate to the different financial accounting and tax depreciation methods and periods for property and equipment (20 to 25 years for financial reporting purposes and 7 to 12 years for tax reporting purposes) and intangibles. Our net operating loss carryforwards, foreign tax credits, alternative minimum tax credits, accrued insurance expenses and deferred compensation amounts represent future income tax benefits (deferred tax assets). The following table summarizes the components of deferred income tax assets and deferred tax liabilities as of December 31, 2017 and 2016:
|
| | | | | | | |
| December 31, |
(Amounts in thousands) | 2017 | | 2016 |
Deferred tax assets | $ | 296,132 |
| | $ | 312,349 |
|
Less: Valuation allowance | 113,509 |
| | 92,272 |
|
Net deferred tax assets | 182,623 |
| | 220,077 |
|
Deferred tax liabilities | 289,474 |
| | 419,357 |
|
Net deferred tax liability | $ | 106,851 |
| | $ | 199,280 |
|
|
| | | | | | | |
| December 31, |
(Amounts in thousands) | 2017 | | 2016 |
Deferred tax assets: | | | |
Federal net operating loss carryforwards | $ | 49,543 |
| | $ | 40,352 |
|
State net operating loss carryforwards | 119,837 |
| | 96,356 |
|
Deferred compensation | 21,464 |
| | 50,067 |
|
Foreign tax credits | 52,152 |
| | 46,795 |
|
Alternative minimum tax credits | 6,591 |
| | 6,591 |
|
Accrued insurance, pension liability and other | 46,545 |
| | 72,188 |
|
Total deferred tax assets | $ | 296,132 |
| | $ | 312,349 |
|
| | | |
Deferred tax liabilities: | | | |
Property and equipment | $ | 200,008 |
| | $ | 294,050 |
|
Intangible assets and other | 89,466 |
| | 125,307 |
|
Total deferred tax liabilities | $ | 289,474 |
| | $ | 419,357 |
|
As of December 31, 2017, we had approximately $0.3 billion and $5.6 billion of net operating loss carryforwards available for U.S. federal income tax and state income tax purposes, respectively, that expire through 2030 and 2037, respectively. We have a valuation allowance of $113.5 million and $92.3 million as of December 31, 2017 and 2016, respectively, due to uncertainties related to our ability to utilize some of our deferred tax assets before they expire. The valuation allowance at December 31, 2017 and December 31, 2016 was based on our inability to use state deferred tax assets related to NOLs that were generated in states where we no longer do business or where we have consistently not generated taxable income. The change in valuation allowance is all attributable to income from operations.
Our unrecognized tax benefit as of December 31, 2017 and 2016 was $25.7 million and $44.6 million, respectively. The change in unrecognized tax benefit was entirely driven by rate remeasurement of the Act. We classify interest and penalties attributable to income taxes as part of income tax expense. Due to the Company's NOL position, we have not accrued any penalties and interest.
Passage of the Tax Cuts and Jobs Act (H.R. 1) and Staff Accounting Bulletin No. 118
On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) ("the Act") was signed into law by President Donald Trump. The Act contains significant changes to corporate taxation, including a reduction of the corporate tax rate from 35% to 21%, creating a territorial tax system, allowing for immediate expensing of certain qualified property, modifying or repealing many business deductions and credits, and providing other incentives. In response to the Act, on December 22, 2017 the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), to provide guidance for companies that are not able to complete their accounting for the income tax effects of the Act in the period of enactment. The SEC Staff noted in SAB 118 that in these cases a company should continue to apply Topic 740, Income Taxes based on the provisions of the tax laws that were in effect immediately prior to the Act being enacted. SAB 118 provides a measurement period that should not extend beyond one year from the Act enactment date for companies to complete the accounting under Topic 740. While the Company was able to make reasonable estimates of the impact of the changes to Section 162(m) of the Internal Revenue Code on our tax provision for the year ended December 31, 2017, the final impact of the Act may differ from these estimates, due to, among other things, changes in our interpretations and assumptions of the Act, and additional guidance that may be issued by the Internal Revenue Service. As a result, the Company will continue to gather additional information to determine the final impact of these changes. Additionally, due to the complexity of the new tax laws around global intangible low taxed income (“GILTI”), the Company is continuing to evaluate how the income tax provision will be accounted for under the U.S. generally accepted accounting principles wherein companies are allowed to make an accounting policy election of either (i) account for GILTI as a component of tax expense in the period in which the Company is subject to the rules (the “period cost method”), or (ii) account for GILTI in the Company’s measurement of deferred taxes (the “deferred method”). Currently, the Company has not elected a method and will only do so after its completion of the analysis of the GILTI provisions.