Income Taxes
Provision for income taxes is comprised of the following for the fiscal years indicated (dollars in millions):
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Current expense (benefit): | | | | | | |
Federal | | $ | 484 |
| | $ | 435 |
| | $ | 470 |
|
State | | 49 |
| | (4 | ) | | 28 |
|
| | 533 |
| | 431 |
| | 498 |
|
Deferred benefit: | | | | | | |
Federal | | (11 | ) | | (5 | ) | | (22 | ) |
State | | — |
| | (3 | ) | | (1 | ) |
| | (11 | ) | | (8 | ) | | (23 | ) |
Provision for income taxes | | $ | 522 |
| | $ | 423 |
| | $ | 475 |
|
A reconciliation of the federal statutory tax rate to the effective tax rate applicable to pre-tax income follows for the fiscal years indicated:
|
| | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Federal statutory rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State taxes, net of federal tax effect | | 2.8 |
| | 2.8 |
| | 3.0 |
|
Adjustments to estimated state income taxes | | — |
| | (0.2 | ) | | 0.1 |
|
Federal incentives | | (0.3 | ) | | (1.4 | ) | | — |
|
Interest recorded (reversed) on unrecognized tax benefits, net | | 0.2 |
| | (1.1 | ) | | (0.1 | ) |
Reversal of accruals for unrecognized tax benefits | | (0.4 | ) | | (1.8 | ) | | (1.1 | ) |
Other | | 0.1 |
| | 0.1 |
| | — |
|
| | 37.4 | % | | 33.4 | % | | 36.9 | % |
The Company's effective income tax rate for fiscal year 2017 was 37.4%, compared to 33.4% and 36.9% for fiscal years 2016 and 2015, respectively. The provision for income taxes for fiscal year 2017 included $8 million of net favorable resolutions of state income tax matters and $4 million of favorable tax benefits for federal incentives. These items had a net favorable impact on the Company's earnings for fiscal year 2017 of approximately two cents per share. The provision for income taxes for fiscal year 2016 was impacted by $39 million of net favorable adjustments to uncertain tax positions and related deferred income tax assets, which included a favorable $33 million tax liability remeasurement related to a state court decision. The provision was also impacted by an $18 million favorable tax benefit claimed during fiscal year 2016 for federal deductions and tax credits related to calendar tax year 2012 through September 30, 2016 and $5 million of net favorable deferred income tax adjustments due to the remeasurement of deferred tax assets and liabilities and the cumulative impact of the decline in the state tax rate. These items had a net favorable impact on the Company's earnings for fiscal year 2016 of approximately twelve cents per share. The provision for income taxes for fiscal year 2015 included $22 million of favorable resolutions of state income tax matters. This favorably impacted the Company's earnings for fiscal year 2015 by approximately four cents per share.
Deferred tax assets (liabilities) are comprised of the following (dollars in millions):
|
| | | | | | | | |
| | September 30, |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Accrued and other liabilities | | $ | 131 |
| | $ | 62 |
|
Stock-based compensation | | 28 |
| | 36 |
|
Unrecognized loss on cash flow hedging instruments | | 15 |
| | 13 |
|
Allowance for doubtful accounts | | 6 |
| | 5 |
|
Intangible assets, state tax benefit | | 5 |
| | 7 |
|
Operating loss carryforwards | | 1 |
| | 3 |
|
Gross deferred tax assets | | 186 |
| | 126 |
|
Less: Valuation allowance | | (1 | ) | | (2 | ) |
Net deferred tax assets | | 185 |
| | 124 |
|
Deferred tax liabilities: | | | | |
Acquired intangible assets | | (331 | ) | | (364 | ) |
Property and equipment | | (35 | ) | | (36 | ) |
Prepaid expenses | | (11 | ) | | (5 | ) |
Other deferred tax liabilities | | (1 | ) | | — |
|
Total deferred tax liabilities | | (378 | ) | | (405 | ) |
Net deferred tax liabilities | | $ | (193 | ) | | $ | (281 | ) |
At September 30, 2017, subsidiaries of the Company have approximately $17 million of separate state operating loss carryforwards. These carryforwards expire between fiscal 2021 and 2031. Because the realization of the tax benefit from state loss carryforwards is dependent on certain subsidiaries generating sufficient state taxable income in future periods, as well as annual limitations on future utilization, the Company has provided a valuation allowance against the computed benefit in order to reflect the tax benefit expected to be realized. The $1 million decrease in the valuation allowance from September 30, 2016 to September 30, 2017 was primarily due to expiration of certain state net operating loss carryforwards during fiscal 2017.
A reconciliation of the activity related to unrecognized tax benefits follows for the fiscal years indicated (dollars in millions):
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Beginning balance | | $ | 142 |
| | $ | 154 |
| | $ | 165 |
|
Additions based on tax positions related to the current year | | 28 |
| | 30 |
| | 16 |
|
Additions for tax positions of prior years | | — |
| | 20 |
| | 5 |
|
Reductions for tax positions of prior years | | (10 | ) | | (33 | ) | | (4 | ) |
Reductions due to settlements with taxing authorities | | (1 | ) | | (21 | ) | | (21 | ) |
Reductions due to lapsed statute of limitations | | (7 | ) | | (8 | ) | | (7 | ) |
Ending balance | | $ | 152 |
| | $ | 142 |
| | $ | 154 |
|
The balance of unrecognized tax benefits as of September 30, 2017 was $152 million ($108 million net of the federal benefit on state matters), all of which, if recognized, would favorably affect the effective income tax rate in any future periods. The balance of unrecognized tax benefits as of September 30, 2016 was $142 million ($100 million net of the federal benefit on state matters), all of which, if recognized, would favorably affect the effective income tax rate in any future periods. The Company's income tax returns are subject to review and examination by federal, state and local taxing authorities. The federal returns for 2012 through 2016 remain open under the statute of limitations. The years open to examination by state and local government authorities vary by jurisdiction, but the statute of limitations is generally three to four years from the date the tax return is filed. It is reasonably possible that the gross unrecognized tax benefits as of September 30, 2017 could decrease by up to $44 million ($35 million net of the federal benefit on state matters) within the next twelve months as a result of settlements of certain examinations or expiration of the statute of limitations with respect to other tax filings.
The Company recognized $2 million of interest and penalties expense (net of the federal benefit) on the Consolidated Statement of Income for fiscal year 2017, primarily due to the accrual for unrecognized tax benefits. The Company recognized $17 million and $2 million of net benefits for interest and penalties (net of the federal income tax effect) for fiscal years 2016 and 2015, respectively, primarily due to favorable resolutions and remeasurement of uncertain tax positions. As of September 30, 2017 and 2016, accrued interest and penalties related to unrecognized tax benefits was $26 million and $23 million, respectively.