Income Taxes
The components of income tax expense are as follows, and presented in thousands:
|
| | | | | | | | | | | |
| Year-Ended December 31, |
| 2017 |
| 2016 |
| 2015 |
Current income tax expense: | | | | | |
Federal | $ | 20,159 |
| | $ | 27,074 |
| | $ | 26,561 |
|
State | 3,227 |
| | 3,186 |
| | 1,649 |
|
Deferred income tax expense (benefit): | | | | | |
Federal | (716 | ) | | (3,969 | ) | | (1,575 | ) |
State | (193 | ) | | (311 | ) | | (66 | ) |
Income tax expense | $ | 22,477 |
| | $ | 25,980 |
| | $ | 26,569 |
|
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 ("Tax Reform") was signed into law making significant changes to the Internal Revenue Code. Changes included, but are not limited to, a corporate tax rate decrease from 35% to 21% and modification of the employee compensation limit effective for tax years beginning after December 31, 2017. The Company has calculated its best estimate of the impact of Tax Reform in its year-end income tax provision in accordance with its understanding of the Tax Reform and guidance available as of the date of these financial statements. As a result, the Company has recorded $2.2 million of additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was $1.4 million. The provisional amount related to the employee compensation limit was $0.8 million.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of Tax Reform. In accordance with SAB 118, the Company has determined that the $1.4 million of the tax expense recorded in connection with the remeasurement of deferred tax assets and liabilities and the $0.8 million of tax expense recorded in connection with the employee compensation limit were provisional amounts and reasonable estimates at December 31, 2017. Given the significant complexity of Tax Reform, additional work is necessary to perform a more detailed analysis of these items. The provisional estimate may be adjusted in future periods due to, among other things, additional analysis performed by the Company and additional guidance that may be issued by the U.S. Department of Treasury, the Securities and Exchange Commission, or the Financial Accounting Standards Board.
The following presents a reconciliation of income tax computed at the U.S. statutory rate to the effective income tax rate:
|
| | | | | | | | |
| Year-Ended December 31, |
| 2017 |
| 2016 | | 2015 |
Statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes | 4.6 |
| | 2.6 |
| | 2.4 |
|
Net impact of Tax Reform | 4.8 |
| | — |
| | — |
|
Impairment of goodwill and intangible assets | 3.6 |
| | — |
| | — |
|
Nondeductible compensation | 3.5 |
| | 0.3 |
| | 0.4 |
|
Nondeductible transaction costs | 2.0 |
| | 0.3 |
| | — |
|
Excess tax benefit on share-based compensation | (3.8 | ) | | — |
| | — |
|
Tax-exempt interest | (0.4 | ) | | (0.2 | ) | | (0.2 | ) |
Other | (0.3 | ) | | — |
| | 0.2 |
|
Effective income tax rate | 49.0 | % | | 38.0 | % | | 37.8 | % |
The following table presents significant components of the Company’s deferred income tax assets and liabilities as of December 31, 2017 and 2016, in thousands: |
| | | | | | | |
| Year-Ended December 31, |
| 2017 | | 2016 |
Deferred income tax assets: | | | |
Net operating loss carryforwards | $ | 219 |
| | $ | 1,069 |
|
Capital loss carryforwards | 4,075 |
| | 6,501 |
|
Allowance for doubtful accounts | 2,618 |
| | 3,881 |
|
Deferred rent and other liabilities | 4,003 |
| | 6,429 |
|
Share-based compensation | 2,918 |
| | 5,611 |
|
Goodwill and intangible assets | 934 |
| | — |
|
Accumulated other comprehensive loss | 41 |
| | 52 |
|
Deferred income tax assets, before valuation allowance | 14,808 |
| | 23,543 |
|
Valuation allowance | (4,075 | ) | | (6,501 | ) |
Deferred income tax assets | 10,733 |
| | 17,042 |
|
Deferred income tax liabilities: | | | |
Prepaid expenses | (423 | ) | | (1,816 | ) |
Property and equipment | (7,326 | ) | | (11,131 | ) |
Goodwill and intangible assets | — |
| | (2,234 | ) |
Other | (145 | ) | | (8 | ) |
Deferred income tax liabilities | (7,894 | ) | | (15,189 | ) |
Net deferred tax asset | $ | 2,839 |
| | $ | 1,853 |
|
The net operating loss carryforwards in the table above represent federal net operating loss carryforwards of approximately $0.2 million and state net operating loss carryforwards of approximately $2.0 million obtained in the Hackbright acquisition that expire beginning in 2035.
