Income Taxes
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“2017 Tax Reform”), a tax reform bill which, among other items, reduces the current corporate federal income tax rate from 35% to 21% and moves from a worldwide tax system to a territorial system. The rate reduction is effective January 1, 2018. As a result of the enactment of the legislation in 2017, we have estimated the remeasurement of our net deferred taxes based on the new lower tax rate, as well as provided for additional one-time income tax expense estimates primarily related to the transition tax on accumulated foreign earnings and elimination of foreign tax credits for dividends that are subject to the 100 percent exemption in our consolidated financial statements as of and for the year ended December 31, 2017. Our provisional analysis resulted in $8.8 million of additional income tax expense for the year ended December 31, 2017. Of the $8.8 million, $7.9 million related to the remeasurement of our deferred tax balances at the lower federal income tax rate; $0.6 million related to the transition tax on accumulated foreign earnings, net of applicable foreign tax credits; and $0.3 million related to withholding tax on outside basis differences due to our change in assertion for permanent reinvestment. The impacts on our financial statements as a result of 2017 Tax Reform are considered provisional and are based on the information that is currently available. These provisional results may be subject to future adjustments as additional analysis is anticipated based on technical corrections and regulatory interpretations to come. We expect to finalize the analysis as soon as practicable, but, in accordance with Staff Accounting Bulletin (“SAB”) No. 118, which was issued as a result of 2017 Tax Reform, not later than one year from the enactment date. Any changes to our provisional analysis will be included as an adjustment to tax expense or benefit in the period the amounts are determined.
The income tax expense for continuing operations for the years ended December 31, 2017, 2016, and 2015 consists of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | (635 | ) | | $ | 15,726 |
| | $ | 4,806 |
|
State | 545 |
| | 1,623 |
| | 2,380 |
|
Foreign | 2,040 |
| | 1,021 |
| | 350 |
|
Total current | 1,950 |
| | 18,370 |
| | 7,536 |
|
Deferred: | | | | | |
Federal | (46,103 | ) | | 1,662 |
| | 12,450 |
|
State | (6,576 | ) | | (274 | ) | | 1,482 |
|
Foreign | (1,270 | ) | | (81 | ) | | 202 |
|
Total deferred | (53,949 | ) | | 1,307 |
| | 14,134 |
|
Income tax expense for continuing operations | $ | (51,999 | ) | | $ | 19,677 |
| | $ | 21,670 |
|
The components of income from continuing operations before taxes were as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. | $ | (221,137 | ) | | $ | 56,141 |
| | $ | 85,164 |
|
Foreign | (1,367 | ) | | 3,016 |
| | (1,599 | ) |
Total | $ | (222,504 | ) | | $ | 59,157 |
| | $ | 83,565 |
|
A reconciliation of the U.S. statutory income tax rate to our effective tax rate for continuing operations is as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Percent of pretax income from continuing operations: | | | | | |
At U.S. statutory tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal benefit | 2.7 |
| | 1.7 |
| | 4.6 |
|
Goodwill impairment charges | (10.2 | ) | | — |
| | — |
|
U.S. federal rate change | (3.4 | ) | | — |
| | — |
|
Transition tax on accumulated foreign earnings, net of credits | (0.3 | ) | | — |
| | — |
|
Stock-based compensation | (0.8 | ) | | — |
| | — |
|
Meals and entertainment | (0.3 | ) | | 1.1 |
| | 0.6 |
|
Valuation allowance | (0.2 | ) | | (3.2 | ) | | 0.5 |
|
Foreign source income | 0.1 |
| | (0.5 | ) | | 0.5 |
|
Tax credits / Section 199 Deduction | 0.2 |
| | (1.1 | ) | | (1.0 | ) |
Net tax benefit related to “check-the-box” election (1) | 1.2 |
| | — |
| | (14.7 | ) |
Other | (0.6 | ) | | 0.3 |
| | 0.4 |
|
Effective income tax rate for continuing operations | 23.4 | % | | 33.3 | % | | 25.9 | % |
| |
(1) | In the fourth quarter of 2015, we made a tax election to classify two of our wholly-owned foreign subsidiaries as disregarded entities for U.S. federal income tax purposes (commonly referred to as a “check-the-box” election). As a result of this election, we realized an income tax benefit of $13.0 million, of which $0.7 million is unrecognized, resulting in a net recognized tax benefit of $12.3 million. Due to the expiration of statute of limitations, in the third quarter of 2017, we recognized a $2.7 million tax benefit, including the reversal of accrued interest and penalties, related to a previously unrecognized tax benefit from our "check-the-box" election made in 2014 to treat one of our wholly-owned foreign subsidiaries as a disregarded entity for U.S federal income tax purposes. |
The effective tax rate for discontinued operations in 2017 was 60.0%, based on tax expense of $0.6 million and pretax income from discontinued operations of $1.0 million, and was higher than the statutory tax rate primarily due to the settlement of foreign tax audits. The effective tax rate for discontinued operations in 2016 was (33.4)%, based on tax benefits of $0.9 million and a pretax loss from discontinued operations of $2.8 million, and was lower than the statutory tax rate primarily due to an increase in the valuation allowance for foreign tax credits. The effective tax rate for discontinued operations in 2015 was 169.0%, based on tax expense of $1.8 million and a pretax loss from discontinued operations of $1.1 million, and was higher than the statutory tax rate primarily due to the tax expense recognized from the sale of the Huron Legal segment. Refer to Note 3 "Discontinued Operations" for further detail on the sale of the Huron Legal segment.
