Income Taxes
The provision for income taxes from operations for the years ended December 31, 2017, 2016 and 2015 consists of the following:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current income taxes: | | | | | |
Federal | $ | 45,899 |
| | $ | 68,312 |
| | $ | 22,552 |
|
State | 8,699 |
| | 11,441 |
| | 3,969 |
|
Total | 54,598 |
| | 79,753 |
| | 26,521 |
|
Deferred income taxes: | | | | | |
Federal | 1,754 |
| | (9,115 | ) | | 8,896 |
|
State | 3,853 |
| | (309 | ) | | 3,781 |
|
Total | 5,607 |
| | (9,424 | ) | | 12,677 |
|
Provision for income taxes from operations | $ | 60,205 |
| | $ | 70,329 |
| | $ | 39,198 |
|
Total income tax expense for the years ended December 31, 2017, 2016 and 2015 was allocated as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Provision for income taxes from operations | $ | 60,205 |
| | $ | 70,329 |
| | $ | 39,198 |
|
Shareholders’ equity, for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes | — |
| | (3,144 | ) | | (7,176 | ) |
| $ | 60,205 |
| | $ | 67,185 |
| | $ | 32,022 |
|
The Company’s income tax expense differs from the amount that would have resulted from applying the federal statutory rate of 35% to pretax income from operations because of the effect of the following items during the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Tax expense at federal statutory rate | $ | 67,467 |
| | $ | 61,658 |
| | $ | 42,381 |
|
State taxes, net of federal benefit | 7,880 |
| | 7,597 |
| | 5,260 |
|
Non-deductible expenses | 3,849 |
| | 3,656 |
| | 3,505 |
|
Share-based compensation | (4,889 | ) | | — |
| | — |
|
Corporate tax rate change impact on deferred income taxes | (14,039 | ) | | — |
| | — |
|
Unrecognized tax benefit | (1,175 | ) | | 379 |
| | (11,464 | ) |
Other, net | 1,112 |
| | (2,961 | ) | | (484 | ) |
Income tax expense from operations | $ | 60,205 |
| | $ | 70,329 |
| | $ | 39,198 |
|
The adoption of ASU 2016-09, “Stock Compensation - Improvements to Employee Share-Based Payment Accounting” in the first quarter of 2017, resulted in recording a $5,449 reduction in income tax expense for the year ended December 31, 2017. Prior to adoption, this amount would have been recorded as additional paid-in capital.
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are presented below as of the years ended December 31, 2017 and 2016:
|
| | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Stock compensation | $ | 7,723 |
| | $ | 11,954 |
|
Deferred compensation | 12,949 |
| | 13,079 |
|
Accrued expenses | 11,343 |
| | 35,499 |
|
Deferred rent | 4,033 |
| | 5,492 |
|
Net operating losses | 2,650 |
| | 5,756 |
|
Other | 4,904 |
| | 6,576 |
|
Total deferred tax assets | $ | 43,602 |
| | $ | 78,356 |
|
Deferred tax liabilities: | | | |
Intangibles | $ | (51,551 | ) | | $ | (78,201 | ) |
Fixed assets | (15,750 | ) | | (18,847 | ) |
Other | (3,297 | ) | | (2,545 | ) |
Total deferred tax liabilities | $ | (70,598 | ) | | $ | (99,593 | ) |
Valuation allowance | $ | (40 | ) | | $ | (183 | ) |
Net deferred tax liabilities | $ | (27,036 | ) | | $ | (21,420 | ) |
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management believes it is more likely than not that the Company will realize the benefits of its deferred tax assets, net of the recorded valuation allowance.
The amount of federal net operating losses (“NOL”) carryforward that is available for use in years subsequent to December 31, 2017 is $11,250, which is set to expire by 2029. The amount of state NOL carryforward that is available for use in years subsequent to December 31, 2017 is $4,749, which is set to expire at various dates between 2018 and 2032.
