INCOME TAXES
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that will impact many areas of taxation, including, but not limited to, (1) reduction of the U.S. federal corporate tax rate from 35% to 21%; (2) elimination of the corporate alternative minimum tax ("AMT"); (3) the introduction of the base erosion anti-abuse tax ("BEAT"), a new minimum tax; (4) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (5) a new provision designed to tax global intangible low-taxed income ("GILTI"); (6) a new limitation on deductible interest expense; (7) the repeal of the domestic production activity deduction; (8) limitations on the deductibility of certain executive compensation; (9) limitations on the use of foreign tax credits to reduce U.S. income tax liability; (10) limitations on net operating losses ("NOLs") generated after December 31, 2017, to 80% of taxable income; (11) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years; and (12) bonus depreciation that will allow for full expensing of qualified property.
On December 22, 2017, 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, Income Taxes. SAB 118 provides a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) where a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Act.
Due to the complex nature of the Tax Act, we have not completed our accounting for the income tax effects of certain elements of the Tax Act. If we were able to make reasonable estimates of the effects of certain elements for which our analysis is not yet complete, we recorded a provisional estimate in the financial statements. If we were not yet able to make reasonable estimates of the impact of certain elements, we have not recorded any adjustments related to those elements and have continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the Tax Act. The ultimate impact of the Tax Act may differ from this estimate, possibly materially, due to changes in interpretations and assumptions, and guidance that may be issued and actions we may take in response to the Tax Act. We note that the Tax Act is complex and we continue to assess the impact that various provisions will have on our business.
Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next twelve months, we consider the accounting for the deferred tax asset re-measurements and other items to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. In connection with our initial analysis, we have recorded a discrete tax expense of $1.25 million as a provisional estimate of the impact of the Tax Act during 2017 increasing our effective tax rate by 60.0%. This provisional estimate primarily consists of a $1.25 million expense primarily related to the revaluation of our deferred tax asset.
The (benefit) provision for income taxes for each of the three years in the period ended December 31, was as follows (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current taxes: | | | | | |
Federal | $ | (5,427 | ) | | $ | 3,720 |
| | $ | 3,370 |
|
State and local | 309 |
| | 1,329 |
| | 1,569 |
|
Total current income taxes | (5,118 | ) |
| 5,049 |
|
| 4,939 |
|
| | | | | |
Deferred taxes: | | | | | |
Federal | (2,884 | ) | | (32,964 | ) | | (2,836 | ) |
State and local | (1,850 | ) | | (1,160 | ) | | 153 |
|
Total deferred income taxes | (4,734 | ) |
| (34,124 | ) |
| (2,683 | ) |
| | | | | |
Provision (benefit) for income taxes | $ | (9,852 | ) |
| $ | (29,075 | ) |
| $ | 2,256 |
|
Current federal income taxes from 2015 to 2017 principally relate to federal alternative minimum tax.
