Income Taxes
For 2015 and the first half of 2016, Herc is included in the consolidated income tax returns of Hertz Holdings. With respect to these time periods, the income tax provision included in these financial statements has been calculated using a separate return basis, as if Herc filed separate consolidated group income tax returns, and was not part of the consolidated income tax returns of Hertz Holdings.
In December 2017 the Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act") was enacted. This legislation had significant impact on the current tax environment in the U.S. Subsequent to the enactment of the 2017 Tax Act, the Securities and Exchange Commission ("SEC") provided guidance on how public companies should report the effects of the 2017 Tax Act in future SEC filings. The Company has performed an initial analysis of the 2017 Tax Act in accordance with this guidance. The Company recognized an income tax net benefit of $207.1 million for the year ended December 31, 2017 associated with the items that were reasonably estimable. This net benefit reflects (i) a $245.2 million revaluation of the Company's net deferred tax liability based on a U.S. federal tax rate of 21%, partially offset by (ii) a one-time transition tax of $38.1 million on unremitted foreign earnings and profits due to the utilization of net operating loss ("NOL") carryforwards.
Below is a summary of the key provisions of the 2017 Tax Act:
Tax Rate Reduction
The 2017 Tax Act reduces the federal income tax rate from 35% to 21% beginning in 2018. Accordingly, the Company recorded an estimated tax benefit of $245.2 million for the year ended December 31, 2017 associated with the reduction in net deferred tax liabilities.
Deemed Repatriation
Under the 2017 Tax Act, companies are required, as part of the December 31, 2017 income tax reporting, to calculate the amount of previously unrepatriated earnings from foreign operations and remit a one-time tax (“Toll Charge”) on these previously untaxed earnings. The Company has recognized a tax expense of $38.1 million associated with this deemed repatriation for the year ended December 31, 2017. The reported amount is an estimate of the expected tax based on information available as of December 31, 2017 including, but not limited to, cumulative earnings and profits from foreign operations, cash equivalent balances, and current state impact on the earnings. These estimates will be finalized during 2018. The Company elected to utilize current NOL carryforwards to offset the deemed repatriation income and therefore recorded no income taxes payable for U.S. federal tax purposes.
Interest Expense Limitation
Beginning in 2018, interest expense deductions are limited to 30% of adjusted taxable income, subject to certain provisions. No current tax has been recorded with respect to this item as the item is not effective until 2018. The Company will review the impact of this provision on a current basis during 2018.
Territorial Taxation
The 2017 Tax Act generally allows for the receipt of foreign dividends on a tax-free basis beginning in 2018. However, the 2017 Tax Act also enacts various new taxes with respect to transactions with, and operations of, foreign related parties. As of December 31, 2017, the Company does not believe this provision impacts currently reported deferred taxes. As a result, the Company has not recorded any tax impacts associated with this provision. The Company will continue to review the impact of this provision, along with new guidance provided by the Internal Revenue Service ("IRS"), during 2018.
Fixed Assets
The 2017 Tax Act allows for a special 100% bonus depreciation deduction to be claimed on many fixed assets purchased subsequent to September 27, 2017 through December 2022. Additionally, the 2017 Tax Act terminated the availability of Section 1031 LKE treatment with respect to personal property items. As a result, the Company has elected to cease matching asset sales with newly acquired assets effective October 1, 2017. Likewise, the Company has elected to begin utilizing the 100% expensing provision effective as of October 1, 2017.
The Company is still analyzing the 2017 Tax Act and refining calculations, which could potentially impact the measurement of the tax balances. A substantial portion of the expected 2017 impact of the enactment of the 2017 Tax Act is reflected in the tables below.
