Entity information:
INCOME TAXES:
The Tax Act, among other things, lowers the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries, limits and eliminates certain tax deductions and creates new taxes on certain foreign-sourced earnings. Consequently, during the year ended December 31, 2017, one-time net tax benefits of $70.1 million were recorded, including $85.3 million of tax benefits associated with the re-measurement of U.S. deferred tax assets and liabilities based on rates at which they are expected to reverse in future periods, which is generally 21%; partially offset by an estimated $15.2 million transition tax on post-1986 earnings and profits of certain foreign subsidiaries. Also during the year ended December 31, 2017, an additional one-time tax benefit of $26.7 million was recorded associated with entity restructuring and recapitalization efforts, partially offset by an $8.5 million decrease of the production activity related tax benefit due to the acceleration of certain deductions in 2017.
While Quanta has substantially completed its provisional analysis of the effects of the Tax Act and recorded a reasonable estimate of such effects, the net one-time benefits related to the Tax Act may differ, possibly materially, due to, among other things, further refinement of Quanta’s calculations, changes in interpretations and assumptions made, additional regulatory guidance, and actions and related accounting policy decisions resulting from the Tax Act. Quanta will complete its analysis over a one-year measurement period ending December 22, 2018, and any adjustments during the measurement period will be included within “Net income from continuing operations” as an adjustment to “Provision for income taxes” on Quanta’s consolidated statement of operations in the reporting period when such adjustments are determined.
The components of income (loss) from continuing operations before income taxes were as follows (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
Income (loss) from continuing operations before income taxes:
 
 
 
 
 
Domestic
$
291,031

 
$
349,959

 
$
244,955

Foreign
62,726

 
(42,273
)
 
(16,280
)
Total
$
353,757

 
$
307,686

 
$
228,675


The components of the provision for income taxes for continuing operations were as follows (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
Current:
 

 
 

 
 

Federal
$
44,695

 
$
106,316

 
$
85,830

State
301

 
11,549

 
9,783

Foreign
22,666

 
5,076

 
21,262

Total current tax provision
67,662

 
122,941

 
116,875

 
 
 
 
 
 
Deferred:
 
 
 
 
 
Federal
(36,915
)
 
(264
)
 
(5,247
)
State
14,951

 
(923
)
 
917

Foreign
(10,166
)
 
(14,508
)
 
(15,073
)
Total deferred tax benefit
(32,130
)
 
(15,695
)
 
(19,403
)
Total provision for income taxes from continuing operations
$
35,532

 
$
107,246

 
$
97,472


The actual income tax provision differed from the income tax provision computed by applying the U.S. federal statutory corporate rate to income from continuing operations before provision for income taxes as follows (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
Provision at the statutory rate
$
123,815

 
$
107,690

 
$
80,036

Increases (decreases) resulting from —
 
 
 
 
 
Tax Cuts and Jobs Act
(70,129
)
 
—

 
—

State taxes
17,920

 
6,479

 
7,241

Foreign taxes
(16,958
)
 
1,860

 
1,239

Contingency reserves, net
3,651

 
(13,540
)
 
4,438

Production activity deduction
(1,504
)
 
(8,586
)
 
(6,871
)
Employee per diems, meals and entertainment
13,605

 
8,764

 
8,727

Taxes on unincorporated joint ventures
(1,354
)
 
(656
)
 
(3,838
)
Asset impairments
—

 
1,909

 
7,047

Entity restructuring and recapitalization efforts
(26,668
)
 
—

 
—

Equity compensation
(5,095
)
 
—

 
—

Other
(1,751
)
 
3,326

 
(547
)
Total provision for income taxes from continuing operations
$
35,532

 
$
107,246

 
$
97,472


Deferred income taxes result from temporary differences in the recognition of income and expenses for financial reporting purposes and tax purposes. The tax effects of these temporary differences, representing deferred tax assets and liabilities, result principally from the following (in thousands):
 
December 31,
 
2017
 
2016
Deferred income tax liabilities:
 
 
 
Property and equipment
$
(161,491
)
 
$
(214,902
)
Goodwill
(49,407
)
 
(83,097
)
Other intangibles
(26,676
)
 
(33,566
)
Customer holdbacks
(36,218
)
 
(16,424
)
Other book/tax accounting method differences
(15,154
)
 
(24,817
)
Total deferred income tax liabilities
(288,946
)
 
(372,806
)
 
 
 
 
Deferred income tax assets:
 

 
 

Accruals and reserves
21,419

 
21,681

Accrued insurance
—

 
79,630

Stock and incentive compensation and pension withdrawal liabilities
17,676

 
58,744

Net operating loss carryforwards
62,925

 
37,362

Tax credits
48,516

 
1,613

Other
4,747

 
5,933

Subtotal
155,283

 
204,963

Valuation allowance
(19,328
)
 