The table below reconciles the expected statutory federal income tax to the actual income tax provision (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Expected federal income tax provision | $ | 720 |
| | $ | 2,761 |
| | $ | 3,066 |
|
State and local income taxes, net of federal income tax benefit | 1,580 |
| | 110 |
| | 1,119 |
|
Decrease in valuation allowance | — |
| | (31,846 | ) | | (1,556 | ) |
Decrease in unrecognized tax benefit | (13,212 | ) | | — |
| | — |
|
Impact of tax reform | 1,240 |
| | — |
| | — |
|
Excess of stock detriment (benefit) | (109 | ) | | — |
| | — |
|
Employee incentive stock options | (88 | ) | | — |
| | — |
|
Permanent difference on tax exempt municipal bond interest | — |
| | (198 | ) | | (264 | ) |
Permanent difference on real estate donation | — |
| | — |
| | (157 | ) |
Meals and entertainment | 43 |
| | 37 |
| | 31 |
|
Other permanent differences | 27 |
| | 43 |
| | 18 |
|
Other | (53 | ) | | 18 |
| | (1 | ) |
Actual income tax provision (benefit) | $ | (9,852 | ) |
| $ | (29,075 | ) |
| $ | 2,256 |
|
At December 31, 2017 and 2016, the net deferred tax asset (liability) consisted of the following (in thousands):
|
| | | | | | | |
| 2017 | | 2016 |
Deferred Tax Asset: | | | |
Minimum tax credit carryovers | $ | 31,559 |
| | $ | 29,743 |
|
Land basis | 247 |
| | 1,741 |
|
BRP equity interest | 3,714 |
| | 8,855 |
|
Other, net | 1,125 |
| | 2,877 |
|
| 36,645 |
|
| 43,216 |
|
Valuation allowance | — |
| | — |
|
| 36,645 |
|
| 43,216 |
|
| | | |
Deferred Tax Liability: | | | |
Buildings | (1,448 | ) | | (6,121 | ) |
Leaseholds | (334 | ) | | (2,353 | ) |
| (1,782 | ) |
| (8,474 | ) |
| | | |
Net deferred tax asset | $ | 34,863 |
|
| $ | 34,742 |
|
The Tax Act repeals the corporate AMT effective for tax years beginning after December 31, 2017. Any AMT credit carryovers
to tax years after that date generally may be utilized to the extent of the taxpayer’s regular tax liability (as reduced by certain other credits). In addition, for tax years beginning in 2018, 2019, and 2020, to the extent that AMT credit carryovers exceed regular tax liability (as reduced by certain other credits), 50% of the excess AMT credit carryovers are refundable. Any remaining AMT credits will be fully refundable in 2021.
During 2016, we determined that we had enough positive evidence to conclude that it is more likely than not that we will be able to generate enough future taxable income to fully utilize all of our Federal minimum tax credits. The primary positive evidence considered was the formation of Village III Master with three national builders to develop and build homes at the Otay Land project and the projections of taxable income from the Otay Land and other of our projects. In addition, our minimum tax credits have no expiration. As a result, we were able to conclude that it is more likely than not that we will be able to realize the entire portion of our net deferred tax asset; accordingly, approximately $31,850,000 of the deferred tax valuation allowance was released as a credit to income tax expense during 2016.
The following table reconciles the total amount of unrecognized tax benefits as of the beginning and end of the period presented (in thousands):
|
| | | | | | | | | | | |
| Unrecognized | | | | |
| Tax Benefits | | Interest | | Total |
Balance, January 1, 2015 | $ | — |
| | $ | — |
| | $ | — |
|
Increases based on tax positions related to current period | 2,936 |
| |
|
| | 2,936 |
|
Interest expense recognized |
|
| | 40 |
| | 40 |
|
| | | | | |
Balance, December 31, 2015 | 2,936 |
|
| 40 |
|
| 2,976 |
|
Increases based on tax positions related
to current period | 1,360 |
| | | | 1,360 |
|
Interest expense recognized | | | 110 |
| | 110 |
|
| | | | | |
Balance, December 31, 2016 | $ | 4,296 |
| | $ | 150 |
| | $ | 4,446 |
|
Increases based on tax positions related
to current period | 382 |
| | | | 382 |
|
Decreases based on tax positions related
to prior periods | (4,678 | ) | | | | (4,678 | ) |
Interest expense reversed | | | (150 | ) | | (150 | ) |
| | | | | |
Balance, December 31, 2017 | $ | — |
| | $ | — |
| | $ | — |
|
During 2017, we effectively settled our 2014 federal tax examination with the IRS and, as a result, recorded an $8,600,000 reduction to deferred tax liabilities and a $4,700,000 reduction to unrecognized tax benefits. The statute of limitations with respect to the Company’s federal income tax returns has expired for all years through 2013, and with respect to California state income tax returns through 2012. We are currently under examination by the City of New York for the year ended 2014. We do not expect that resolution of this examination will have a significant effect on our consolidated financial position, but it could have a significant impact on the consolidated results of operations for the period in which resolution occurs.