A summary of the changes in the amount of unrecognized tax benefits (excluding interest and penalties) for 2017, 2016 and 2015 is as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Beginning balance of unrecognized tax benefits | $ | 6,842 |
| | $ | 6,537 |
| | $ | 22,890 |
|
Additions based on tax positions related to the current year | 513 |
| | — |
| | — |
|
Additions based on tax positions of prior years | 731 |
| | 868 |
| | 395 |
|
Reductions due to lapse of applicable statute of limitation | (949 | ) | | (563 | ) | | (214 | ) |
Settlements | (2,474 | ) | | — |
| | (16,534 | ) |
Ending balance of unrecognized tax benefits | $ | 4,663 |
| | $ | 6,842 |
| | $ | 6,537 |
|
At December 31, 2017, if recognized, approximately $4,613 would affect the effective tax rate (including interest).
The Company recognizes interest related to unrecognized tax benefits in income tax expense. The Company had approximately $606, $1,622 and $1,544 of accrued interest related to unrecognized tax benefits at December 31, 2017, 2016 and 2015, respectively. The amount of interest expense (benefit) recognized in 2017, 2016 and 2015 was $(1,016), $78 and $(4,272), respectively.
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. With few exceptions, as of December 31, 2017, the Company is no longer subject to state, local or foreign examinations by tax authorities for tax years before 2006, and the Company is no longer subject to U.S. federal income or payroll tax examinations for tax years before 2013. The Company’s tax years 2007, 2008, 2009 and 2010 had been under audit by the Internal Revenue Service (“IRS”) for several years and the Company received a final determination from the IRS in July 2015 on both the Revenue Agent Report (“RAR”) adjustments and Employment Tax Examination Report (“ETER”) assessments, effectively settling these audits with the IRS.
The IRS conducted and completed a separate audit of the Company’s 2011 and 2012 tax years that focused on income and employment tax issues similar to those raised in the 2007 through 2010 examination. The IRS completed its audit during the quarter ended March 31, 2015, and issued its RAR and ETER to the Company with proposed adjustments to the Company’s taxable income for 2011 and 2012 and net operating loss carryforwards from 2010 and assessments for additional payroll tax liabilities and penalties for 2011 and 2012 related to the Company’s treatment of certain non-taxable per diem allowances and travel benefits. The Company filed a Protest Letter for both the RAR and ETER in April 2015. The Company received a final determination from the IRS in November 2017 on both the 2011 and 2012 RAR adjustments and ETER assessments, respectively, effectively settling these audits with the IRS for $2,000 (including interest) during the fourth quarter of 2017. As a result, the Company recorded federal income tax benefits of approximately $800 during the quarter ended December 31, 2017 as the settlement was less than the previously recorded uncertain tax position reserve.
The IRS began an audit of the Company’s 2013 tax year during the quarter ended June 30, 2015. The Company believes its reserve for unrecognized tax benefits and contingent tax issues is adequate with respect to all open years. Notwithstanding the foregoing, the Company could adjust its provision for income taxes and contingent tax liability based on future developments.
Tax Cuts and Jobs Act
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, including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent.
Tax Act changes that affect the Company in 2017 are primarily tax rate changes on certain deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”).
The Tax Act also establishes new tax laws that will affect 2018 and beyond, including, but not limited to, (1) reduction of the U.S. federal corporate tax rate; (2) the repeal of the domestic production activity deduction; (3) limitations on the deductibility of certain executive compensation; and (4) limitations on various entertainment and meals deductions.
The SEC staff issued Staff Accounting Bulletin No. 118 (“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 enactment date for companies to complete the accounting under ASC 740. 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.
In connection with the Company's initial analysis of the impact of the Tax Act, the Company recorded a discrete net tax benefit of $14,039 in the quarter ended December 31, 2017. This net benefit primarily consists of a net benefit for the corporate rate reduction on the Company's existing deferred tax assets and liabilities.
The Company's accounting for the following elements of the Tax Act is incomplete. However, the Company was able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments for items impacting executive compensation and accounting methods.