Income Taxes:
Income tax (benefit) expense was as follows for the years ended December 31:
|
| | | | | | | | | | | | |
(Millions) | | 2017 |
| | 2016 |
| | 2015 |
|
Current: | | | | | | |
Federal | | $ | (0.3 | ) | | $ | (2.7 | ) | | $ | 9.1 |
|
State | | 4.9 |
| | 1.0 |
| | 23.2 |
|
| | 4.6 |
| | (1.7 | ) | | 32.3 |
|
Deferred: | | | | | | |
Federal | | (328.0 | ) | | (130.2 | ) | | 15.0 |
|
State | | (84.7 | ) | | (8.1 | ) | | (31.3 | ) |
| | (412.7 | ) | | (138.3 | ) | | (16.3 | ) |
Income tax (benefit) expense | | $ | (408.1 | ) | | $ | (140.0 | ) | | $ | 16.0 |
|
Deferred income tax (benefit) expense for all three years primarily resulted from temporary differences between depreciation and amortization expense for income tax purposes and depreciation and amortization expense recorded in the accompanying consolidated financial statements. Goodwill is not amortized for financial statement purposes in accordance with authoritative guidance on goodwill and other intangible assets; however, the goodwill impairment charge recorded in 2017 resulted in the recognition of a deferred income tax benefit.
Differences between the federal income tax statutory rates and effective income tax rates, which include both federal and state income taxes, were as follows for the years ended December 31:
|
| | | | | | | | | |
| | 2017 |
| | 2016 |
| | 2015 |
|
Statutory federal income tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
Increase (decrease) | | | | | |
|
State income taxes, net of federal benefit | | 3.6 |
| | 3.7 |
| | 4.0 |
|
Adjust deferred taxes for state net operating loss carryforward | | — |
| | (0.6 | ) | | 16.0 |
|
Transaction costs | | (0.1 | ) | | (0.2 | ) | | 18.7 |
|
Valuation allowance | | (0.1 | ) | | — |
| | (48.4 | ) |
Income tax reserves | | — |
| | 0.1 |
| | 12.2 |
|
Research and development credit | | 0.1 |
| | 0.8 |
| | (8.4 | ) |
Adjustment of deferred taxes for legal entity restructuring | | — |
| | — |
| | 6.8 |
|
Disallowed loss | | — |
| | (12.1 | ) | | — |
|
Tax credits | | — |
| | — |
| | (1.0 | ) |
Debt exchange | | (6.1 | ) | | — |
| | — |
|
2017 Federal tax reform | | (7.6 | ) | | — |
| | — |
|
Goodwill impairment | | (8.4 | ) | | — |
| | — |
|
Other items, net | | (0.2 | ) | | — |
| | 2.0 |
|
Effective income tax rate | | 16.2 | % | | 26.7 | % | | 36.9 | % |
In connection with the spin-off in 2015, we adjusted our deferred tax assets and liabilities, including our valuation allowance related to our federal and state net operating loss carryforwards, to reflect the transfer of the telecommunication network assets and consumer CLEC business to Uniti and the recognition of the long-term lease obligation related to the master lease with Uniti. For income tax purposes, the spin-off of the telecommunications network assets is treated as an operating lease. The disallowed loss in 2016 was attributable to the disposal of the Uniti common stock.
With regard to the debt exchange that occurred in 2017, a portion was treated as cancellation of debt (COD) income for tax purposes and resulted in non-deductible original issue discount (OID). We also recorded the impact of the portion of the goodwill impairment that is non-deductible.
13. Income Taxes, Continued:
Federal Tax Reform – On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law in the United States. It is the largest sweeping tax reform legislation in 30 years. The most significant change is the reduction of the statutory corporate tax rate from 35 percent to 21 percent effective January 1, 2018. As of December 31, 2017, we have not fully completed our accounting for the impacts of the Act. However, we have reasonably estimated the effects on our deferred tax account balances due to the re-measurement required for the rate change. The federal tax rate change from the 2017 federal tax reform resulted in a decrease of our net deferred tax assets of $192.2 million and corresponding deferred income expense which is included in the provisional income tax expense during the period it was enacted. In other cases, we have not been able to make reasonable estimates regarding the impact of the Act and continue to account for those items under existing GAAP and statutory tax provisions in effect on December 31, 2017. For periods beginning in 2018, we will calculate all federal income tax expense based on the new rate set forth in the Act.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company has determined that the $192.2 million of the deferred tax expense recorded in connection with the remeasurement of certain deferred tax assets and liabilities was a provisional amount and a reasonable estimate at December 31, 2017. Additional work is necessary to do a more detailed analysis. Any subsequent adjustment to these amounts will be recorded to tax expense in the quarter of 2018 when the analysis is complete.