The components of income (loss) before income taxes for the periods were as follows (in millions):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Domestic | $ | (59.2 | ) | | $ | 2.5 |
| | $ | 102.4 |
|
Foreign | (5.2 | ) | | (7.4 | ) | | 54.5 |
|
Income (loss) before income taxes | $ | (64.4 | ) | | $ | (4.9 | ) | | $ | 156.9 |
|
The provision for income taxes consists of the following (in millions):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 2.0 |
| | $ | — |
| | $ | 15.8 |
|
Foreign | 5.0 |
| | 2.4 |
| | 3.3 |
|
State and local | (3.3 | ) | | 0.1 |
| | 4.2 |
|
Total current | 3.7 |
| | 2.5 |
| | 23.3 |
|
Deferred: | | | | | |
Federal | (214.9 | ) | | 3.5 |
| | 20.4 |
|
Foreign | (4.6 | ) | | (2.3 | ) | | 0.1 |
|
State and local | (8.9 | ) | | 11.1 |
| | 1.8 |
|
Total deferred | (228.4 | ) | | 12.3 |
| | 22.3 |
|
Total income tax (benefit) provision | $ | (224.7 | ) | | $ | 14.8 |
| | $ | 45.6 |
|
The principal items of the U.S. and foreign net deferred tax assets and liabilities are as follows (in millions):
|
| | | | | | | |
| December 31, 2017 | | December 31, 2016 |
Deferred tax assets: | | | |
Employee benefit plans | $ | 5.4 |
| | $ | 7.1 |
|
Tax credit carryforwards | 4.2 |
| | 1.5 |
|
Accrued and prepaid expenses | 31.7 |
| | 38.6 |
|
Net operating loss carryforwards | 46.5 |
| | 90.7 |
|
Total deferred tax assets | 87.8 |
| | 137.9 |
|
Less: valuation allowance | (7.6 | ) | | (4.5 | ) |
Total net deferred tax assets | 80.2 |
| | 133.4 |
|
Deferred tax liabilities: | | | |
Deferred state gain | (5.8 | ) | | (5.5 | ) |
Depreciation on tangible assets | (469.7 | ) | | (721.1 | ) |
Intangible assets | (66.2 | ) | | (98.9 | ) |
Total deferred tax liabilities | (541.7 | ) | | (825.5 | ) |
Net deferred tax liability | $ | (461.5 | ) | | $ | (692.1 | ) |
In connection with the Spin-Off in 2016, NOL carryforwards were split between the Company and New Hertz pursuant to the Code and regulations. The split of net operating loss carryforwards was adjusted in 2017 after the income tax returns were finalized. Accordingly, the Company recorded an adjustment to the federal and state net operating losses of $0.9 million and $4.0 million, respectively. As of December 31, 2017, deferred tax assets of $28.5 million, net of $0.2 million recorded for uncertain tax positions, were recorded for unutilized federal NOL carryforwards of $28.7 million. The total federal NOL carryforwards are $136.1 million. The federal NOL carryforwards begin to expire in 2031. State NOL carryforwards have generated a deferred tax asset of $14.1 million. The state NOL carryforwards expire over various years beginning in 2018 depending upon the particular jurisdictions.
As of December 31, 2017, deferred tax assets of $4.2 million were recorded for federal Alternative Minimum Tax, Fuel Tax Credits and various non-U.S. Tax Credits.
As of December 31, 2017, deferred tax assets of $3.9 million were recorded for foreign NOL carryforwards of $16.3 million. The foreign NOL carryforwards of $16.3 million include $1.7 million that have an indefinite carryforward period and associated deferred tax assets of $0.3 million. The remaining foreign NOL carryforwards of $14.6 million are subject to expiration beginning in 2018 and have associated deferred tax assets of $3.6 million.
In determining the valuation allowance, an assessment of positive and negative evidence was performed regarding realization of the net deferred tax assets in accordance with ASC Topic 740, Accounting for Income Taxes. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, the availability of carryforwards and estimates of projected future taxable income. Based on the assessment, as of December 31, 2017, total valuation allowances of $7.6 million were recorded against deferred tax assets. Although realization is not assured, the Company has concluded that it is more likely than not the remaining deferred tax assets of $80.2 million will be realized and as such no valuation allowance has been provided on these assets.
