5. Income Taxes
The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred taxes are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax laws that will be in effect when the differences are expected to reverse.
Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2017 and 2016 were as follows (amounts in thousands):
|
| | | | | | | | |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Allowance for uncollectible accounts | | $ | 5,224 |
| | $ | 9,735 |
|
Accrued employee benefits | | 4,147 |
| | 5,532 |
|
|
| | | | | | | | |
Stock compensation | | 663 |
| | 1,004 |
|
Accrued self-insurance | | 2,157 |
| | 2,762 |
|
Acquisition costs | | 2,064 |
| | 1,781 |
|
Net operating loss carry forward | | 1,299 |
| | 1,880 |
|
Intangible asset impairment | | 21 |
| | 38 |
|
Uncertain tax position—state tax portion | | — |
| | 63 |
|
Uncertain tax position - interest expense | | — |
| | 90 |
|
Other | | 91 |
| | 155 |
|
Capital loss carryforward | | 12 |
| | 154 |
|
Valuation allowance | | (44 | ) | | (44 | ) |
Deferred tax assets | | $ | 15,634 |
| | $ | 23,150 |
|
Deferred tax liabilities: | | | | |
Amortization of intangible assets | | (35,955 | ) | | (45,622 | ) |
Tax depreciation in excess of book depreciation | | (5,988 | ) | | (8,397 | ) |
Prepaid expenses | | (623 | ) | | (817 | ) |
Non-accrual experience accounting method | | (534 | ) | | (255 | ) |
Deferred tax liabilities | | (43,100 | ) | | (55,091 | ) |
Net deferred tax liability | | $ | (27,466 | ) | | $ | (31,941 | ) |
Based on the Company’s historical pattern of taxable income, the Company believes it will produce sufficient income in the future to realize its deferred income tax assets. Management provides a valuation allowance for any net deferred tax assets when it is more likely than not that a portion of such net deferred tax assets will not be recovered.
The components of the Company’s income tax expense from continuing operations, less noncontrolling interest, were as follows (amounts in thousands):
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
Federal | | $ | 12,798 |
| | $ | 12,563 |
| | $ | 18,094 |
|
State | | 2,621 |
| | 2,371 |
| | 3,232 |
|
| | 15,419 |
| | 14,934 |
| | 21,326 |
|
Deferred: | | | | | | |
Federal | | (6,273 | ) | | 6,223 |
| | 1,389 |
|
State | | 1,798 |
| | 1,019 |
| | 133 |
|
| | (4,475 | ) | | 7,242 |
| | 1,522 |
|
Total income tax expense | | $ | 10,944 |
| | $ | 22,176 |
| | $ | 22,848 |
|
A reconciliation of the difference between the federal statutory tax rate and the Company's effective tax rate for income taxes for each period is as follows:
|
| | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Federal statutory tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal benefit | | 4.4 |
| | 3.8 |
| | 3.9 |
|
Nondeductible expenses | | 3.2 |
| | 2.6 |
| | 2.5 |
|
Uncertain tax position | | — |
| | (3.3 | ) | | — |
|
TCJA Enactment | | (22.9 | ) | | — |
| | — |
|
Excess Tax Benefit | | (1.6 | ) | | — |
| | — |
|
Credits and other | | (0.1 | ) | | (0.4 | ) | | — |
|
Effective tax rate | | 18.0 | % | | 37.7 | % | | 41.4 | % |
The Company is subject to both federal tax and state income tax for jurisdictions within which it operates. Within these jurisdictions, the Company is open to examination for tax years ended after December 31, 2013.
On December 22, 2017, the U.S. enacted significant changes to U.S. tax law following the passage and signing of “Tax Cuts and Jobs Act” or the “TCJA”. The TCJA is complex and significantly changes the U.S. corporate income tax system by, among other things, reducing the Federal corporate income tax rate from 35% to 21%. Given the significant changes resulting from the TCJA, the estimated financial impacts for fourth-quarter and full-year 2017 are provisional and subject to further analysis, interpretation and clarification of the TCJA, which could result in changes to these estimates during 2018.
The reduction in the corporate tax rate under the TCJA will require a one-time revaluation of certain deferred tax-related assets and liabilities to reflect their value at the lower corporate tax rate of 21%. As such, the Company experienced a reduction in the value of these assets and liabilities of approximately $14.0 million. This reduction in value is based on balances as of December 31, 2017. Solely based on this reduction in deferred tax assets and liabilities, the Company experienced a decrease in the provision for income taxes of approximately $14.0 million for the fourth quarter of 2017, which reduced the effective tax rate by 22.9%.
No material uncertain tax positions exist as of December 31, 2017. As of December 31, 2016, $1.3 million was recorded in income tax payable as an unrecognized tax benefit which, if recognized, would decrease the Company’s effective tax rate. All of the Company's unrecognized tax benefit is due to the settlement with the United States of America, which was announced September 30, 2011. On July 31, 2014, the Internal Revenue Service ("IRS") issued a notice of proposed adjustment asserting that a portion of the original tax deduction claimed by the Company associated with the settlement of the United States of America should be disallowed. In December 2016, the Company signed a final settlement offer from the IRS that reduced the unrecognized tax benefit from $3.4 million to $1.3 million. The Company received approval from Joint Committee Review in February 2017 to finalize the settlement. The settlement was paid in the second quarter of 2017. No other material uncertain tax positions exist as of December 31, 2017. A reconciliation of the total amounts of unrecognized tax benefits follows (amounts in thousands):
|
| | | |
| |
Total unrecognized tax benefits as of December 31, 2016 | $ | 1,315 |
|
Increases (decreases) in unrecognized tax benefits as a result of: | |
Tax positions taken during the current period | (1,315 | ) |
Total unrecognized tax benefits as of December 31, 2017 | $ | — |
|
The Company recognizes interest and penalties related to uncertain tax positions in interest expense and general and administrative expenses, respectively. During the year ended December 31, 2017, the Company recognized an increase of $0.02 million in interest expense due to the final settlement paid related to the overall uncertain tax position. During the years ended December 31, 2016 and 2015, the Company recognized $0.2 million each year in interest expense, and recorded an accrued liability of interest payments related to uncertain tax positions.