INCOME TAXES
The Company’s income tax provision totaled $325.9 million, $90.7 million and $26.7 million for the years ended December 31, 2017, 2016 and 2015, respectively. The Company’s effective tax rate was approximately 18.4%, 8.5% and 7.1% for the years ended December 31, 2017, 2016 and 2015, respectively.
The provision for income taxes is presented in the following table:
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal income tax | $ | 3,314 |
| | $ | — |
| | $ | (10,108 | ) |
Foreign income tax(1) | 3,271 |
| | 5,843 |
| | 7,842 |
|
State and local income tax | 6,364 |
| | 2,847 |
| | 2,573 |
|
Subtotal | 12,949 |
| | 8,690 |
| | 307 |
|
Deferred: | | | | | |
Federal income tax | 290,213 |
| | 66,567 |
| | 19,581 |
|
Foreign income tax(1) | — |
| | (16 | ) | | (256 | ) |
State and local income tax | 22,783 |
| | 15,466 |
| | 7,101 |
|
Subtotal | 312,996 |
| | 82,017 |
| | 26,426 |
|
Total Income Tax Provision | $ | 325,945 |
| | $ | 90,707 |
| | $ | 26,733 |
|
| |
(1) | The foreign income tax provision was calculated on $24.0 million, $38.8 million and $27.6 million of pre-tax income generated in foreign jurisdictions for the years ended December 31, 2017, 2016 and 2015, respectively. |
The following table reconciles the U.S. Federal statutory tax rate to the effective income tax rate:
|
| | | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. Statutory Tax Rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Income Passed Through to Non-Controlling Interests | (16.3 | ) | | (18.9 | ) | | (20.4 | ) |
Income Passed Through to Class A Shareholders | (10.4 | ) | | (9.2 | ) | | (10.4 | ) |
State and Local Income Taxes (net of Federal Benefit) | 1.2 |
| | 1.4 |
| | 2.1 |
|
Impact of Federal Tax Reform | 9.7 |
| | — |
| | — |
|
Other | (0.8 | ) | | 0.2 |
| | 0.8 |
|
Effective Income Tax Rate | 18.4 | % | | 8.5 | % | | 7.1 | % |
Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated statements of financial condition. These temporary differences result in taxable or deductible amounts in future years.
Existing accounting rules require the effect of a change in tax law or rates to be recognized in income as a component of the income tax provision on the date a bill is signed into law. Existing accounting rules also require deferred tax assets and liabilities to be measured at the enacted rate. The Tax Cuts and Jobs Act (the “TCJA”) was signed into law on December 22, 2017 and includes a broad range of tax reforms including a reduction in the corporate income tax rate to 21% from 35% effective January 1, 2018. The rate change resulted in a reduction of our net deferred tax assets of $254.3 million, resulting primarily from the remeasurement of tax assets arising from the AOG exchanges.
As existing accounting rules do not address all circumstances that may arise for companies in accounting for the income tax effects of the TCJA, the SEC staff issued guidance on December 22, 2017 to clarify the application of existing rules in situations where an entity does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for the income tax effects of the TCJA in the period the TCJA was enacted.
In situations where the accounting for the income tax effects of the TJCA are incomplete by the time the company issues its financial statements (but the company can determine a reasonable estimate for those effects), the company can report provisional amounts that would be subject to adjustment during a measurement period until the accounting is complete.
Upon enactment, there is a one-time deemed repatriation tax on undistributed foreign earnings and profits (the “transition tax”). While our initial assessment indicates that any impact from the transition tax is insignificant, our adjustments to deferred tax assets and liabilities and the liability related to the transition tax are provisional amounts estimated based on information available as of December 31, 2017.
These amounts are subject to change as we obtain information necessary to complete the calculations. We will recognize any changes to the provisional amounts as we refine our estimates. We expect to complete our analysis of the provisional items during the second half of 2018. The effects of other provisions of the TCJA are not expected to have a material impact on our consolidated financial statements.
