Income Taxes
Income tax (benefit) expense consists of: |
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Current: | | | | | |
Federal | $ | (17,498 | ) | | $ | 10,262 |
| | $ | 11,322 |
|
State and local | 191 |
| | 642 |
| | 3,587 |
|
Foreign | 366 |
| | 494 |
| | 738 |
|
Total current | (16,941 | ) | | 11,398 |
| | 15,647 |
|
Deferred | | | | | |
Federal | (72,057 | ) | | 26,955 |
| | 56,431 |
|
State and local | 13,053 |
| | 3,148 |
| | 5,221 |
|
Foreign | (15 | ) | | 36 |
| | (8 | ) |
Total deferred | (59,019 | ) | | 30,139 |
| | 61,644 |
|
Total income tax (benefit) expense | $ | (75,960 | ) | | $ | 41,537 |
| | $ | 77,291 |
|
The reconciliation of income taxes computed at the United States federal statutory tax rate to income tax expense is:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Computed income tax expense | $ | 23,176 |
| | $ | 39,970 |
| | $ | 73,760 |
|
State and local tax expense | 6,210 |
| | 2,221 |
| | 4,207 |
|
Permanent differences, including domestic production activities deduction | 1,060 |
| | (623 | ) | | (724 | ) |
Revaluation of deferred taxes from Tax Cuts and Jobs Act | (107,900 | ) | | — |
| | — |
|
Transition tax from Tax Cuts and Jobs Act | 628 |
| | — |
| | — |
|
Adjustments for uncertain tax positions | (198 | ) | | 110 |
| | 204 |
|
Valuation Allowance | 1,019 |
| | — |
| | — |
|
Other, net | 45 |
| | (141 | ) | | (156 | ) |
Total income tax (benefit) expense | $ | (75,960 | ) | | $ | 41,537 |
| | $ | 77,291 |
|
The tax effects of temporary differences that have given rise to deferred tax assets and liabilities are presented below:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (in thousands) |
Non-current deferred tax assets | | | |
Provisions not currently deductible | $ | 8,642 |
| | $ | 12,421 |
|
Stock based compensation | 499 |
| | 842 |
|
Net operating loss carryforwards—federal and state | 1,701 |
| | 189 |
|
Net capital loss carryforwards—federal and state | 693 |
| | 1,833 |
|
Tax credits and other | 399 |
| | 327 |
|
Pensions and post retirement | 1,931 |
| | 3,231 |
|
Valuation allowance | (693 | ) | | — |
|
Total deferred tax asset | $ | 13,172 |
| | $ | 18,843 |
|
Non-current deferred tax liabilities | | | |
Investment in joint ventures/partnerships | $ | (1,012 | ) | | $ | (2,084 | ) |
Property, plant and equipment | (206,244 | ) | | (269,478 | ) |
Unrealized gain on financial instruments | — |
| | (224 | ) |
Total deferred tax liability | $ | (207,256 | ) | | $ | (271,786 | ) |
The net deferred tax asset (liability) is classified as non-current in the consolidated balance sheets as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (in thousands) |
Deferred tax assets | $ | 13,172 |
| | $ | 18,843 |
|
Deferred tax liability | (207,256 | ) | | (271,786 | ) |
Deferred tax liability, net | (194,084 | ) | | (252,943 | ) |
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the 2017 Tax Act) was signed into law, making significant changes to the Internal Revenue Code of 1986, as amended (the Code). Changes include, but are not limited to: a federal corporate tax rate decrease from 35% to 21%, effective for tax years beginning after December 31, 2017; the transition of U.S international taxation from a worldwide tax system to a territorial system; and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company estimated the impact of the 2017 Tax Act in its income tax provision for the year ended December 31, 2017 in accordance with its understanding of the 2017 Tax Act and guidance available as of the date of this filing and as a result have recorded adjustments to the various tax balances, current, long-term and deferred tax assets and liabilities, all during the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was $107.9 million, representing an income tax benefit recorded during the current period. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $0.6 million, net of applicable foreign tax credits, based on cumulative foreign earnings and taxes of $10.2 million.
