Income Taxes
Total income before income taxes, classified by source of income, was as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
U.S. | $ | 192,505 |
| | $ | 168,692 |
| | $ | 151,209 |
|
Outside the U.S. | 31,492 |
| | 31,288 |
| | 32,776 |
|
Income before income taxes | $ | 223,997 |
| | $ | 199,980 |
| | $ | 183,985 |
|
The provision for income taxes, classified by the timing and location of payment, was as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Current tax expense | | | | | |
Federal | $ | 63,279 |
| | $ | 62,216 |
| | $ | 50,794 |
|
State | 5,183 |
| | 8,163 |
| | 5,476 |
|
Foreign | 2,000 |
| | 745 |
| | 592 |
|
Deferred tax (benefit) expense | | | | | |
Federal | 37,997 |
| | (7,723 | ) | | (112 | ) |
State | 900 |
| | (2,655 | ) | | (737 | ) |
Foreign | (255 | ) | | (137 | ) | | (57 | ) |
Income taxes | $ | 109,104 |
| | $ | 60,609 |
| | $ | 55,956 |
|
Net deferred tax assets consisted of:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (in thousands) |
Property, equipment and intangible assets | $ | (8,026 | ) | | $ | (9,171 | ) |
Accrued compensation | 12,472 |
| | 17,365 |
|
Accrued expenses | 6,708 |
| | 43,176 |
|
Foreign operations | (775 | ) | | (941 | ) |
Valuation allowance on foreign deferred tax assets | (158 | ) | | (145 | ) |
Foreign net operating losses | 2,286 |
| | 2,064 |
|
Valuation allowance on foreign net operating losses | (1,392 | ) | | (1,270 | ) |
Deferred tax asset on unrecognized tax positions | 966 |
| | 1,107 |
|
Other | 1,215 |
| | 335 |
|
Net deferred tax assets | $ | 13,296 |
| | $ | 52,520 |
|
Balance sheet presentation:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (in thousands) |
Non-current net deferred tax assets | $ | 13,335 |
| | $ | 52,812 |
|
Non-current net deferred tax assets (liabilities) | (39 | ) | | (292 | ) |
Net deferred tax assets | $ | 13,296 |
| | $ | 52,520 |
|
As of December 31, 2017, the Company had foreign net operating loss carryforwards of approximately $7.6 million before applying tax rates for the respective jurisdictions, subject to a valuation allowance of $4.2 million. Approximately $2.7 million of our foreign net operating losses may expire between 2020 and 2026. In addition, the Company has recorded a valuation allowance on approximately $0.5 million of foreign deferred tax assets before applying the tax rate of the respective jurisdiction.
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. Some of these changes are effective in 2017, including, but not limited to (1) requiring a mandatory one-time transition tax (the “Transition Tax”) on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years; and (2) bonus depreciation that will allow for full expensing of qualified property placed in service after September 27, 2017. In addition, effective January 1, 2018, the U.S. federal corporate income tax rate is reduced from 35% to 21%.
The statutory United States federal income tax rate reconciles to the effective income tax rates as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Statutory U.S. federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal tax benefit | 1.8 | % | | 1.7 | % | | 1.7 | % |
Benefits and taxes related to foreign operations | (4.4 | )% | | (5.2 | )% | | (6.2 | )% |
Windfall tax benefit on share-based compensation | (1.7 | )% | | (1.7 | )% | | — | % |
Unrecognized tax positions | (0.2 | )% | | 0.2 | % | | (0.2 | )% |
Transition Tax imposed on unrepatriated foreign earnings | 15.7 | % | | — | % | | — | % |
Write-down of net deferred tax assets due to U.S. rate change | 2.1 | % | | — | % | | — | % |
Other | 0.4 | % | | 0.3 | % | | 0.1 | % |
Effective income tax rates | 48.7 | % | | 30.3 | % | | 30.4 | % |
The Company's effective income tax rates were 48.7%, 30.3%, and 30.4%, for the years ended December 31, 2017, 2016 and 2015, respectively.
