On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law. The Tax Act significantly changed the U.S. corporate income tax law by lowering the statutory corporate tax rate from 35% to 21%, imposing a one-time mandatory repatriation tax on earnings of foreign subsidiaries, and changing how foreign earnings are subject to U.S. tax. We have not completed our determination of the implications of the Tax Act. However, we have reasonably estimated the impact of the Tax Act and recorded provisional amounts in our financial statements as of December 31, 2017, pursuant to the guidance of the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118. We recorded income tax expense for the impact of the Tax Act of approximately $13.0 million. This net amount is primarily comprised of $8.3 million from re-measurement of federal net deferred tax assets resulting from the reduction in the U.S. statutory corporate tax rate and a provisional amount of $4.7 million from the one-time mandatory repatriation tax on deferred earnings of our foreign subsidiaries. As we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department and the IRS, we may make adjustments to the provisional amount. Those adjustments may materially impact our provision for income taxes in the period in which the adjustments are made. The accounting for the tax effects of the Tax Act will be completed in 2018.
Income before income taxes includes the following:
|
(Dollars in thousands) |
2017 |
2016 |
2015 |
||||||
|
United States |
$ |
(5,143) |
$ |
(1,886) |
$ |
3,826 | |||
|
Foreign |
38,675 | 14,324 | 23,149 | ||||||
|
Income before income taxes and equity earnings of unconsolidated joint ventures |
$ |
33,532 |
$ |
12,438 |
$ |
26,975 | |||
|
Equity earnings of unconsolidated joint ventures: |
|||||||||
|
United States |
-- |
-- |
-- |
||||||
|
Foreign |
815 | 999 | 1,204 | ||||||
|
Income before income taxes |
$ |
34,347 |
$ |
13,437 |
$ |
28,179 | |||
Significant components of the provision for income taxes are as follows:
|
(Dollars in thousands) |
2017 |
2016 |
2015 |
||||||
|
Current income tax expense (benefit) |
|||||||||
|
Federal (1) |
$ |
(7,846) |
$ |
2,982 |
$ |
481 | |||
|
State |
775 | 675 | 516 | ||||||
|
Foreign |
7,079 | 4,685 | 3,120 | ||||||
|
Total |
8 | 8,342 | 4,117 | ||||||
|
Deferred income tax expense (benefit) |
|||||||||
|
Federal |
3,654 | (4,197) | 612 | ||||||
|
State |
(2,351) | (422) | (940) | ||||||
|
Foreign |
2,026 | 297 | 1,359 | ||||||
|
Total |
3,329 | (4,322) | 1,031 | ||||||
|
Total income tax expense |
$ |
3,337 |
$ |
4,020 |
$ |
5,148 | |||
|
(1) |
The 2017 amount includes a federal tax benefit of $7,785 related to changes in unrecognized tax benefits and related interest. |
Deferred income taxes reflect the “temporary differences” between the financial statement carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, adjusted by the relevant tax rate. The components of the deferred tax assets and liabilities are as follows:
|
(Dollars in thousands) |
December 31, 2017 (1) |
December 31, 2016 |
||||
|
Deferred Tax Assets: |
||||||
|
Net operating loss carry-forwards |
$ |
8,579 |
$ |
11,940 | ||
|
Alternative minimum tax credit carry-forwards |
939 | 1,690 | ||||
|
Compensation and employee benefits |
4,146 | 6,221 | ||||
|
Deferred revenue |
2,500 | 5,486 | ||||
|
Accrued expenses |
6,178 | 7,134 | ||||
|
Accrued taxes |
2,440 | 3,381 | ||||
|
Land and property |
8,457 | 12,857 | ||||
|
Other |
107 | 995 | ||||
|
Total Deferred Tax Assets |
33,346 | 49,704 | ||||
|
Deferred Tax Liabilities: |
||||||
|
Intangibles |
(1,087) | (1,482) | ||||
|
Cancellation of indebtedness |
(481) | (1,559) | ||||
|
Notes receivable |
-- |
(7,403) | ||||
|
Total Deferred Tax Liabilities |
(1,568) | (10,444) | ||||
|
Net deferred tax assets before valuation allowance |
31,778 | 39,260 | ||||
|
Valuation allowance |
(6,870) | (10,593) | ||||
|
Net deferred tax asset |
$ |
24,908 |
$ |
28,667 | ||
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we considered all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. Because there are more negative evidences for New Zealand and certain U.S. state carryforwards as of December 31, 2017, we recorded a valuation allowance of $6.9 million.
As of December 31, 2017, we had the following carry-forwards:
|
· |
approximately $939,000 in U.S. alternative minimum tax credit carry-forwards with no expiration date and are refundable beginning tax year 2018; |
|
· |
approximately $8.4 million in available New Zealand loss carry-forwards with no expiration date; |
|
· |
approximately $43.7 million in New York state loss carryforwards expiring in 2034; and, |
|
· |
approximately $43.8 million in New York city loss carryforwards expiring in 2034. |
In 2017 we liquidated a non-operating foreign subsidiary resulting in a reversal of approximately $7.6 million in deferred tax liability and $7.8 million in withholding tax reserves.
