INCOME TAXES
Provision for Income Taxes
The provision for income taxes consists of the following:
|
| | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2017 | 2016 | 2015 |
Current: | | | |
Federal | $ | 46 |
| $ | 1 |
| $ | 9 |
|
State | 1 |
| — |
| 4 |
|
Total Current | 47 |
| 1 |
| 13 |
|
Deferred: | | | |
Federal | 12 |
| 38 |
| 12 |
|
State | 3 |
| 5 |
| — |
|
Revaluation due to legislative changes | (40 | ) | (1 | ) | 3 |
|
Total Deferred | (25 | ) | 42 |
| 15 |
|
Total | $ | 22 |
| $ | 43 |
| $ | 28 |
|
The U.S. federal statutory income tax rate reconciled to our effective tax rate is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | 2016 | 2015 |
(In millions, except percent) | Pre-Tax Income | Tax Expense/(Benefit) | Percent of Pre-Tax Income (Loss) | Pre-Tax Income | Tax Expense/(Benefit) | Percent of Pre-Tax Income (Loss) | Pre-Tax Income | Tax Expense/(Benefit) | Percent of Pre-Tax Income (Loss) |
| $ | 200 |
| | | $ | 104 |
| | | $ | 60 |
| | |
U.S. federal statutory tax rate | | $ | 70 |
| 35 | % | | $ | 37 |
| 35 | % | | $ | 21 |
| 35 | % |
State income taxes, net of federal benefit | | 10 |
| 5 |
| | 4 |
| 4 |
| | 4 |
| 7 |
|
Tax rate change | | (40 | ) | (20 | ) | | (1 | ) | (1 | ) | | 3 |
| 5 |
|
Nondeductible meals, entertainment and penalties | | 1 |
| — |
| | 4 |
| 4 |
| | 2 |
| 3 |
|
Stock-based compensation | | (15 | ) | (7 | ) | | 1 |
| 1 |
| | 1 |
| 1 |
|
Uncertain tax positions | | 4 |
| 2 |
| | — |
| — |
| | — |
| — |
|
Tax credits | | (3 | ) | (1 | ) | | (1 | ) | (1 | ) | | (2 | ) | (2 | ) |
State and tax return to provision adjustment | | (5 | ) | (3 | ) | | (1 | ) | (1 | ) | | — |
| — |
|
Sec 199 benefits | | (3 | ) | (1 | ) | | — |
| — |
| | — |
| — |
|
Other | | 3 |
| 1 |
| | — |
| — |
| | (1 | ) | (2 | ) |
Total | | $ | 22 |
| 11 | % | | $ | 43 |
| 41 | % | | $ | 28 |
| 47 | % |
Our effective income tax rate decreased by 30% from 41% in 2016 to 11% in 2017. The decrease was primarily attributable to a revaluation of deferred taxes due to federal legislative changes enacted in the fourth quarter ended December 31, 2017. The remaining decrease consisted of tax benefits recognized from excess tax benefits related to stock-based compensation, qualified production activities deduction for certain software offerings pursuant to Internal Revenue Code Section 199 and an increase in tax credits, partially offset by an increase in uncertain tax positions.
The revaluation of deferred taxes resulted in discrete tax (benefit)/expense representing (20)%, (1)% and 5% of the effective tax rate for the years ended December 31, 2017, 2016 and 2015, respectively.
Deferred Income Taxes
Significant components of our deferred tax assets and liabilities are as follows:
|
| | | | | | |
| Year Ended December 31, |
(in millions) | 2017 | 2016 |
Deferred tax assets: | | |
Net operating losses (federal and state) | $ | 4 |
| $ | 4 |
|
Accrued expenses | 6 |
| 11 |
|
Accrued workers' compensation costs | 8 |
| 13 |
|
Stock-based compensation | 8 |
| 6 |
|
Tax benefits relating to uncertain positions | 1 |
| — |
|
Tax credits (federal and state) | 9 |
| 6 |
|
Total | 36 |
| 40 |
|
Valuation allowance | (7 | ) | (6 | ) |
Total deferred tax assets | 29 |
| 34 |
|
Deferred tax liabilities: | | |
Depreciation and amortization | (13 | ) | (8 | ) |
Deferred service revenues | (79 | ) | (114 | ) |
Prepaid health plan expenses | (3 | ) | (4 | ) |
Total deferred tax liabilities | (95 | ) | (126 | ) |
Net deferred tax liabilities | $ | (66 | ) | $ | (92 | ) |
We recorded a change of $1 million to the valuation allowance to $7 million in 2017 from $6 million in 2016, related to certain state net operating loss and state tax credit carryforwards adjusted in the current year that may not be utilized prior to expiration. We have $78 million in multiple state net operating loss carryforwards as of December 31, 2017 and have utilized all of the federal net operating loss carryforwards. The state net operating loss carryforwards will begin expiring in 2018.
Excess tax benefits or deficiencies from share-based award activities are now reflected as a component of the provision for income taxes instead of equity. The provision for income taxes for the year ended December 31, 2017 included $16 million of excess tax benefits resulting from equity incentive plan activities.
We have $9 million (net of federal benefit) state tax credit carryforwards available that will begin expiring in 2021, which are partially offset by a valuation allowance of $6 million and $5 million as of December 31, 2017 and 2016, respectively.
We are subject to tax in U.S. federal and various state and local jurisdictions, as well as Canada. We are not subject to any material income tax examinations in federal or state jurisdictions for tax years prior to January 1, 2011. We paid Notices of Proposed Assessments disallowing employment tax credits totaling $11 million, plus interest and penalties of $4 million in connection with the IRS examination of Gevity HR, Inc. and its subsidiaries, which was acquired by TriNet in June 2009. This issue is being resolved through the litigation process. Currently, we anticipate our recovery of the refund is likely less than the total amount.
Pursuant to the Tax Cuts and Jobs Act (TCJA), the approach to the taxation of foreign earnings fundamentally changed to require a mandatory deemed repatriation of undistributed foreign earnings and profits at a repatriation toll charge. As such a toll charge of less than $1 million will be assessed on our Canadian subsidiary's undistributed earnings of $4 million as of December 31, 2017.
Uncertain Tax Positions
As of December 31, 2017 and 2016, the total unrecognized tax benefits related to uncertain income tax positions, which would affect the effective tax rate if recognized, were $5 million and $1 million, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) is as follows:
|
| | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2017 | 2016 | 2015 |
Unrecognized tax benefits at January 1 | $ | 1 |
| $ | 3 |
| $ | 2 |
|
Additions for tax positions of prior periods | 4 |
| — |
| — |
|
Additions for tax positions of current period | 1 |
| — |
| 1 |
|
Reductions for tax positions of prior period: | | | |
Settlements with taxing authorities | — |
| (2 | ) | — |
|
Unrecognized tax benefits at December 31 | $ | 6 |
| $ | 1 |
| $ | 3 |
|
As of December 31, 2017, the total amount of gross interest and penalties accrued was immaterial and $1 million as of December 31, 2016. The unrecognized tax benefit, including accrued interest and penalties are included in other liabilities on the consolidated balance sheet.
It is reasonably possible the amount of the unrecognized benefit could increase or decrease within the next twelve months, which would have an impact on net income.