INCOME TAXES
The components of the provision for income taxes for the years ended December 31 follow:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 358.3 |
| | $ | 299.5 |
| | $ | 337.6 |
|
State | 48.4 |
| | 34.6 |
| | 38.4 |
|
Deferred: | | | | | |
Federal | (388.1 | ) | | 44.9 |
| | 91.5 |
|
State | 9.1 |
| | 2.3 |
| | 25.2 |
|
State deferred benefit - change in valuation allowance | 9.6 |
| | (1.4 | ) | | (10.5 | ) |
Uncertain tax positions and interest, and other | (34.2 | ) | | (27.2 | ) | | (36.7 | ) |
Provision for income taxes | $ | 3.1 |
| | $ | 352.7 |
| | $ | 445.5 |
|
The reconciliations of the statutory federal income tax rate to our effective tax rate for the years ended December 31 follow:
|
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal benefit | 3.0 |
| | 3.1 |
| | 4.3 |
|
Change in valuation allowance | (0.2 | ) | | (0.1 | ) | | (0.9 | ) |
Non-deductible expenses | 1.8 |
| | 0.9 |
| | 0.6 |
|
Uncertain tax position taxes and interest | — |
| | (0.1 | ) | | (1.5 | ) |
Investment tax credits | (1.0 | ) | | (1.1 | ) | | — |
|
Change in U.S. Tax Law | (36.2 | ) | | — |
| | — |
|
Other, net | (2.2 | ) | | (1.2 | ) | | (0.2 | ) |
Effective income tax rate | 0.2 | % | | 36.5 | % | | 37.3 | % |
The Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, limits deductions for, among other things, interest expense, executive compensation and meals and entertainment while enhancing deductions for equipment and other fixed assets. The Tax Act also requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.
The SEC staff issued 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’s enactment date for companies to complete its accounting under ASC 740. In accordance with SAB 118, to the extent a company has not completed its analysis of the Tax Act but can provide a reasonable estimate, it must record a provisional estimate in its financial statements.
As of December 31, 2017, we have not finalized our accounting for the tax effects of the enactment of the Tax Act; however, as described below we have made a reasonable estimate of the effects on our existing deferred tax balances, uncertain tax positions and the one-time transition tax.
We re-measured our deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the provisional measurement of these balances. We also anticipate that the completion of our 2017 income tax returns by the third quarter of 2018 will also impact the provisional amounts we have recorded. Based on our current estimates, the provisional amount recorded at December 31, 2017 reduced our tax provision by approximately $473 million.
We adjusted our reserve for uncertain tax positions to reflect the lower federal benefit of state tax deductions. The provisional amount recorded at December 31, 2017 increased our tax provision by approximately $4 million.
The one-time transition tax on our foreign subsidiaries is based on our total post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes. Our provisional amount recorded at December 31, 2017 increased our tax provision by approximately $4 million. This amount may change as we refine our calculations of post-1986 E&P for our foreign subsidiaries as well as the amounts held in cash or other specified assets. No additional income taxes have been provided for outside basis differences inherent in these entities as these amounts continue to be indefinitely reinvested. At December 31, 2017 we estimate additional taxes associated with outside basis differences to be approximately $4 million.
The Tax Act also creates a new requirement that Global Intangible Low Taxed Income (GILTI) earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs U.S. shareholder. Due to the complexity of the new GILTI rules we are continuing to evaluate this provision of the Tax Act. We have not recorded any provisional amounts as of December 31, 2017 nor have we made an accounting policy choice of including taxable income related to GILTI as either a current period tax expense or factoring such amounts into our measurement of deferred taxes.
We anticipate that the completion of our 2017 income tax returns, future guidance and additional information and interpretations with the respect to the Tax Act will cause us to further adjust the provisional amounts recorded as of December 31, 2017. In accordance with SAB 118, we will record such adjustments in the period that relevant guidance and/or additional information becomes available and our analysis is completed.
Outside of the impact of the Tax Act, our 2017 tax provision was reduced by approximately $9 million due to the realization of tax credits and lower state rates due to changes in estimates following the completion of our 2016 tax returns and the favorable resolution of various state tax matters during 2017. These benefits were partially offset by the write-off of goodwill associated with divestitures that had no corresponding tax basis.
