| (6) | INCOME TAXES |
Income before provision for income taxes in 2017, 2016 and 2015 consists of the following (in thousands):
| 2017 | 2016 | 2015 | ||||||||||
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Domestic |
$ | 386,989 | $ | 334,892 | $ | 298,055 | ||||||
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Foreign |
13,164 | 9,766 | 8,160 | |||||||||
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| $ | 400,153 | $ | 344,658 | $ | 306,215 | |||||||
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The differences between the United States Federal statutory income tax provision (using the statutory rate of 35%) and the Company’s consolidated provision for income taxes for 2017, 2016 and 2015 are summarized as follows (in thousands):
| 2017 | 2016 | 2015 | ||||||||||
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Federal income tax provision based on the statutory rate |
$ | 140,054 | $ | 120,630 | $ | 107,175 | ||||||
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State and local income taxes, net of related Federal income taxes |
11,520 | 9,787 | 8,589 | |||||||||
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Non-resident withholding and foreign income taxes |
20,210 | 17,275 | 15,750 | |||||||||
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Foreign tax and other tax credits |
(23,324 | ) | (20,049 | ) | (18,345 | ) | ||||||
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Excess tax benefits from equity-based compensation |
(27,227 | ) | — | — | ||||||||
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Non-deductible expenses, net |
1,794 | 1,579 | 1,180 | |||||||||
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Unrecognized tax provision (benefit), net of related Federal income taxes |
(173 | ) | (98 | ) | 110 | |||||||
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Other |
(606 | ) | 856 | (1,033 | ) | |||||||
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| $ | 122,248 | $ | 129,980 | $ | 113,426 | |||||||
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The Company adopted ASU 2016-09 during 2017, which is intended to simplify several areas of accounting for share-based compensation arrangements. As a result, excess tax benefits or deficiencies from equity-based compensation activity are now reflected in the Company’s consolidated statements of income as a component of the provision for income taxes, whereas they previously were recognized in the consolidated statement of stockholders’ deficit. The adoption of ASU 2016-09 resulted in a decrease in our provision for income taxes of $27.2 million in 2017, primarily due to the recognition of excess tax benefits for options exercised and the vesting of equity awards. Refer to Note 1 for additional information related to the impact of adopting ASU 2016-09.
The components of the 2017, 2016 and 2015 consolidated provision for income taxes are as follows (in thousands):
| 2017 | 2016 | 2015 | ||||||||||
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Provision for Federal income taxes |
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Current provision |
$ | 81,747 | $ | 100,673 | $ | 84,071 | ||||||
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Deferred provision (benefit) |
6,732 | (3,096 | ) | 862 | ||||||||
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Total provision for Federal income taxes |
88,479 | 97,577 | 84,933 | |||||||||
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Provision for state and local income taxes |
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Current provision |
14,131 | 15,091 | 11,892 | |||||||||
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Deferred provision (benefit) |
(572 | ) | 37 | 851 | ||||||||
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Total provision for state and local income taxes |
13,559 | 15,128 | 12,743 | |||||||||
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Provision for non-resident withholding and foreign income taxes |
20,210 | 17,275 | 15,750 | |||||||||
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| $ | 122,248 | $ | 129,980 | $ | 113,426 | |||||||
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As of December 31, 2017 and January 1, 2017, the significant components of net deferred income taxes are as follows (in thousands):
| 2017 | 2016 | |||||||
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Deferred Federal income tax assets |
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Insurance reserves |
$ | 8,290 | $ | 11,202 | ||||
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Equity compensation |
7,724 | 11,978 | ||||||
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Other accruals and reserves |
7,187 | 18,741 | ||||||
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Bad debt reserves |
309 | 1,005 | ||||||
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Other |
3,164 | 5,732 | ||||||
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Total deferred Federal income tax assets |
26,674 | 48,658 | ||||||
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Deferred Federal income tax liabilities |
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Depreciation, amortization and asset basis differences |
4,823 | 6,352 | ||||||
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Capitalized software |
18,522 | 25,869 | ||||||
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Gain on debt extinguishments |
2,722 | 9,073 | ||||||
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Total deferred Federal income tax liabilities |
26,067 | 41,294 | ||||||
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Net deferred Federal income tax asset |
607 | 7,364 | ||||||
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Net deferred state and local income tax asset |
2,143 | 1,571 | ||||||
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Net deferred income taxes |
$ | 2,750 | $ | 8,935 | ||||
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Realization of the Company’s deferred tax assets is dependent upon many factors, including, but not limited to, the Company’s ability to generate sufficient taxable income. Although realization of the Company’s net deferred tax assets is not assured, management believes it is more likely than not that the net deferred tax assets will be realized. On an ongoing basis, management will assess whether it remains more likely than not that the net deferred tax assets will be realized.
For financial reporting purposes, the Company’s investment in foreign subsidiaries does not exceed its tax basis. Therefore, no deferred income taxes have been provided.
The Company recognizes the financial statement benefit of a tax position if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents. For tax positions meeting the “more likely than not” threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes accrued interest related to unrecognized tax benefits in interest expense and penalties in income tax expense.
At December 31, 2017, the amount of unrecognized tax benefits was $1.8 million of which, if ultimately recognized, $1.5 million would be recognized as an income tax benefit and reduce the Company’s effective tax rate. At December 31, 2017, the Company had less than $0.1 million of accrued interest and no accrued penalties.
At January 1, 2017, the amount of unrecognized tax benefits was $2.0 million of which, if ultimately recognized, $1.6 million would be recognized as an income tax benefit and reduce the Company’s effective tax rate. At January 1, 2017, the Company had less than $0.1 million of accrued interest and no accrued penalties.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
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Balance as of December 28, 2014 |
$ | 2,939 | ||
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Additions for tax positions of current year |
233 | |||
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Additions for tax positions of prior years |
171 | |||
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Reductions in tax positions from prior years for: |
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Changes in prior year tax positions |
(100 | ) | ||
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Settlements during the period |
(27 | ) | ||
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Lapses of applicable statute of limitations |
(1,101 | ) | ||
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Balance as of January 3, 2016 |
2,115 | |||
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Additions for tax positions of current year |
209 | |||
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Reductions in tax positions from prior years for: |
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Changes in prior year tax positions |
(33 | ) | ||
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Lapses of applicable statute of limitations |
(337 | ) | ||
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Balance as of January 1, 2017 |
1,954 | |||
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Additions for tax positions of current year |
224 | |||
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Additions for tax positions of prior years |
42 | |||
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Reductions in tax positions from prior years for: |
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Changes in prior year tax positions |
(10 | ) | ||
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Lapses of applicable statute of limitations |
(373 | ) | ||
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Balance as of December 31, 2017 |
$ | 1,837 | ||
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The Company continues to be under examination by certain states. The Company’s Federal statute of limitation has expired for years prior to 2014 and the relevant state and foreign statutes vary. The Company expects the current ongoing examinations to be concluded in the next twelve months and does not expect the assessment of any significant additional amounts in excess of amounts reserved.
Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act includes many changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017.
The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act was signed into law. The Company did not identify items for which the income tax effects of the 2017 Tax Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017.
The remeasurement of the deferred tax assets and liabilities was not material to our 2017 financial statements. However, the remeasured amounts incorporate assumptions made based upon the Company’s current interpretation of the 2017 Tax Act, mainly related to the deductibility of certain officers’ compensation, and may change as the Company receives additional clarification and implementation guidance.