Section 382 of the U.S. Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that might be used to offset taxable income when a corporation has undergone significant changes in stock ownership. In 2017, the Company completed a Section 382 analysis of the loss carryforwards related to the Hackbright acquisition and determined that all of the loss carryforwards are utilizable.
The Company regularly assesses the likelihood that its deferred tax assets will be recovered in the future. A valuation allowance is recorded to the extent the Company concludes a deferred tax asset will not more-likely-than-not be realized. The Company considers all positive and negative evidence related to the realization of the deferred tax assets in assessing the need for a valuation allowance. If the Company determines it will not realize all or part of its deferred tax assets, adjustments to the deferred tax asset are charged to earnings in the period such determinations were made.
The valuation allowance for deferred tax assets as of December 31, 2017 and 2016 was $4.1 million and $6.5 million, respectively. The valuation allowance was established in 2016 and relates to the capital loss generated by the divestiture of Arden University in 2016. The Company concluded that it was more likely than not that the deferred tax asset for the capital loss carryforward would not be realized due to a lack of history of recognizing capital gains. The valuation allowance decreased by $2.4 million due to the revaluation of the capital loss carryforward from a 35% federal income tax rate to a 21% federal income tax rate as a result of the enactment of Tax Reform.
The Company's accounting for deferred tax consequences represents its best estimate of future events. A valuation allowance established, or revised, as a result of the Company's assessment is recorded through income tax expense in the Consolidated Statements of Income. Changes in current estimates due to unanticipated events, or other factors, could have a material effect on the Company's financial condition and results of operations.
As part of its adoption of ASU No. 2016-09, the Company now reflects excess tax benefits or deficiencies arising from share-based awards within the Consolidated Statements of Income as a component of income tax expense rather than as a component of shareholders' equity. For the year ended December 31, 2017, the Company recognized $1.9 million of excess tax benefits related to share-based awards as a reduction to income tax expense within the Consolidated Statements of Income. For the year ended December 31, 2016, the Company recorded a tax benefit from share-based compensation arrangements against additional paid-in-capital and reduced taxes payable by a corresponding amount of $0.5 million. For the year ended December 31, 2015, the Company recorded a tax shortfall from share-based compensation arrangements of $0.1 million.
The Company is subject to income taxes in the U.S. federal and various state jurisdictions. During 2017, a state income tax audit for New York tax years 2012-2014 was completed, resulting in a $216 thousand income tax and interest charge. During 2016, state income tax audits for Illinois tax years 2012 and 2013 and Minnesota tax years 2012-2014 were completed, resulting in a $79 thousand income tax and interest charge. No other income tax audits are ongoing or pending as of December 31, 2017.
For U.S. federal tax purposes, the statute of limitations remains open on tax years from 2014. For state purposes, the statute of limitations varies by jurisdiction, but is generally from three to five years.
As of December 31, 2017, the Company had $1.1 million of total gross unrecognized tax benefits. Of this total, $0.8 million (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect its effective income tax rate in future periods.
The following table reconciles the beginning and ending amount of unrecognized tax benefits, in thousands:
|
| | | | | | | | | | | |
| Year-Ended December 31, |
| 2017 | | 2016 | | 2015 |
Balance at January 1 | $ | 22 |
| | $ | 27 |
| | $ | 38 |
|
Additions for tax positions of prior years | 1,060 |
| | — |
| | — |
|
Reductions due to lapse of the applicable statute of limitations | (2 | ) | | (5 | ) | | (11 | ) |
Balance at December 31 | $ | 1,080 |
| | $ | 22 |
| | $ | 27 |
|
The Company does not anticipate any significant increases or decreases in unrecognized tax benefits within the next twelve months. In the fourth quarter of 2016, the statute of limitations expired on approximately $5 thousand in unrecognized tax benefits related to state issues from tax year 2012. In the fourth quarter of 2017, the statue of limitations expired on approximately $2 thousand in unrecognized tax benefits related to state issues from tax year 2012. In the fourth quarter of 2018, the statute of limitations will expire on approximately $144 thousand in unrecognized tax benefits related to state issues from tax years 2013 and 2014.
The Company continues to recognize interest and penalties related to uncertain tax positions in income tax expense. The Company recognized $5 thousand, $1 thousand, and $2 thousand in interest and penalties related to uncertain tax positions in income tax expense during the years ended December 31, 2017, 2016, and 2015, respectively.