INCOME TAXES
The table below represents a geographical breakdown of book income (loss) before the provision for income taxes:
|
| | | | | | | | | | | | |
| | Year ended December 31, |
(Dollars in millions) | | 2017 | | 2016 | | 2015 |
Domestic | | $ | 90.6 |
| | $ | 33.9 |
| | $ | 61.2 |
|
Foreign | | 31.1 |
| | 56.6 |
| | 51.2 |
|
Total | | $ | 121.7 |
| | $ | 90.5 |
| | $ | 112.4 |
|
The U.S. and foreign components of (benefit from) provision for income taxes consisted of the following components. However, it is not reflective of the cash tax results of the Company.
|
| | | | | | | | | | | | |
| | Year ended December 31, |
(Dollars in millions) | | 2017 | | 2016 | | 2015 |
Federal | | | | | | |
Current | | $ | (0.3 | ) | | $ | (0.8 | ) | | $ | 0.2 |
|
Deferred | | (17.9 | ) | | 17.0 |
| | 13.2 |
|
| | (18.2 | ) | | 16.2 |
| | 13.4 |
|
State | | | | | | |
Current | | 0.1 |
| | 0.1 |
| | — |
|
Deferred | | (3.1 | ) | | 2.8 |
| | 0.3 |
|
| | (3.0 | ) | | 2.9 |
| | 0.3 |
|
Foreign | | | | | | |
Current | | 8.4 |
| | 5.8 |
| | 31.9 |
|
Deferred | | (3.5 | ) | | (10.9 | ) | | 7.8 |
|
| | 4.9 |
| | (5.1 | ) | | 39.7 |
|
| | | | | | |
Total | | $ | (16.3 | ) | | $ | 14.0 |
| | $ | 53.4 |
|
A reconciliation of the statutory federal income tax rate of 35% with Kennedy Wilson’s effective income tax rate is as follows:
|
| | | | | | | | | | | | |
| | Year ended December 31, |
(Dollars in millions) | | 2017 | | 2016 | | 2015 |
Tax computed at the statutory rate | | $ | 42.6 |
| | $ | 31.7 |
| | $ | 39.3 |
|
Tax Reform federal rate change | | (44.8 | ) | | — |
| | — |
|
Tax deduction in excess of book compensation from restricted stock vesting | | (3.7 | ) | | — |
| | — |
|
Foreign permanent differences, primarily non-deductible depreciation, amortization and acquisition-related expenses in the United Kingdom | | 6.1 |
| | 6.5 |
| | 13.7 |
|
Sale of KWR, investment basis difference | | — |
| | — |
| | 10.6 |
|
Effect of foreign tax operations, net of foreign tax credits | | 1.6 |
| | 1.1 |
| | (3.8 | ) |
Noncontrolling interests | | (15.0 | ) | | (25.8 | ) | | (2.8 | ) |
Adjustment to investment basis | | — |
| | — |
| | 1.4 |
|
Non-vested stock expense | | — |
| | — |
| | 1.0 |
|
State income taxes, net of federal benefit | | (3.8 | ) | | 2.8 |
| | (1.5 | ) |
Other | | 0.7 |
| | (2.3 | ) | | (4.5 | ) |
Provision for (benefit from) income taxes | | $ | (16.3 | ) | | $ | 14.0 |
| | $ | 53.4 |
|
Cumulative tax effects of temporary differences are shown below at December 31, 2017 and 2016:
|
| | | | | | | | |
| | Year ended December 31, |
(Dollars in millions) | | 2017 | | 2016 |
Deferred tax assets: | | | | |
Foreign currency translation | | $ | 11.9 |
| | $ | 131.9 |
|
Net operating loss carryforward and credits | | 103.7 |
| | 85.2 |
|
Stock option expense | | 5.2 |
| | 19.5 |
|
Hedging transactions | | 8.1 |
| | — |
|
Marketable securities | | 0.1 |
| | 0.4 |
|
Accrued reserves | | 0.1 |
| | 0.1 |
|
Total deferred tax assets | | 129.1 |
| | 237.1 |
|
Valuation allowance | | (32.7 | ) | | (29.9 | ) |
Net deferred tax assets | | 96.4 |
| | 207.2 |
|
| | | | |
Deferred tax liabilities: | | | | |
Investment basis, depreciation, amortization and reserve differences | | 119.8 |
| | 157.6 |
|
Hedging transactions | | — |
| | 5.0 |
|
Prepaid expenses and other | | 9.2 |
| | 13.9 |
|
Capitalized interest | | 1.4 |
| | 2.3 |
|
Total deferred tax liabilities | | 130.4 |
| | 178.8 |
|
| | | | |
Deferred tax asset (liability), net | | $ | (34.0 | ) | | $ | 28.4 |
|
U.S. tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Bill”), was signed into law on December 22, 2017. The Tax Bill amends a range of U.S. federal tax rules applicable to individuals, businesses and international taxation. These changes include lowering the federal corporate income tax rate from 35% to 21% and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. During the fourth quarter of 2017, the Company we adjusted our net U.S. deferred tax liability down to the new federal tax rate and recorded a $44.8 million tax benefit. Due to the nature of our business operations, a majority of our foreign income is taxed currently in the U.S. For those foreign subsidiaries where there is no current U.S. tax inclusion, we have estimated that no repatriation tax is due as those foreign subsidiaries do not have aggregate positive unrepatriated foreign earnings. While we were able to make a reasonable, provisional estimate of the impact of the reduction in the U.S. corporate tax rate and other provisions that may have a significant impact to the Company, the final impact of the Tax Bill may differ from our estimates due to additional guidance that might be issued by the IRS, Treasury Regulations or state taxing authorities and changes in our assumptions and interpretations. We are continuing to assess the changes from and gather information related to Tax Bill in order to finalize our provisional estimates and to assess the impact of Tax Bill in future periods.
As of December 31, 2017, Kennedy Wilson had federal net operating losses of $146.3 million. These net operating losses begin to expire in the year 2031. As of December 31, 2017, there were also California net operating loss carryforwards of approximately $146.7 million. The California net operating losses begin to expire in the year 2028. In addition, Kennedy Wilson has $9.1 million of other state net operating losses. As of December 31, 2017, Kennedy Wilson had $224.8 million of foreign net operating losses carryforwards which have no expiration date. The Company has foreign tax credits of $17.3 million which begin to expire in 2023.
The Company's valuation allowance on deferred tax assets increased by $2.8 million in 2017 and decreased by $7.8 million in 2016. The increase in 2017 principally relates to additional foreign net operating losses that not more-likely-than not to be realized. The decrease in 2016 principally related to a release in our valuation allowance as update forecasts indicated that certain net operating losses in the United Kingdom were more-likely-than-not realizable.
There were no gross unrecognized tax benefits at December 31, 2017 and 2016. Management has considered the likelihood and significance of possible penalties associated with Kennedy Wilson's current and intended filing positions and has determined, based on its assessment, that such penalties, if any, would not be significant.
Kennedy Wilson's federal and state income tax returns remain open to examination for the years 2014 through 2016 and 2013 through 2016, respectively. However, due to the existence of prior year loss carryovers, the IRS may examine any tax years for which the carryovers are used to offset future taxable income. Our foreign subsidiaries’ tax returns remain open to examination for the years 2013 through 2016. The Spanish loss carryovers of $49.0 million may be subject to tax examination for a period of 10 years from the period in which such losses were generated.