INCOME TAXES
The components of the provision for income taxes for income from operations are as follows (in millions):
|
| | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended
December 31, 2016 | | Year Ended
December 31, 2015 |
Federal: | | | | | | |
Current | | $ | 79.5 |
| | $ | 89.2 |
| | $ | 91.1 |
|
Deferred | | 4.6 |
| | 3.3 |
| | (8.1 | ) |
Total Federal | | 84.1 |
| | 92.5 |
| | 83.0 |
|
State: | | | | | | |
Current | | 22.7 |
| | 19.6 |
| | 19.9 |
|
Deferred | | (5.2 | ) | | (0.9 | ) | | (2.8 | ) |
Total State | | 17.5 |
| | 18.7 |
| | 17.1 |
|
Total income tax provision | | $ | 101.6 |
| | $ | 111.2 |
| | $ | 100.1 |
|
During the years ended December 31, 2017, December 31, 2016 and December 31, 2015, a current tax benefit of $0.0 million, $0.9 million and $1.8 million, respectively, was allocated directly to stockholders' equity for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes.
A reconciliation of the provision for income taxes as reported and the amount computed by multiplying the income before taxes and extraordinary item by the U.S. federal statutory rate of 35% was as follows (in millions):
|
| | | | | | | | | | | | |
| | Year Ended
December 31, 2017 | | Year Ended
December 31, 2016 | | Year Ended
December 31, 2015 |
Provision calculated at federal statutory income tax rate | | $ | 74.9 |
| | $ | 98.6 |
| | $ | 88.7 |
|
State and local income taxes, net of federal benefit | | 5.9 |
| | 12.2 |
| | 11.1 |
|
U.S. Tax Cuts and Jobs Act | | 15.9 |
| | — |
| | — |
|
Permanent items | | 4.1 |
| | 0.6 |
| | 0.5 |
|
Other | | 0.8 |
| | (0.2 | ) | | (0.2 | ) |
Total income tax provision | | $ | 101.6 |
| | $ | 111.2 |
| | $ | 100.1 |
|
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law by President Trump. The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. As a result of the Tax Reform Act, the Company recorded federal and state tax expense of $10.5 million due to a remeasurement of deferred tax assets and liabilities during the year ended December 31, 2017.
In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Reform Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.
With respect to our accounting for the effect of the changes in the Tax Reform Act, we are still in the process of evaluating the transition rule applicable to the executive compensation limitations that will be effective January 1, 2018 and the impact of the full-expensing provisions on property and equipment placed in service during the year ended December 31, 2017. Furthermore, the remeasurement of the deferred tax liabilities associated with the Company’s investments in National CineMedia and DCIP are based on estimates of the tax basis of these investments at December 31, 2017. Therefore, the federal and state tax expenses represent provisional amounts and the Company’s current best estimate. Any adjustments recorded to the provisional amounts during the one-year measurement period will be included in income from operations as an adjustment to tax expense. The provisional amounts incorporate assumptions made based upon the Company’s current interpretation of the Tax Reform Act and may change as the Company receives additional clarification and implementation guidance.
Significant components of the Company's net deferred tax asset consisted of the following at (in millions): |
| | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
Deferred tax assets: | | | | |
Net operating loss carryforward | | $ | 21.4 |
| | $ | 46.6 |
|
Excess of tax basis over book basis of fixed assets | | 18.0 |
| | 55.2 |
|
Deferred revenue | | 119.4 |
| | 176.5 |
|
Deferred rent | | 76.6 |
| | 86.6 |
|
Other | | 8.8 |
| | 14.3 |
|
Total deferred tax assets | | 244.2 |
| | 379.2 |
|
Valuation allowance | | (16.7 | ) | | (34.5 | ) |
Total deferred tax assets, net of valuation allowance | | 227.5 |
| | 344.7 |
|
Deferred tax liabilities: | | | | |
Excess of book basis over tax basis of intangible assets | | (34.9 | ) | | (58.7 | ) |
Excess of book basis over tax basis of investments | | (128.2 | ) | | (219.1 | ) |
Other | | (9.9 | ) | | (10.6 | ) |
Total deferred tax liabilities | | (173.0 | ) | | (288.4 | ) |
Net deferred tax asset | | $ | 54.5 |
| | $ | 56.3 |
|
At December 31, 2017, the Company had net operating loss carryforwards for federal income tax purposes of approximately $69.4 million with expiration commencing in 2018. The Company's net operating loss carryforwards were generated by the entities of Edwards and Hollywood Theaters. The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of net operating losses in the event of an "ownership change" of a corporation. Accordingly, the Company's ability to utilize the net operating losses acquired from Edwards and Hollywood Theaters may be impaired as a result of the "ownership change" limitations. The Company’s state net operating losses may be carried forward for various periods, between seven and 20 years, with expiration commencing in 2018. The Company also has net operating losses in U.S. territorial jurisdictions with expirations commencing in 2019.