We reduced our 2017 tax provision by $19.6 million due to excess tax benefits required to be recorded to the income statement resulting from the adoption of ASU 2016-09, Compensation - Stock Compensation (Topic 718). Prior to 2017, these benefits were recorded directly to shareholders’ equity.
In addition, during 2017 we acquired non-controlling interests in limited liability companies established to construct solar energy assets that qualified for investment tax credits under Section 48 of the Internal Revenue Code. Our 2017 tax provision was reduced by approximately $13 million mainly due to the tax credits related to these investments. We account for these investments using the equity method of accounting and recognize our share of income or loss and other reductions in the value of our investment in “Loss from unconsolidated equity method investments” within our consolidated statements of income. For further discussion regarding our equity method accounting, see Note 3, Business Acquisitions, Investments and Restructuring Charges, included herein.
Our 2016 tax provision was reduced by approximately $13 million due to the resolution of various state and federal tax matters as well as the realization of tax credits and lower state rates due to changes in estimates.
In addition, during 2016 we acquired a noncontrolling interest in a limited liability company established to construct a solar energy asset that qualified for an investment tax credit under Section 48 of the Internal Revenue Code. Our 2016 tax provision was reduced by approximately $10 million primarily due to the tax credit related to this investment.
Our 2015 tax provision was reduced by approximately $17 million due to the resolution of outstanding tax matters in various states and Puerto Rico.
We made income tax payments (net of refunds received) of approximately $370 million, $265 million and $321 million for 2017, 2016 and 2015, respectively. Lower cash taxes paid during 2016 were the result of various debt refinancings.
Income taxes paid in 2017 reflect the passage of the Tax Act which provided for 100% equipment expensing on qualified assets placed in service after September 27, 2017 and the favorable tax depreciation provisions of the Protecting Americans from Tax Hikes Act which provided for bonus depreciation deductions on assets placed in service in 2017 at 50% of the capitalized value. Income taxes paid in 2016 and 2015 reflect the favorable tax depreciation provisions of the Protecting Americans from Tax Hikes Act signed into law in December 2015.
The components of the net deferred income tax asset and liability as of December 31 follow:
|
| | | | | | | |
| 2017 | | 2016 |
Deferred tax liabilities relating to: | | | |
Differences between book and tax basis of property and equipment | $ | (715.3 | ) | | $ | (1,058.7 | ) |
Difference between book and tax basis of intangible assets | (446.9 | ) | | (711.6 | ) |
Basis difference due to redemption of partnership interests | (89.0 | ) | | (130.1 | ) |
Total liabilities | $ | (1,251.2 | ) | | $ | (1,900.4 | ) |
Deferred tax assets relating to: | | | |
Environmental reserves | $ | 272.5 |
| | $ | 449.2 |
|
Accruals not currently deductible | 106.2 |
| | 177.8 |
|
Net operating loss carryforwards | 143.3 |
| | 103.3 |
|
Difference between book and tax basis of other assets | 27.3 |
| | 44.5 |
|
Other | 14.4 |
| | 17.4 |
|
Total assets | 563.7 |
| | 792.2 |
|
Valuation allowance | (72.4 | ) | | (62.3 | ) |
Net deferred tax asset | 491.3 |
| | 729.9 |
|
Net deferred tax liabilities | $ | (759.9 | ) | | $ | (1,170.5 | ) |
Changes in the deferred tax valuation allowance for the years ended December 31 follow:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Valuation allowance, beginning of year | $ | 62.3 |
| | $ | 63.7 |
| | $ | 73.9 |
|
Additions charged to provision for income taxes | 12.9 |
| | 0.3 |
| | 0.3 |
|
Deferred tax assets realized or written-off | (2.8 | ) | | (1.4 | ) | | (10.5 | ) |
Other, net | — |
| | (0.3 | ) | | — |
|
Valuation allowance, end of year | $ | 72.4 |
| | $ | 62.3 |
| | $ | 63.7 |
|
We have deferred tax assets related to state net operating loss carryforwards. We provide a partial valuation allowance due to uncertainty surrounding the future utilization of these carryforwards in the taxing jurisdictions where the loss carryforwards exist. When determining the need for a valuation allowance, we consider all positive and negative evidence, including recent financial results, scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies. The weight given to the positive and negative evidence is commensurate with the extent such evidence can be objectively verified. We adjust the valuation allowance in the period management determines it is more likely than not that deferred tax assets will or will not be realized.
