Income Taxes
The Company is subject to income taxes in the United States, Canada, and Australia. Significant judgment is required in evaluating the Company's tax positions and determining the provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain.
As required by the Income Taxes Topic of the FASB Accounting Standards Codification ("ASC Topic 740"), the Company recognizes in the consolidated financial statements only those tax positions determined to be more likely than not of being sustained upon examination, based on the technical merits of the positions. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period of such change.
As of December 31, 2017, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state positions) was $28.4 million, which is included in “other liabilities” on the consolidated balance sheet. Of this total, $22.4 million (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future periods. The Company currently anticipates uncertain tax positions will decrease by $7.1 million prior to December 31, 2018 as a result of a lapse of applicable statutes of limitations, settlements, correspondence with examining authorities, and recognition or measurement considerations with federal and state jurisdictions; however, actual developments in this area could differ from those currently expected. Of the anticipated $7.1 million decrease, $5.6 million, if recognized, would favorably affect the Company's effective tax rate. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits follows:
|
| | | | | | |
| Year ended December 31, |
| 2017 | | 2016 |
Gross balance - beginning of year | $ | 28,004 |
| | 27,688 |
|
Additions based on tax positions of prior years | 145 |
| | 904 |
|
Additions based on tax positions related to the current year | 2,903 |
| | 4,347 |
|
Settlements with taxing authorities | — |
| | — |
|
Reductions for tax positions of prior years | (356 | ) | | (3,088 | ) |
Reductions based on tax positions related to the current year | — |
| | — |
|
Reductions due to lapse of applicable statutes of limitations | (2,275 | ) | | (1,847 | ) |
Gross balance - end of year | $ | 28,421 |
| | 28,004 |
|
All the reductions shown in the table above that are due to prior year tax positions and the lapse of statutes of limitations impacted the effective tax rate.
The Company's policy is to recognize interest and penalties accrued on uncertain tax positions as part of interest expense and other expense, respectively. As of December 31, 2017 and 2016, $4.5 million and $3.5 million in accrued interest and penalties, respectively, were included in “other liabilities” on the consolidated balance sheets. The Company recognized interest expense of $0.8 million, $0.3 million, and $1.2 million related to uncertain tax positions for the years ended December 31, 2017, 2016, and 2015, respectively. The impact to the consolidated statements of income related to penalties for uncertain tax positions was not significant for the years 2017, 2016, and 2015. The impact of timing differences and tax attributes are considered when calculating interest and penalty accruals associated with the unrecognized tax benefits.
The Company and its subsidiaries file a consolidated federal income tax return in the U.S. and the Company or one of its subsidiaries files income tax returns in various state, local, and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2014. The Company is no longer subject to U.S. state and local income tax examinations by tax authorities prior to 2007. As of December 31, 2017, the Company has tax uncertainties that remain unsettled in the following jurisdictions:
California 2010 through 2015
Maine 2011 through 2016
New York 2008 through 2014
Texas 2007 through 2009
The provision for income taxes consists of the following components:
|
| | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 65,196 |
| | 111,302 |
| | 140,778 |
|
State | 1,246 |
| | 3,019 |
| | 4,530 |
|
Foreign | (35 | ) | | (13 | ) | | 23 |
|
Total current provision | 66,407 |
| | 114,308 |
| | 145,331 |
|
| | | | | |
Deferred: | | | | | |
Federal | (8,270 | ) | | 25,423 |
| | 3,572 |
|
State | 6,618 |
| | 1,976 |
| | 3,875 |
|
Foreign | 108 |
| | (394 | ) | | (398 | ) |
Total deferred provision | (1,544 | ) | | 27,005 |
| | 7,049 |
|
Provision for income tax expense | $ | 64,863 |
| | 141,313 |
| | 152,380 |
|
The differences between the income tax provision computed at the statutory federal corporate tax rate and the financial statement provision for income taxes are shown below:
|
| | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Tax expense at federal rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Increase (decrease) resulting from: | | | | | |