In assessing the realizable value 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. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. The Company has recorded a valuation allowance against deferred tax assets of $16.7 million and $34.5 million as of December 31, 2017 and December 31, 2016, respectively, as management believes it is more likely than not that certain deferred tax assets will not be realized in future tax periods. Future reductions in the valuation allowance associated with a change in management's determination of the Company's ability to realize these deferred tax assets will result in a decrease in the provision for income taxes. During the year ended December 31, 2017, the valuation allowance decreased by $11.0 million related to a reduction in certain state net operating losses in connection with the settlement of state tax positions and decreased by $6.8 million related to the U.S. Tax Cuts and Jobs Act.
In accordance with the provisions of ASC Subtopic 740-10, a reconciliation of the change in the amount of unrecognized tax benefits during the years ended December 31, 2017 and December 31, 2016 was as follows (in millions): |
| | | | | | | | |
| | Year Ended
December 31, 2017 | | Year Ended
December 31, 2016 |
Beginning balance | | $ | 10.9 |
| | $ | 13.1 |
|
Decreases related to prior year tax positions | | (2.5 | ) | | — |
|
Increases related to current year tax positions | | 0.2 |
| | 0.4 |
|
Lapse of statute of limitations | | (2.9 | ) | | (2.6 | ) |
Ending balance | | $ | 5.7 |
| | $ | 10.9 |
|
Exclusive of interest and penalties, it is reasonably possible that gross unrecognized tax benefits associated with state tax positions will decrease between $0.6 million and $3.5 million within the next 12 months primarily due to the settlement of tax disputes with taxing authorities and the expiration of the statute of limitations.
The total net unrecognized tax benefits that would affect the effective tax rate if recognized at December 31, 2017 and December 31, 2016 was $4.6 million and $5.4 million, respectively. Additionally, the total net unrecognized tax benefits that would result in an increase to the valuation allowance if recognized at December 31, 2017 and December 31, 2016 was approximately $0.0 million and $1.7 million, respectively.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2017 and December 31, 2016, the Company has accrued gross interest and penalties of approximately $2.0 million and $1.8 million, respectively. The total amount of interest and penalties recognized in the statement of income for the years ended December 31, 2017, December 31, 2016 and December 31, 2015 was $0.2 million, $(0.2) million and $0.3 million, respectively.
The Company and its subsidiaries collectively file income tax returns in the U.S. federal jurisdiction and various state and U.S. territory jurisdictions. The Company is not subject to U.S. federal or U.S. Territory examinations before 2014, and with limited exceptions, state examinations before 2013. However, the taxing authorities still have the ability to review the propriety of tax attributes created in closed tax years if such tax attributes are utilized in an open tax year. During the year ended December 31, 2017, the Company settled an Internal Revenue Service ("IRS") examination of its 2014 federal income tax return. The settlement did not have a material impact on the Company’s financial statements. In September 2017, the Company was notified that the IRS would examine its 2015 federal tax return. The Company is in the process of providing information requested by the IRS with respect to such tax year. Management believes that it has provided adequate provision for income taxes relative to the tax year under examination.