During 2017, additions to our valuation allowance were due to the increase we recorded to our deferred taxes for existing state net operating losses resulting from the lower federal tax rate in the Tax Act.
During 2015, we completed a tax restructuring between two of our subsidiaries that possess the majority of our state loss carryforwards. This resulted in a reduction to the valuation allowance of $10.2 million. This reduction was offset by a corresponding decrease to our deferred tax asset related to those same state loss carryforwards.
Substantially all of our valuation allowance is associated with state loss carryforwards. The realization of our deferred tax asset for state loss carryforwards ultimately depends upon the existence of sufficient taxable income in the appropriate state taxing jurisdictions in future periods. We continue to regularly monitor both positive and negative evidence in determining the ongoing need for a valuation allowance.
We have deferred tax assets related to state net operating loss carryforwards with an estimated tax effect of approximately $126 million available as of December 31, 2017. These state net operating loss carryforwards expire at various times between 2017 and 2037. We believe that it is more likely than not that the benefit from some of our state net operating loss carryforwards will not be realized due to limitations on these loss carryforwards in certain states. In recognition of this risk, as of December 31, 2017, we have provided a valuation allowance of approximately $71 million.
As a result of the recent changes in U.S. tax law, as well as our ongoing efforts to streamline and maximize the efficiency of our tax footprint, we could further adjust our valuation allowance in a future period if there is sufficient evidence to support a conclusion that it is more likely than not that certain of the state net operating loss carryforwards, on which we currently provide a valuation allowance, would be realized.
We are subject to income tax in the United States and Puerto Rico, as well as income tax in multiple state jurisdictions. Our compliance with income tax rules and regulations is periodically audited by tax authorities. These authorities may challenge the positions taken in our tax filings. Thus, to provide for certain potential tax exposures, we maintain liabilities for uncertain tax positions for our estimate of the final outcome of the examinations. Our federal statute of limitations is closed for all years prior to 2014. We are currently under state examination or administrative review in various jurisdictions for tax years 2009 to 2015.
The following table summarizes the activity in our gross unrecognized tax benefits for the years ended December 31:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Balance at beginning of year | $ | 46.1 |
| | $ | 47.0 |
| | $ | 70.1 |
|
Additions based on tax positions related to current year | — |
| | — |
| | 0.2 |
|
Additions for tax positions of prior years | 1.7 |
| | 0.1 |
| | 1.4 |
|
Reductions for tax positions of prior years | (8.0 | ) | | (0.7 | ) | | (10.2 | ) |
Reductions for tax positions resulting from lapse of statute of limitations | (0.5 | ) | | (0.3 | ) | | (0.6 | ) |
Settlements | — |
| | — |
| | (13.9 | ) |
Balance at end of year | $ | 39.3 |
| | $ | 46.1 |
| | $ | 47.0 |
|
During 2017 and 2016, we resolved tax matters in various states which reduced our gross unrecognized tax benefits by $8.5 million and $1.0 million, respectively. During 2015, we settled tax matters in various states and Puerto Rico which reduced our gross unrecognized tax benefits by $13.9 million.
Included in our gross unrecognized tax benefits as of December 31, 2017 and 2016 are $31.0 million and $30.0 million, respectively, of unrecognized tax benefits (net of the federal benefit on state matters) that, if recognized, would affect our effective income tax rate in future periods.
We recognize interest and penalties as incurred within the provision for income taxes in our consolidated statements of income. Related to the unrecognized tax benefits previously noted, we recorded interest expense of approximately $3.2 million during 2017 and, in total as of December 31, 2017, have recognized a liability for penalties of $0.5 million and interest of $13.2 million.
During 2016, we recorded interest expense of approximately $1.0 million and, in total as of December 31, 2016, had recognized a liability for penalties of $0.5 million and interest of $11.6 million. During 2015, we accrued interest of approximately $1.2 million and, in total as of December 31, 2015, had recognized a liability for penalties of $0.5 million and interest of $10.3 million.
Gross unrecognized benefits that we expect to settle in the following twelve months are in the range of approximately $0 to $10 million; however, it is reasonably possible that the amount of unrecognized tax benefits may either increase or decrease in the next twelve months.
We are currently under examination or administrative review by state and local taxing authorities for various tax years. These state audits are ongoing.
We believe the recorded liabilities for uncertain tax positions are adequate. However, a significant assessment against us in excess of the liabilities recorded could have a material adverse effect on our consolidated financial position, results of operations and cash flows.