Reduction of statutory federal rate (a) | (8.0 | ) | | — |
| | — |
|
State tax, net of federal income tax benefit | 1.6 | | | 1.1 | | | 1.0 | |
Provision for uncertain federal and state tax matters | — |
| | — |
| | 0.9 | |
Tax credits | (1.3 | ) | | (0.6 | ) | | (0.5 | ) |
Other | — |
| | — |
| | (0.1 | ) |
Effective tax rate | 27.3 | % | | 35.5 | % | | 36.3 | % |
| |
(a) | The Tax Cuts and Jobs Act (the “Tax Act”), signed into law on December 22, 2017, changes existing United States tax law and includes numerous provisions that affect businesses, including the Company. The Tax Act, for instance, introduces changes that impact U.S. corporate tax rates, business-related exclusions, and deductions and credits. |
The Company accounted for the change in tax laws in accordance with ASC Topic 740 that provides guidance that a change in tax law or rates be recognized in the financial reporting period that includes the enactment date, which is the date the changes were signed into law. The income tax accounting effect of a change in tax laws or tax rates includes, for example, adjusting (or re-measuring) deferred tax liabilities and deferred tax assets, as well as evaluating whether a valuation allowance is needed for deferred tax assets. The Company re-measured its deferred tax liabilities and deferred tax assets as of December 22, 2017 resulting in a decrease to income tax expense of $19.3 million. The Company determined no valuation allowance was needed for any deferred tax assets as a result of the Act.
In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance regarding how a company is to reflect provisional amounts when necessary information is not yet available, prepared, or analyzed sufficiently to complete its accounting for the effect of the changes in the Tax Act. The income tax benefit of $19.3 million recorded during the year ended December 31, 2017 represents all known and estimable impacts of the Tax Act and is a provisional amount based on the Company’s current best estimate. This provisional amount incorporates assumptions made based upon the Company’s current interpretations of the Tax Act and may change as the Company receives additional clarification and implementation guidance, and as data becomes available allowing for a more accurate scheduling of the deferred tax assets and liabilities, including those related to items potentially impacted by the Tax Act such as accruals in 2017 related to payments not occurring until later in 2018, partnership basis, and tax implications of the Tax Act at state and local jurisdictions. Adjustments to this provisional amount through December 22, 2018 will be included in income from operations as an adjustment to tax expense in future periods.
The tax effect of temporary differences that give rise to deferred tax assets and liabilities include the following:
|
| | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Student loans | $ | 13,532 |
| | 20,980 |
|
Deferred revenue | 3,246 |
| | 2,699 |
|
Securitizations | 2,970 |
| | 5,675 |
|
Intangible assets | 2,899 |
| | 4,821 |
|
Accrued expenses | 2,246 |
| | 3,533 |
|
Stock compensation | 1,744 |
| | 2,948 |
|
Total gross deferred tax assets | 26,637 |
| | 40,656 |
|
Less valuation allowance | (254 | ) | | (264 | ) |
Net deferred tax assets | 26,383 |
| | 40,392 |
|
Deferred tax liabilities: | | | |
Basis in certain derivative contracts | 23,051 |
| | 46,636 |
|
Partnership basis | 21,474 |
| | 4,976 |
|
Loan origination services | 8,001 |
| | 13,019 |
|
Depreciation | 4,958 |
| | 5,128 |
|
Debt repurchases | 3,856 |
| | 12,457 |
|
Debt and equity investments | 1,767 |
| | 3,246 |
|
Other | 823 |
| | 360 |
|
Total gross deferred tax liabilities | 63,930 |
| | 85,822 |
|
Net deferred tax liability | $ | (37,547 | ) | | (45,430 | ) |
The Company has performed an evaluation of the recoverability of deferred tax assets. In assessing the realizability of the Company's deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected taxable income, carry back opportunities, and tax planning strategies in making the assessment of the amount of the valuation allowance. With the exception of a portion of the Company's state net operating loss, it is management's opinion that it is more likely than not that the deferred tax assets will be realized and should not be reduced by a valuation allowance. The amount of deferred tax assets considered realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.
As of December 31, 2017 and 2016, the Company had a current income tax receivable of $42.4 million and $13.0 million, respectively, that is included in "other assets" on the consolidated balance sheets.