NOTE 15 – INCOME TAXES

 

The (benefit from) provision for income taxes from continuing operations consists of the following:

 





 

The difference between the (benefit from) provision for income taxes and the expected income tax provision determined by applying the statutory federal and state income tax rates to pre-tax accounting income from continuing operations are as follows:

 



The Tax Cuts and Jobs Act

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“Tax Act”) that instituted fundamental changes to the taxation of multinational corporations. The Tax Act includes changes to the taxation of foreign earnings by implementing a dividend exemption system, expansion of the current anti-deferral rules, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion. The Tax Act also includes a permanent reduction in the corporate tax rate to 21%, repeal of the corporate alternative minimum tax, expensing of capital investment, and limitation of the deduction for interest expense. Furthermore, as part of the transition to the new tax system, a one-time transition tax is imposed on a U.S. shareholder’s historical undistributed earnings of foreign affiliates. Although the Tax Act is generally effective January 1, 2018, GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date, which was December 22, 2017.

As a result of the impacts of the Tax Act, the SEC provided guidance that allows the Company to record provisional amounts for those impacts, with the requirement that the accounting be completed in a period not to exceed one year from the date of enactment. As of December 31, 2017, the Company has not completed the accounting for certain tax effects of the Tax Act. Therefore, we have recorded provisional amounts for the effects of the Tax Act. The primary impact of the Tax Act related to the re-measurement of deferred tax assets and liabilities resulting from the change in the corporate tax rate (“Corporate Tax Rate Change”).

Corporate Tax Rate Change

For the year ended December 31, 2017, we recorded a tax benefit of approximately $73 million due to a decrease in deferred tax liabilities as a result of the reduction in the corporate tax rate from 35% to 21%.

At the date of enactment, the Company had a deferred tax liability for the excess of its net book value over its tax basis of its U.S. assets and liabilities that will generate future taxable income in excess of book income. Due to the Tax Act, this additional taxable income will be subject to tax at a lower corporate tax rate, consequently reducing the Company’s deferred tax liability as of the date of enactment.

The Company also reevaluated the need for a valuation allowance as a result of changes made by the Tax Act. As more fully described below, the Company determined that it has become more likely than not that it will realize substantially all of its deferred tax assets.

 

The components of the Company’s consolidated deferred income tax balances as of December 31, 2017 and 2016 are as follows:

 





 

Deferred income taxes arise principally from net operating loss (“NOL”) carryforwards and intangible asset deferred tax assets and liabilities. 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 income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.  Based on consideration of these items and new tax provisions under the Tax Act, primarily the new limitation on interest expense deductions, management has determined that enough certainty exists to warrant the release of the valuation allowance recorded against substantially all the Company’s deferred tax assets as of December 31, 2017.   As of December 31, 2017 and 2016, a valuation allowance of $17.4 million and $110.8 million, respectively, has been recognized for deferred income taxes that may not be realized by the Company in future periods.  The valuation allowance at December 31, 2017 primarily relates to state net operating losses and capital loss carryforwards.



The taxable temporary difference related to indefinite-lived trademarks, which are currently amortized for tax purposes, will reverse when such assets are disposed of or impaired. Because the period for their reversal is not determinable, the net deferred tax liability of $200.4 million as December 31, 2016 attributable to indefinite-lived trademarks could not be used to offset the deferred tax assets.

 

The Company has federal NOLs available to carryforward to future periods of $195.6 million as of December 31, 2017 which begin expiring in 2024. The Company has state NOLs available to carryforward to future periods of $205.7 million as of December 31, 2017 which begin expiring in 2018.  The Company has foreign tax credits available to carryforward to future periods of $1.6 million as of December 31, 2017 which began expiring in 2017. The Company has experienced several changes of ownership under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) which places various limitations on the NOLs. The limitations on NOLs are based upon a formula provided under Section 382 of the Code that is based on the fair market value of the Company and prevailing interest rates at the time of the ownership change. An “ownership change” is generally a 50% increase in ownership over a three-year period by stockholders who directly or indirectly own at least five percent of a company’s stock. The limitations on the use of the NOLs under Section 382 could affect the Company’s ability to offset future taxable income.

 

The Company currently files U.S. federal tax returns and various state tax returns. Tax years that remain open for assessment for federal and state purposes include years ended December 31, 2014 through December 31, 2017.

 

A reconciliation of the consolidated liability for gross unrecognized income tax benefits (excluding penalties and interest) is as follows:

 





 

During the year ended December 31, 2016, the Company released its $0.3 million reserve of certain unrecognized tax benefits through current income tax expense in accordance ASC 740. The Company has no remaining unrecognized tax benefits at December 31, 2017.

 

The Company recognizes interest and penalties related to unrecognized tax benefits in the tax provision. During the year ended December 31, 2016, the Company recognized a gain of $0.3 million and a charge of less than $0.1 million related to interest and penalties, respectively. The Company has no remaining interest and penalties related to unrecognized tax benefits at December 31, 2017.