We expect no substantial limitations on the future use of U.S. or foreign loss carry-forwards.
The provision for income taxes is different from amounts computed by applying U.S. statutory rates to consolidated losses before taxes. The significant reason for these differences is as follows:
|
(Dollars in thousands) |
2017 |
2016 |
2015 |
||||||
|
Expected tax provision |
$ |
12,022 |
$ |
4,566 |
$ |
9,581 | |||
|
Increase (decrease) in tax expense resulting from: |
|||||||||
|
Foreign tax rate differential |
(2,153) | (648) | (654) | ||||||
|
Change in valuation allowance |
(905) | 129 | 1,531 | ||||||
|
State and local tax provision |
(541) | 307 | 1,133 | ||||||
|
Prior year adjustments |
(79) | (954) | (514) | ||||||
|
Unrecognized tax benefits |
(8,498) | 262 | 946 | ||||||
|
Advance to Overseas Subsidiary |
(7,620) |
-- |
-- |
||||||
|
Impact of Tax Act |
13,018 |
-- |
-- |
||||||
|
Non-taxable insurance proceeds |
(1,871) |
-- |
-- |
||||||
|
Indefinite reinvestment assertion |
-- |
-- |
(3,089) | ||||||
|
State rate and law change |
-- |
-- |
(3,635) | ||||||
|
Other |
(36) | 358 | (151) | ||||||
|
Actual tax provision |
$ |
3,337 |
$ |
4,020 |
$ |
5,148 | |||
The undistributed earnings of the Company's Australian subsidiaries are considered to be indefinitely reinvested. Accordingly, no provision for state income taxes or foreign withholding taxes has been provided on such undistributed earnings. Due to the enactment of the Tax Act, future repatriations of foreign earnings will generally not be subject to U.S. federal taxation but may incur state taxes. At December 31, 2017, we have not changed our indefinite reinvestment decision as a result of the Tax Act but will reassess this decision during the course of 2018 as we continue to consider the impact of the Tax Act.
The following table is a summary of the activity related to unrecognized tax benefits, excluding interest and penalties, for the years ended December 31, 2017, 2016, and 2015:
|
(Dollars in thousands) |
2017 |
2016 |
2015 |
||||||
|
Unrecognized tax benefits – gross beginning balance |
$ |
11,480 |
$ |
11,022 |
$ |
3,760 | |||
|
Gross increase (decrease) - prior year tax positions |
(7,905) | 133 | 6,679 | ||||||
|
Gross increase (decrease) - current period tax positions |
-- |
325 | 583 | ||||||
|
Settlements |
(452) |
-- |
-- |
||||||
|
Unrecognized tax benefits – gross ending balance |
$ |
3,123 |
$ |
11,480 |
$ |
11,022 | |||
As of December 31, 2017 and 2016, if recognized, $3.1 million and $9.9 million respectively, of the unrecognized tax benefits would impact the Company’s effective tax rate.
We record interest and penalties related to income tax matters as part of income tax expense. During the year ended December 31, 2016, we recorded an increase to tax interest of $0.4 million, resulting in a total $8.9 million in interest. During the year ended December 31, 2017, we recorded an increase to tax interest of $203,000, resulting in a total $9.1 million in interest.
It is difficult to predict the timing and resolution of uncertain tax positions. Based upon the Company’s assessment of many factors, including past experience and judgments about future events, it is probable that within the next 12 months the reserve for uncertain tax positions will increase within a range of $500,000 to $1.5 million. The reasons for such change include but are not limited to tax positions expected to be taken during 2017, revaluation of current uncertain tax positions, and expiring statutes of limitations.
Generally, changes to our federal and most state income tax returns for the calendar year 2013 and earlier are barred by statutes of limitations. Certain U.S. subsidiaries filed federal and state tax returns for periods before these entities became consolidated with us. These subsidiaries were examined by IRS for the years 1996 to 1999 and significant tax deficiencies were assessed for those years. Those deficiencies have been settled, as discussed in “Tax Audit/Litigation,” Note 12 – Commitments and Contingencies.
As of December 31, 2017, federal income tax returns for 2014 and after are open for examination, with the 2015 return being currently under examination. California worldwide unitary income tax returns for 2013 and after are open for examination, but an examination of 2013 through 2015 has been completed, awaiting a final assessment notice. Income tax returns filed in Puerto Rico for 2013 and after are open for examination. Australia income tax returns for calendar years 2012 and after are open for examination, with 2014 and 2015 currently under risk review. New Zealand income tax returns for calendar year 2009 and after were under examination as of December 31, 2017, with no other New Zealand returns being open for examination.