The income tax in the accompanying consolidated statements of operations differs from the income tax calculated by applying the statutory federal income tax rate to income (loss) before income taxes due to the following (in millions):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income tax (benefit) provision at statutory rate | $ | (22.5 | ) | | $ | (1.7 | ) | | $ | 54.9 |
|
| | | | | |
Increases (decreases) resulting from: | | | | | |
Foreign taxes | 1.9 |
| | 0.8 |
| | 2.2 |
|
State and local income taxes, net of federal income tax | 0.9 |
| | 11.2 |
| | 4.5 |
|
Federal and foreign | 0.5 |
| | 3.2 |
| | (0.3 | ) |
Enactment of the 2017 Tax Act | (207.1 | ) | | — |
| | — |
|
Finalization of estimates from Spin-Off | (0.9 | ) | | — |
| | — |
|
Change in valuation allowance | 2.8 |
| | 1.3 |
| | 3.8 |
|
Benefit from sale of non-U.S. operations | — |
| | — |
| | (20.4 | ) |
All other items, net | (0.3 | ) | | — |
| | 0.9 |
|
Income tax (benefit) provision | $ | (224.7 | ) | | $ | 14.8 |
| | $ | 45.6 |
|
The income tax benefit for 2017 is approximately $202.2 million greater than the benefit calculated using the statutory federal tax rate. The increase is primarily due to the $207.1 million net impact of the 2017 Tax Act. State and local income taxes are primarily impacted by $13.5 million for state rate and state impacts of the federal rate reduction, offset by a $7.3 million benefit from the finalization of the 2016 tax returns.
As a result of the 2017 Tax Act, previously undistributed earnings from foreign subsidiaries are deemed to have been repatriated as of December 31, 2017 for federal income tax purposes, while uncertainties exist with respect to the impact on state income taxes. Beginning in 2018, companies will generally be able to repatriate earnings from foreign subsidiaries with no U.S. federal income tax impact. However, certain foreign limitations may still exist including, but not limited to, withholding taxes. Additionally, the repatriated earnings may have state tax expense associated with the transaction. As December 31, 2017, deferred tax liabilities have not been recorded for such earnings because, while it is management’s current intention to permanently reinvest such undistributed earnings offshore, management is continuing to evaluate this position. Due to uncertainty it is not practicable to estimate the actual amount of such deferred tax liabilities. Further, the Company is still analyzing the 2017 Tax Act which could potentially impact the measurement of certain tax balances.
As a consequence of the Company’s inclusion in the Hertz Global Holdings, Inc. consolidated income tax returns, it is joint and severally liable, with other members of the consolidated group, for any additional taxes that may be assessed against Hertz Global Holdings, Inc. for the periods prior to June 30, 2016. As of December 31, 2017 and December 31, 2016, the Company has recorded a $0.2 million liability related to New Hertz which could impact the NOL allocated to the Company and which is included in the consolidated group for the first half of 2016. The Company classifies net, after-tax interest and penalties related to the liabilities for unrecognized tax benefits as a component of “Income tax benefit (provision)” in the consolidated statements of operations. However, no penalties or interest have been calculated on the balance of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 as any additional taxable income would be covered by the Company's NOL carryforwards.
The Company conducts business globally and, as a result, files one or more income tax returns in the U.S. and non-U.S. jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. The open tax years for these jurisdictions span from 2005 to 2016. The IRS completed its audit of the Company's 2007 to 2011 consolidated income tax returns, which Herc is included in, and had no changes to the previously filed tax returns. The Company was recently notified that the IRS will be auditing the 2014 and 2015 income tax returns. Several U.S. state and non-U.S. jurisdictions are under audit. The Company does not expect any material assessments resulting from these audits.