The significant components of the net deferred income tax liability (asset) were as follows at December 31:
|
| | | | | | | | |
(Millions) | | 2017 |
| | 2016 |
|
Property, plant and equipment | | $ | 876.3 |
| | $ | 1,395.8 |
|
Goodwill and other intangible assets | | 532.5 |
| | 1,265.6 |
|
Operating loss and credit carryforward | | (595.6 | ) | | (528.8 | ) |
Postretirement and other employee benefits | | (85.6 | ) | | (142.4 | ) |
Unrealized holding loss and interest rate swaps | | 4.5 |
| | (0.2 | ) |
Deferred compensation | | (2.8 | ) | | (4.0 | ) |
Bad debt | | (14.5 | ) | | (19.4 | ) |
Long-term lease obligations | | (1,226.3 | ) | | (1,932.7 | ) |
Deferred debt costs | | (2.0 | ) | | 8.9 |
|
Restricted stock | | (7.9 | ) | | (9.4 | ) |
Other, net | | (29.0 | ) | | (28.4 | ) |
| | (550.4 | ) | | 5.0 |
|
Valuation allowance | | 179.6 |
| | 146.5 |
|
Deferred income taxes, net | | $ | (370.8 | ) | | $ | 151.5 |
|
Deferred tax assets | | $ | (2,000.7 | ) | | $ | (2,695.9 | ) |
Deferred tax liabilities | | 1,629.9 |
| | 2,847.4 |
|
Deferred income taxes, net | | $ | (370.8 | ) | | $ | 151.5 |
|
At December 31, 2017 and 2016, we had federal net operating loss carryforwards of approximately $1,796.6 million and $1,094.2 million, respectively, which expire in varying amounts from 2018 through 2037. The loss carryforwards at December 31, 2017 were primarily losses acquired in conjunction with our acquisitions including PAETEC, EarthLink and Broadview. The 2017 increase is primarily associated with our acquisitions of EarthLink and Broadview.
13. Income Taxes, Continued:
At December 31, 2017 and 2016, we had state net operating loss carryforwards of approximately $2,805.4 million and $1,788.8 million, respectively, which expire annually in varying amounts from 2018 through 2037. The loss carryforwards at December 31, 2017 were primarily losses acquired in conjunction with our acquisitions including PAETEC and EarthLink. Federal and state tax rules limit the deductibility of loss carryforwards in years following an ownership change. As a result of these limitations or the expected lack of sufficient future taxable income, we believe that it is more likely than not that the benefit from certain federal and state loss carryforwards will not be realized prior to their expiration. In September 2015, Windstream's board of directors adopted a shareholder rights plan designed to protect our net operating loss carryforwards from the effect of limitations imposed by federal and state tax rules following an ownership change. This plan was designed to deter an ownership change (as defined in IRC Section 382) from occurring, and therefore protect our ability to utilize our federal and state net operating loss carryforwards in the future. The plan is not meant to be an anti-takeover measure and our board of directors has established a procedure to consider requests to exempt the acquisition of Windstream common stock from the rights plan, if such acquisition would not limit or impair the availability of our net loss carryforwards.
We establish valuation allowances when necessary to reduce deferred tax assets to amounts expected to be realized. Therefore, as of December 31, 2017 and 2016, we recorded valuation allowances of $173.0 million and $140.3 million, respectively, related to federal and state loss carryforwards which are expected to expire before they are utilized. The amount of federal tax credit carryforward at December 31, 2017 and 2016, was approximately $44.2 million and $48.7 million, respectively, which expire in varying amounts from 2031 through 2037. The amount of state tax credit carryforward at December 31, 2017 and 2016, was approximately $19.9 million and $22.7 million, respectively, which expire in varying amounts from 2018 through 2027. Due to the expected lack of sufficient future taxable income, we believe that it is more likely than not that the benefit from some of the state tax credit carryforwards will not be realized prior to their expiration. Therefore, as of December 31, 2017 and 2016, we recorded a valuation allowance of approximately $6.6 million and $6.2 million, net of federal benefit, respectively, to reduce our state deferred tax assets to amounts expected to be realized.
An examination of Windstream's 2015 federal income tax return was completed by the Internal Revenue Service during 2017 with no changes made to the reported tax or tax attributes carried forward from that year.
We account for uncertainty in taxes in accordance with authoritative guidance. A reconciliation of the unrecognized tax benefits is as follows:
|
| | | | | | | | | | | | |
(Millions) | | 2017 |
| | 2016 |
| | 2015 |
|
Beginning balance | | $ | 8.8 |
| | $ | 10.1 |
| | $ | 5.6 |
|
Additions based on EarthLink acquisition | | 2.5 |
| | — |
| | — |
|
Additions based on tax positions related to current year | | 0.7 |
| | 0.7 |
| | 5.0 |
|
Reductions for tax positions of prior years | | (1.2 | ) | | (1.6 | ) | | (0.5 | ) |
Settlements | | (2.1 | ) | | (0.4 | ) | | — |
|
Ending balance | | $ | 8.7 |
| | $ | 8.8 |
| | $ | 10.1 |
|
We do not expect or anticipate a significant increase or decrease over the next twelve months in the unrecognized tax benefits reported above. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate are $8.3 million, $8.6 million and $9.9 million (net of indirect benefits) for the years ended December 31, 2017, 2016 and 2015, respectively.
We file income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2014. However, due to acquired net operating losses, tax authorities have the ability to adjust those net operating losses related to closed years. We have identified Arkansas, California, Florida, Georgia, Illinois, Iowa, Kentucky, Nebraska, New York, North Carolina, Pennsylvania, Texas and Virginia as “major” state taxing jurisdictions.
We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. During the years ended December 31, 2017, 2016 and 2015, we recognized approximately $0.2 million, $0.1 million, and $0.1 million in interest and penalties. Furthermore, we had approximately $0.3 million, $0.1 million, and $0.1 million of interest and penalties accrued as of December 31, 2017, 2016 and 2015, respectively.