(14,991
)
Total deferred income tax assets
135,955

 
189,972

Total net deferred income tax liabilities
$
(152,991
)
 
$
(182,834
)

The net deferred income tax assets and liabilities were comprised of the following in the accompanying consolidated balance sheets (in thousands):
 
December 31,
 
2017
 
2016
Deferred income taxes:
 

 
 

Assets
$
26,390

 
$
10,000

Liabilities
(179,381
)
 
(192,834
)
Total net deferred income tax liabilities
$
(152,991
)
 
$
(182,834
)

The valuation allowance for deferred income tax assets at December 31, 2017, 2016 and 2015 was $19.3 million, $15.0 million and $16.1 million, respectively. These valuation allowances relate to state and foreign net operating loss carryforwards. The net change in the total valuation allowance for each of the years ended December 31, 2017, 2016 and 2015 was an increase of $4.3 million, a decrease of $1.1 million and an increase of $3.1 million, respectively. The valuation allowance was established primarily as a result of uncertainty in Quanta’s outlook as to future taxable income in particular tax jurisdictions. Quanta believes it is more likely than not that it will realize the benefit of its deferred tax assets net of existing valuation allowances.
At December 31, 2017, Quanta had state and foreign net operating loss carryforwards, the tax effect of which was $67.9 million. These carryforwards will expire as follows: 2018, $0.2 million; 2019, $0.1 million; 2020, $1.9 million; 2021, $0.1 million; 2022, $0.2 million and $65.4 million thereafter. A valuation allowance of $17.8 million has been recorded against certain foreign and state net operating loss carryforwards.
Quanta generally does not provide for taxes related to undistributed earnings of its foreign subsidiaries because such earnings either would not be taxable when remitted or they are considered to be indefinitely reinvested. Quanta could also be subject to additional foreign withholding taxes if it were to repatriate cash that is indefinitely reinvested outside the United States, but it does not expect such amount to be material.
A reconciliation of unrecognized tax benefit balances is as follows (in thousands):
 
December 31,
 
2017
 
2016
 
2015
Balance at beginning of year
$
35,240

 
$
54,541

 
$
50,668

Additions based on tax positions related to the current year
7,040

 
4,227

 
5,340

Additions for tax positions of prior years
3,372

 
2,048

 
292

Reductions for tax positions of prior years
(1,171
)
 
(1,948
)
 
(132
)
Reductions for audit settlements
—

 
(180
)
 
(1,345
)
Reductions resulting from a lapse of the applicable statute
of limitations periods
(8,252
)
 
(23,448
)
 
(282
)
Balance at end of year
$
36,229

 
$
35,240

 
$
54,541



For the year ended December 31, 2017, the $8.3 million reduction was primarily due to the expiration of certain federal and state statute of limitations periods for the 2013 tax year. For the year ended December 31, 2016, the $23.4 million reduction was primarily due to the expiration of certain federal and state statute of limitations periods for the 2010 through 2012 tax years. For the year ended December 31, 2015, the $0.3 million reduction was primarily due to the expiration of certain federal and state statute of limitations periods for the 2004 tax year.
The balances of unrecognized tax benefits, the amount of related interest and penalties and what Quanta believes to be the range of reasonably possible changes in the next 12 months are as follows (in thousands):
 
December 31,
 
2017

2016

2015
Unrecognized tax benefits
$
36,229


$
35,240


$
54,541

Portion that, if recognized, would reduce tax expense and
effective tax rate
35,561


33,128


48,312

Accrued interest on unrecognized tax benefits
5,368


5,539


8,750

Accrued penalties on unrecognized tax benefits
631


650


673

Reasonably possible reduction to the balance of unrecognized
tax benefits in succeeding 12 months
$0 to $13,655


$0 to $12,332


$0 to $27,485

Portion that, if recognized, would reduce tax expense and
effective tax rate
$0 to $12,483


$0 to $10,983


$0 to $24,009



Quanta classifies interest and penalties within the provision for income taxes. Quanta recognized interest income of $0.2 million, interest income of $3.2 million and interest expense of $2.4 million in the provision for income taxes for the years ended December 31, 2017, 2016 and 2015, respectively.
Although the IRS completed its examination related to tax years 2010, 2011 and 2012 during 2016, certain subsidiaries remain under examination by various U.S. state, Canadian and other foreign tax authorities for multiple periods. Quanta’s Canadian subsidiaries remain open to examination by the Canada Revenue Agency for tax years 2010 through 2014 as these statute of limitations periods have not yet expired. Quanta does not consider any state in which it does business to be a major tax jurisdiction.