The Company’s deferred tax assets and liabilities in the consolidated statements of financial condition consist of the following:
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Deferred Tax Assets: | | | |
Depreciation and amortization | $ | 300,882 |
| | $ | 525,261 |
|
Net operating loss carryforwards | 21,091 |
| | 43,733 |
|
Revenue recognition | 14,652 |
| | 26,629 |
|
Foreign tax credit | 13,338 |
| | 11,746 |
|
Equity-based compensation | 3,196 |
| | 1,801 |
|
Other | 3,030 |
| | 4,947 |
|
Total Deferred Tax Assets | 356,189 |
| | 614,117 |
|
Deferred Tax Liabilities: | | | |
Unrealized gains from investments | 17,818 |
| | 41,346 |
|
Other | 733 |
| | 508 |
|
Total Deferred Tax Liabilities | 18,551 |
| | 41,854 |
|
Total Deferred Tax Assets, Net | $ | 337,638 |
| | $ | 572,263 |
|
As of December 31, 2017, the Company had approximately $83.6 million of federal net operating loss (“NOL”) carryforwards and $82.7 million of state and local net operating loss carryforwards that will begin to expire after 2035. In addition, the Company’s foreign tax credit carryforwards will begin to expire after 2022.
As a result of certain realization requirements, the Company does not include certain deferred tax assets as of December 31, 2017 that arose directly from tax deductions related to equity-based compensation greater than compensation recognized for financial reporting. As discussed in note 2, during the first quarter of 2017 the Company adopted guidance that amended the accounting for employee share-based payment awards, and $22.9 million of deferred tax assets were recognized with a corresponding increase to retained earnings.
The Company considered its historical and current year earnings, current utilization of existing deferred tax assets and deferred tax liabilities, the 15 year amortization periods of the tax basis of its intangible assets, the 20 year carry forward periods of any NOLs, short and long term business forecasts and the impact of the TCJA on future earnings in evaluating whether it should establish a valuation allowance. The Company concluded it is more likely than not that the deferred tax assets will be realized and that no valuation allowance was needed at December 31, 2017.
Under U.S. GAAP, a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. Based upon the Company’s review of its federal, state, local and foreign income tax returns and tax filing positions, the Company determined that no unrecognized tax benefits for uncertain tax positions were required to be recorded. In addition, the Company does not believe that it has any tax positions for which it is reasonably possible that it will be required to record significant amounts of unrecognized tax benefits within the next twelve months.
The Company’s primary jurisdictions in which it operates are the United States, New York State, New York City, California and the United Kingdom. There are no unremitted earnings with respect to the United Kingdom and other foreign entities due to the flow-through nature of these entities.
In the normal course of business, the Company is subject to examination by federal and certain state, local and foreign tax authorities. With a few exceptions, as of December 31, 2017, the Company’s U.S. federal, state, local and foreign income tax returns for the years 2014 through 2017 are open under the general statute of limitations provisions and therefore subject to examination. Currently, the Internal Revenue Service is examining the tax return of certain subsidiaries for the 2011 tax year. The State and City of New York are examining certain subsidiaries’ tax returns for tax years 2011 to 2016.
The Company has recorded a deferred tax asset for the future amortization of tax basis intangibles as a result of the 2007 Reorganization. The Company recorded additional deferred tax assets as a result of the step-up in tax basis of intangibles from subsequent exchanges of AOG Units for Class A shares. A related tax receivable agreement liability is recorded in due to related parties in the consolidated statements of financial condition for the expected payments under the tax receivable agreement entered into by and among APO Corp., the Managing Partners, the Contributing Partners, and other parties thereto (as amended, the “tax receivable agreement”) (see note 15). The benefit the Company obtains from the difference in the tax asset recognized and the related liability results in an increase to additional paid in capital. The amortization period for these tax basis intangibles is 15 years and the deferred tax assets will reverse over the same period.
The table below presents the impact to the deferred tax asset, tax receivable agreement liability and additional paid in capital related to the exchange of AOG Units for Class A shares.
|
| | | | | | | | | | | | |
Exchange of AOG Units for Class A shares | | Increase in Deferred Tax Asset | | Increase in Tax Receivable Agreement Liability | | Increase to Additional Paid In Capital |
For the Year Ended December 31, 2017 | | $ | 56,908 |
| | $ | 44,972 |
| | $ | 11,936 |
|
For the Year Ended December 31, 2016 | | 7,342 |
| | 6,187 |
| | 1,155 |
|
For the Year Ended December 31, 2015 | | 61,720 |
| | 45,432 |
| | 16,288 |
|