INCOME TAXES
The TCJA includes a broad range of tax reforms including a reduction in the corporate income tax rate to 21% from 35% effective January 1, 2018. GAAP requires companies to recognize the income tax accounting effects of changes in tax law or rates (including retroactive changes) in the period of enactment. The Company recognized the tax effects of the TCJA during the three months ended December 31, 2017, and recorded $280.8 million in deferred tax expense related solely to the impact of the TCJA. This increase in tax expense is comprised of $190.4 million of deferred tax expense due to the remeasurement of deferred tax assets at the 21% tax rate, and $90.4 million of additional tax expense related to the change in the tax receivable agreement liability as a result of the reduction in the corporate tax rate.
As a result of the complexities involved in accounting for the full effect of the TCJA, the SEC permits companies to record provisional amounts in the current year. The Company considers all amounts recorded as a result of the TCJA to be provisional and subject to revision. The Company’s provisional amounts, including the remeasurement of the Company’s deferred income tax assets and related tax receivable agreement liability, are based on reasonable and supportable assumptions as of December 31, 2017. Any such revisions will be treated in accordance with the measurement period guidance allowing for a period of up to one year after the enactment date of the TCJA to finalize the recording of the related tax impacts.
The Registrant and each of the Oz Operating Group entities are partnerships for U.S. federal income tax purposes. Due to the Company’s legal structure, only a portion of the income earned by the Company is subject to corporate-level income taxes in the United States and in foreign jurisdictions.
The following table presents the components of the Company’s provision for income taxes:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| | | | | |
| (dollars in thousands) |
Current: | | | | | |
Federal income taxes | $ | 103 |
| | $ | 19 |
| | $ | (151 | ) |
State and local income taxes | 2,172 |
| | 4,885 |
| | 13,241 |
|
Foreign income taxes | 2,520 |
| | 3,746 |
| | 3,374 |
|
| 4,795 |
| | 8,650 |
| | 16,464 |
|
Deferred: | | | | | |
Federal income taxes | 322,162 |
| | 7,760 |
| | 40,510 |
|
State and local income taxes | (9,828 | ) | | (6,131 | ) | | 73,898 |
|
Foreign income taxes | 430 |
| | 607 |
| | 1,352 |
|
| 312,764 |
| | 2,236 |
| | 115,760 |
|
Total Provision for Income Taxes | $ | 317,559 |
| | $ | 10,886 |
| | $ | 132,224 |
|
The foreign income tax provision was calculated on $21.3 million, $(3.6) million and $11.6 million of pre-tax income (loss) generated in foreign jurisdictions for the years ended December 31, 2017, 2016 and 2015, respectively.
Deferred income tax assets and liabilities represent the tax effects of the temporary differences between the GAAP bases and tax bases of the Company’s assets and liabilities.
The following table presents the Company’s deferred income tax assets and liabilities before the impact of offsetting deferred income tax assets and liabilities within the same legal entity and tax jurisdiction:
|
| | | | | | | |
| December 31, 2017 | | December 31, 2016 |
| | | |
| (dollars in thousands) |
Deferred Income Tax Assets: | | | |
Tax goodwill | $ | 272,636 |
| | $ | 583,707 |
|
Net operating loss | 76,100 |
| | 86,935 |
|
Tax credit carryforwards | 16,102 |
| | 20,931 |
|
Investments in partnerships | 20,440 |
| | 11,173 |
|
Employee compensation | 626 |
| | 780 |
|
Other | 2,145 |
| | 227 |
|
| 388,049 |
| | 703,753 |
|
Valuation allowance | (12,028 | ) | | (7,955 | ) |
Total Deferred Income Tax Assets | $ | 376,021 |
| | $ | 695,798 |
|
| | | |
Total Deferred Income Tax Liabilities | $ | 1,167 |
| | $ | 655 |
|
The majority of the Company’s deferred income tax assets relate to tax goodwill in the United States that arose in connection with the Company’s IPO and concurrent private Class A Share offering in 2007 (collectively, the “2007 Offerings”), as well as subsequent exchanges of Group A Units for Class A Shares. These deferred income tax assets are derived from goodwill recognized for tax purposes that are subsequently amortized and result in future taxable deductions and cash savings to the Company. The Company entered into a tax receivable agreement to pay a portion of these tax savings to the Company’s executive managing directors and the Ziffs. The tax goodwill amounts presented above include the increases that these tax receivable agreement payments will have on future tax goodwill. See Note 15 for additional information regarding the tax receivable agreement.
As of December 31, 2017, the Company had federal income tax credit carryforwards of approximately $16.1 million, the majority of which will begin to expire in 2018. As of December 31, 2017, the Company had $269.0 million of net operating losses available to offset future taxable income for federal income tax purposes that will expire between 2030 and 2037, and $146.0 million for state and $142.4 million for local income tax purposes that will expire between 2035 and 2037.
The Company has determined that it may not realize certain foreign income tax credits within the limited carryforward period available. Accordingly, a valuation allowance for $12.0 million and $8.0 million as of December 31, 2017 and 2016, respectively, has been established for these items.
The following is a reconciliation of the statutory U.S. federal income tax rate to the Company’s effective income tax rate:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Statutory U.S. federal income tax rate | 35.00 | % |
| 35.00 | % |
| 35.00 | % |
Impact of federal tax reform | 40.34 | % | | — | % | | — | % |
Income passed through to noncontrolling interests | -10.40 | % | | -23.10 | % | | -16.34 | % |
Nondeductible fines and penalties | — | % | | -12.78 | % | | — | % |
Income not subject to entity level tax | -4.54 | % | | -3.01 | % | | 2.44 | % |
State and local income taxes due to enacted change in tax laws | — | % | | — | % | | 23.14 | % |
Other state and local income taxes | 4.42 | % | | 0.56 | % | | 4.66 | % |
Changes in tax receivable agreement liability | — | % | | — | % | | -6.94 | % |
Foreign income taxes | 0.63 | % | | -0.96 | % | | 1.24 | % |
Other, net | 1.84 | % | | 0.72 | % | | 0.94 | % |
Effective Income Tax Rate | 67.29 | % | | -3.57 | % | | 44.14 | % |
The Company files income tax returns with the U.S. federal government and various state and local jurisdictions, as well as foreign jurisdictions. The income tax years under examination vary by jurisdiction. In general, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2014; however, certain subsidiaries are no longer subject to income tax examinations for years prior to 2012 for state and local and 2007 for foreign jurisdictions.
The Company recognizes tax benefits for amounts that are “more likely than not” to be sustained upon examination by tax authorities. For uncertain tax positions in which the benefit to be realized does not meet the “more likely than not” threshold, the Company establishes a liability, which is included within other liabilities in the consolidated balance sheets. The Company did not accrue interest or penalties related to uncertain tax positions. In 2014, the Company recorded a liability for unrecognized tax benefits of $7.0 million. There was no change to the liability through December 31, 2017. As of December 31, 2017, the Company does not believe that there will be a significant change to the uncertain tax positions during the next 12 months. The amount of the Company’s total unrecognized tax benefits that, if recognized, would affect its effective tax rate was $4.5 million as of December 31, 2017.
There are no unremitted earnings with respect to the foreign subsidiaries of the Company due to the flow through nature of these entities.