The net deferred tax liabilities for continuing operations at December 31, 2017 and 2016 consisted of the following:
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Share-based compensation | $ | 5,674 |
| | $ | 10,151 |
|
Accrued payroll and other liabilities | 7,010 |
| | 10,004 |
|
Intangibles and goodwill | 2,137 |
| | — |
|
Deferred lease incentives | 4,352 |
| | 4,666 |
|
Convertible note hedge transactions | 250 |
| | 12,197 |
|
Revenue recognition | 1,586 |
| | 1,983 |
|
Restructuring charge liability | 1,104 |
| | 2,230 |
|
Net operating loss carry-forwards | 495 |
| | 92 |
|
Tax credits | 1,918 |
| | 1,804 |
|
Other | 882 |
| | 1,934 |
|
Total deferred tax assets | 25,408 |
| | 45,061 |
|
Valuation allowance | (1,247 | ) | | (626 | ) |
Net deferred tax assets | 24,161 |
| | 44,435 |
|
Deferred tax liabilities: | | | |
Prepaid expenses | (1,229 | ) | | (2,500 | ) |
Property and equipment | (4,031 | ) | | (2,933 | ) |
Intangibles and goodwill | — |
| | (60,411 | ) |
Convertible note discount | (3 | ) | | (11,586 | ) |
Convertible debt investment | (3,110 | ) | | (2,600 | ) |
Other | (133 | ) | | (38 | ) |
Total deferred tax liabilities | (8,506 | ) | | (80,068 | ) |
Net deferred tax asset (liability) for continuing operations | $ | 15,655 |
| | $ | (35,633 | ) |
As of December 31, 2017 and 2016, we had valuation allowances of $1.2 million and $0.6 million, respectively, primarily due to uncertainties relating to the ability to utilize deferred tax assets recorded for foreign losses. The increase in valuation allowances in 2017 primarily related to increases of net operating losses in jurisdictions where the net operating loss credits cannot be benefited and valuation allowances recorded on certain tax credits.
We have federal and state tax credit carry-forwards of $1.9 million which expire in 2022 and 2019, respectively. We have no federal net operating losses or state net operating loss carry-forwards as of December 31, 2017.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
A reconciliation of our beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | | |
| | Unrecognized Tax Benefits |
Balance at January 1, 2015 | | $ | 2,488 |
|
Additions based on tax positions related to the current year | | 735 |
|
Balance at December 31, 2015 | | 3,223 |
|
Additions based on tax positions related to the current year | | 117 |
|
Balance at December 31, 2016 | | 3,340 |
|
Decrease due to lapse of statute of limitations | | (2,410 | ) |
Decrease based on tax positions related to the prior year | | (117 | ) |
Balance at December 31, 2017 | | $ | 813 |
|
As of December 31, 2017, we had $0.8 million of unrecognized tax benefits which would affect the effective tax rate of continuing operations if recognized.
As of December 31, 2017 and 2016, we had $0.1 million and $0.3 million accrued for the potential payment of interest and penalties. Accrued interest and penalties are recorded as a component of provision for income taxes on our consolidated statement of earnings.
We file income tax returns with federal, state, local and foreign jurisdictions. Tax years 2013 through 2016 are subject to future examinations by federal tax authorities. Tax years 2010 through 2016 are subject to future examinations by state and local tax authorities. Currently, the Company is not under audit by any tax authority. Our foreign income tax filings are subject to future examinations by the local foreign tax authorities for tax years 2010 through 2016.