The effective income tax rate for the year ended December 31, 2017 was higher than the United States federal statutory rate of 35% primarily due to the Transition Tax of $35.3 million and the $4.7 million impairment of our net domestic deferred tax assets resulting from the reduction of the U.S. federal corporate income tax rate to 21% effective January 1, 2018. The increase from these items was partially offset by the recurring impact of foreign operations and windfall tax benefits related to share-based compensation. The effective income tax rate for the year ended December 31, 2016 was lower than the U.S. federal statutory rate of 35% primarily due to the recurring impact of foreign operations and windfall tax benefits related to share-based compensation, partially offset by state income taxes.
As of December 31, 2017 and 2016, the Company’s gross unrecognized tax benefits totaled $2.3 million and $2.7 million, respectively. After considering the deferred income tax accounting impact, it is expected that about $1.3 million of the total as of December 31, 2017 would favorably affect the effective tax rate if resolved in the Company’s favor. The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Balance, January 1 | $ | 2,691 |
| | $ | 3,137 |
| | $ | 3,395 |
|
Changes for tax positions of prior years | (16 | ) | | 580 |
| | 116 |
|
Increases for tax positions related to the current year | 138 |
| | 181 |
| | 772 |
|
Settlements and lapsing of statutes of limitations | (529 | ) | | (1,207 | ) | | (1,146 | ) |
Balance, December 31 | $ | 2,284 |
| | $ | 2,691 |
| | $ | 3,137 |
|
It is reasonably possible that the Company’s unrecognized tax benefits could decrease within the next 12 months by as much as $2.3 million due to settlements and the expiration of applicable statutes of limitations. The Company's federal income tax returns for tax years 2014, 2015 and 2016 remain subject to examination by the Internal Revenue Service.
The practice of the Company is to recognize interest and penalties related to income tax matters in the provision for income taxes. The Company did not incur any material interest or penalties for 2017 and 2016. The Company had $0.6 million and $0.7 million of accrued interest and penalties at December 31, 2017 and 2016, respectively.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of the Tax Act. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. Therefore, in accordance with SAB 118, the Company has recorded the provisional amounts described below.
The Transition Tax is a tax on accumulated and undistributed earnings and profits (E&P) of the Company's foreign subsidiaries. To compute the Transition Tax, the Company determined the E&P of these subsidiaries, as well as the amount of non-U.S. income taxes previously paid on such earnings. As of December 31, 2017, E&P was estimated to be $288 million and therefore a provisional Transition Tax expense of $35.3 million was recorded. However, the Company has not yet completed its analysis of these highly complex items. The Company also continues to monitor pertinent guidance by the Internal Revenue Service, U.S. Treasury Department, and U.S. state tax authorities, which may provide the Company with additional information to more precisely compute the amount of the Transition Tax.
Although the Tax Act imposes the mandatory Transition Tax, the Company’s intent is for its foreign earnings to continue to be permanently reinvested in operations outside the United States. The Company plans to utilize these earnings to fund overseas operations and working capital needs as well as facilitate overseas growth including, but not limited to, investment in new hotel contracts and acquisitions intended to further its global growth strategy. However, as a result of the Tax Act, the Company’s foreign subsidiaries will pay a special non-recurring dividend of approximately $200 million to the U.S. parent company in 2018. As the Company continues to evaluate the Tax Act and the impact of its global financial statements, it may modify this assertion in future quarters.
Deferred tax assets and deferred tax liabilities must be valued at the rate at which they are expected to reverse. Beginning January 1, 2018, the Tax Act reduces the corporate tax rate from 35% to 21%. As a result, the Company has recorded a provisional $13.6 million decrease in its deferred tax assets and a $8.9 million decrease in its deferred tax liabilities for the year ended December 31, 2017. While the Company has made reasonable estimates of the impact of the Tax Act, these estimates may be affected by further analyses and guidance related to the Tax Act including, but not limited to, an analysis of the tax basis of foreign subsidiaries, deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences.
The Tax Act permits taxpayers to immediately expense the full cost of qualified property that is acquired and placed into service from September 28, 2017 through December 31, 2022. While the Company has not yet completed all of the analysis and computations relating to 2017 expenditures that qualify for immediate expensing, it has recorded a $0.8 million provisional reduction of income tax expense based on the intent to fully expense all qualified asset purchases.