Income Taxes
Significant components of our deferred tax assets and liabilities at December 31, 2017 and 2016, which are included in other long term assets on our consolidated balance sheets, were as follows:
|
| | | | | | | |
| 2017 | | 2016 |
Non-current deferred tax assets: | | | |
Allowance for doubtful accounts | 933 |
| | 1,254 |
|
Deferred gains on sale and leaseback transactions | 20,548 |
| | 33,121 |
|
Insurance reserves | 2,369 |
| | 3,976 |
|
Tax credits | 20,286 |
| | 21,647 |
|
Tax loss carryforwards | 35,999 |
| | 41,160 |
|
Depreciable assets | 4,114 |
| | 1,795 |
|
Goodwill | 3,865 |
| | 6,478 |
|
Other assets | 1,301 |
| | 2,003 |
|
Total non-current deferred tax assets before valuation allowance | 89,415 |
| | 111,434 |
|
Valuation allowance: | (80,154 | ) | | (100,524 | ) |
Total non-current deferred tax assets | 9,261 |
| | 10,910 |
|
| | | |
| | | |
Non-current deferred tax liabilities: | | | |
Lease expense | (5,941 | ) | | (9,660 | ) |
Employee stock grants | (36 | ) | | (72 | ) |
Other liabilities | (1,312 | ) | | (1,178 | ) |
Total non-current deferred tax liabilities | (7,289 | ) | | (10,910 | ) |
Net deferred tax assets | $ | 1,972 |
| | $ | — |
|
On December 22, 2017, legislation commonly referred to as the Tax Cuts and Jobs Act of 2017, or the TCJA, became effective, enacting significant change to the United States Internal Revenue Code of 1986, as amended, or the IRC. Among other things, the TCJA reduces the corporate income tax rate from 35% to 21%, repeals the corporate alternative minimum tax, or AMT, limits various business deductions, modifies the maximum usage of net operating losses and significantly modifies various international tax provisions. The changes effected by the TCJA are generally effective for tax years ending after December 31, 2017.
While the corporate income tax rate reduction took effect on January 1, 2018, the carrying value of deferred tax assets and liabilities is determined by the enacted federal corporate income tax rate. As a result, our deferred tax assets and liabilities and resulting valuation allowance as of December 31, 2017 have decreased by $24,200 and $24,000, respectively. In connection with the elimination of the AMT, the TCJA permits the monetization of AMT credits. We previously recorded a valuation allowance against our AMT credit generated in 2016. The TCJA has made this credit refundable, and we therefore recorded a benefit of $1,108 related to the reversal of the valuation allowance.
In addition, the TCJA will have other impacts on us in the future. Our federal net operating losses incurred prior to December 31, 2017 will continue to have a 20-year carryforward limitation applied to them and will need to be evaluated for recoverability in the future. Federal net operating losses incurred after December 31, 2017, if any, will have an indefinite life, but their usage will be limited to 80% of taxable income in any given year.
As of December 31, 2017, our federal net operating loss carryforwards, which are scheduled to begin expiring in 2026 if unused, were approximately $91,255, and our federal tax credit carryforwards, which begin expiring in 2022 if unused, were approximately $19,423. The Internal Revenue Service, or the IRS, has completed its examination of our 2014 federal income tax return and there were no adjustments. At December 31, 2017, our federal income tax returns filed for the 2015 and 2016 tax years are subject to examination and our federal net operating loss carryforwards and tax credit carryforwards are subject to adjustment by the IRS.
Management assessed the available positive and negative evidence to estimate if sufficient future taxable income will be generated to realize the existing deferred tax assets. An important piece of objective negative evidence evaluated was the significant losses we incurred over the three year period ending December 31, 2017. That objective negative evidence is difficult to overcome and would require a substantial amount of objectively verifiable positive evidence beyond projections of future income to support the realizability of our deferred tax assets. Accordingly, on the basis of that assessment, we have recorded a valuation allowance against the majority of our deferred tax assets and liabilities as of December 31, 2017 and all of our deferred tax assets and liabilities as of December 31, 2016. In the future, if we believe that we will more likely than not realize the benefit of these deferred tax assets, we will adjust our valuation allowance and recognize an income tax benefit, which may affect our results of operations.
The changes in our valuation allowance for deferred tax assets were as follows:
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| | | | | | | | | | | | | | | | | | | |
| Balance at Beginning of Period | | Amounts Charged To Expense | | Amounts Charged Off, Net of Recoveries | | Amounts Charged (Credited) to Equity | | Balance at End of Period |
Year Ended December 31, 2016 | $ | 90,726 |
| | $ | 10,021 |
| | $ | — |
| | $ | (223 | ) | | $ | 100,524 |
|
Year Ended December 31, 2017 | $ | 100,524 |
| | $ | — |
| | $ | (20,280 | ) | | $ | (90 | ) | | $ | 80,154 |
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For the year ended December 31, 2017, we recognized a benefit for income taxes from continuing operations of $4,536 primarily related to our monetization of AMT credits. For the year ended December 31, 2016, we recognized a provision for income taxes from continuing operations of $2,351, primarily related to the state taxes on the gain we realized for tax purposes in connection with the June 2016 sale and leaseback transaction. We had no operating results from discontinued operations for the year ended December 31, 2017. We recognized an immaterial amount of tax expense from discontinued operations for the year ended December 31, 2016.
The (benefit) provision for income taxes from continuing operations is as follows:
|
| | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 |
Current tax (benefit) provision: | | | |
Federal | $ | (3,167 | ) | | $ | (319 | ) |
State | 603 |
| | 2,670 |
|
Total current tax (benefit) provision | (2,564 | ) | | 2,351 |
|
Deferred tax (benefit) provision: | | | |
Federal | (1,109 | ) | | — |
|
State | (863 | ) | | — |
|
Total deferred tax (benefit) provision | (1,972 | ) | | — |
|
Total tax (benefit) provision | $ | (4,536 | ) | | $ | 2,351 |
|
The principal reasons for the difference between our effective tax rate on continuing operations and the U.S. federal statutory income tax rate are as follows:
|
| | | | | |
| For the years ended December 31, |
| 2017 | | 2016 |
Taxes at statutory U.S. federal income tax rate | (35.0 | )% | | (35.0 | )% |
State and local income taxes, net of federal tax benefit | 1.5 | % | | (0.7 | )% |
Tax credits | (9.0 | )% | | (9.1 | )% |
Change in valuation allowance | (72.0 | )% | | 55.6 | % |
Tax rate change | 95.1 | % | | — | % |
Other differences, net | 1.5 | % | | 1.3 | % |
Effective tax rate | (17.9 | )% | | 12.1 | % |
We utilize a two step process for the measurement of uncertain tax positions that have been taken or are expected to be taken on a tax return. The first step is a determination of whether the tax position should be recognized in the financial statements. The second step determines the measurement of the tax position. As of December 31, 2017 and 2016, there were no unrecognized tax benefits. We recognize interest and penalties related to income taxes in income tax expense, and such amounts were not material for the years ended December 31, 2017 and 2016.