On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. 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 $107.9 million of the deferred tax benefit recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the $0.6 million of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings were each a provisional amount and a reasonable estimate as of the date of this filing. The accounting for these provisional amounts may be adjusted as the Company gains a better understanding of the new tax laws due to additional guidance and analysis on these estimates, including but not limited to, rules related to the deductibility of acquired assets, state tax treatments, and finalizing our foreign affiliate analysis. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete and additional guidance and IRS interpretations are issued.
The 2017 Tax Act requires a U.S. shareholder of a foreign corporation to include in income its global intangible low-taxed income (GILTI). The computation for the GILTI is still subject to interpretation and additional clarifying guidance is expected in 2018. Given the complexity of the new GILTI tax rules, the Company is continuing to evaluate this requirement and its application under ASC 740. Thus, the Company has not made any adjustments in its current year financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI or record it as a period cost adjustment.
Under the 2017 Tax Act, an entity must pay a Base Erosion Anti-Abuse Tax (BEAT) if the BEAT is greater than its regular tax liability. Based upon the FASB’s guidance in this area, any incremental effect of BEAT tax should be recognized in the year the BEAT is incurred. This tax applies to future years and therefore there are no impacts or estimates in the current year financial statements.
ARI considers its Canadian earnings to be permanently reinvested, even after considering the one-time deemed repatriation tax on undistributed earnings, and therefore has not recorded a provision for any foreign withholding taxes on the cumulative undistributed earnings of its Canadian subsidiary. Such undistributed earnings from ARI's Canadian subsidiary have been included in consolidated retained earnings in the amount of $5.8 million and $4.2 million as of December 31, 2017 and 2016, respectively. If ARI were to change its tax position with respect to its Canadian subsidiary, any additional taxes required would be recorded at that time.
As of December 31, 2017, the Company had a federal net operating loss of $53.7 million that will be carried back to tax years 2015 and 2016 and will be fully absorbed. In addition, the Company had state net operating loss carryforwards in the amount of $31.0 million, which have varying expiration dates that extend into 2037. In 2016, ARI had state net operating loss carryforwards of $3.8 million.
The Company had remaining federal capital losses of $4.7 million carried forward from 2013. In 2017, the Company realized capital gains in the amount of $2.2 million that were used to offset a portion of the capital loss carryforward. During the second quarter of 2017, the Company established a valuation allowance of $1.0 million, for federal and state purposes, related to the remaining capital loss of $2.5 million. In the fourth quarter of 2017, this valuation allowance was adjusted to $0.7 million as a result of the new income tax rates specified by the 2017 Tax Act. The capital loss carryforward expires at December 31, 2018.
As of December 31, 2017, the Company's gross unrecognized tax benefits were $1.8 million, of which $1.5 million, net of federal benefit on state matters, would impact the effective tax rate if reversed. As of December 31, 2016, the Company's gross unrecognized tax benefits were $2.0 million, of which $1.6 million, net of federal benefit on state matters, would impact the effective tax rate if reversed.
The aggregate changes in the balance of gross unrecognized tax benefits were as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Beginning balance | $ | 2,023 |
| | $ | 1,684 |
| | $ | 1,422 |
|
Increases in tax positions for prior years | 47 |
| | 253 |
| | 30 |
|
Increases in tax positions for current year | — |
| | 86 |
| | 298 |
|
Settlements and decreases in tax positions | (252 | ) | | — |
| | (66 | ) |
Ending balance | $ | 1,818 |
| | $ | 2,023 |
| | $ | 1,684 |
|
The total amount of interest and penalties included in the tax provision as an income tax expense for the years ended December 31, 2017 and 2016 was $0.1 million each year. The Company does not anticipate a material change in the amount of unrecognized tax benefits in the next twelve months.
The statute of limitations on the Company's 2013 federal income tax return expired in December 2017. The Company's federal income tax returns for tax years 2014 and beyond remain subject to examination, with the latest statute of limitations expiring in October 2021.
Certain of the Company's 2013 state income tax returns and all of the Company's state income tax returns for 2014 and beyond remain open and subject to examination, with the latest statute of limitations expiring in December 2022, upon the filing of the 2017 state tax returns. The Company's foreign subsidiary's income tax returns for 2013 and beyond remain open to examination by foreign tax authorities.