INCOME TAXES
The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2017 and December 31, 2016, the Company did not have any uncertain tax positions.
On December 22, 2017, President Trump signed into law the TCJA. Substantially all of the provisions of the TCJA are effective for taxable years beginning after December 31, 2017. The TCJA includes significant changes to the Internal Revenue Code of 1986, as amended (the “Code”), including amendments which significantly change the taxation of individuals and business entities, and includes specific provisions related to regulated public utilities. Among its significant provisions, the TCJA (i) reduces the federal corporate income tax rate from 35% to 21%; (ii) eliminates bonus depreciation for regulated utilities, but allows 100% expensing for the cost of qualified property for non-regulated businesses; (iii) eliminates the provisions that treated AIAC and CIAC provided to regulated water utilities as non-taxable; (iv) eliminates the domestic production activities deduction, and (v) limits the amount of net interest that can be deducted; however, this limitation is not applicable to regulated utilities and, therefore is not anticipated to have a material impact to the Company’s ability to deduct net interest. Non-regulated segments of the Company’s business will be able to take advantage of the full expensing provisions of the TCJA.
Changes in the Code from the TCJA had a material impact on our financial statements in 2017. Under GAAP, specifically Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, the tax effects of changes in tax laws must be recognized in the period in which the law is enacted. ASC 740 also requires deferred income tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment, the Company’s deferred income taxes were re-measured based upon the new tax rate. For the Company’s regulated entities, substantially all of the change in deferred income taxes is recorded as an offset to either a regulatory asset or liability because the impact of changes in the rates are expected to be recovered from or refunded to customers. For deferred taxes related to the Company’s unregulated operations, the change in deferred income taxes is recorded as a non-cash re-measurement adjustment to earnings. The re-measurement of deferred income taxes at the new federal tax rate decreased income tax expense by $2.3 million for the year ended December 31, 2017. Additionally, the Company recorded a net regulatory asset of $1.3 million.
Following the enactment of the TCJA, the staff of the U.S. Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin 118 — "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" (SAB 118) which provides for a measurement period of up to one year from the enactment date to complete accounting under GAAP for the tax effects of the legislation. The Company has made a reasonable estimate for the measurement and accounting of certain effects of the TCJA on deferred income tax assets and liabilities and related regulatory assets and liabilities which have been reflected in these financial statements, as discussed above. The Company has not recorded the impact of the TCJA for certain other items for which it has not yet been able to gather, prepare, and analyze the necessary information in reasonable detail to complete the ASC 740 accounting treatment. For these items, which include the impact of the TCJA on state income taxes, the current and deferred income taxes were recognized and measured based on the provisions of the tax laws that were in effect immediately prior to the TCJA being enacted. The determination of the impact of the income tax effects of these items, as well as the estimates we have recorded, will require additional analysis of historical records, further interpretation of the TCJA from yet to be issued U.S. Treasury regulations, and an evaluation of future administrative interpretations, court decisions, accounting interpretations, or other developments relating to the TCJA.
The income tax benefit from continuing operations for the years ended December 31, 2017, December 31, 2016, and December 31, 2015 is comprised of the following (in thousands):
|
| | | | | | | | | | | |
| 2017 |
| Federal | | State | | Total |
Current income tax expense | $ | 138 |
| | $ | — |
| | $ | 138 |
|
Deferred income tax expense (benefit) | (993 | ) | | 254 |
| | (739 | ) |
Income tax expense (benefit) | $ | (855 | ) | | $ | 254 |
| | $ | (601 | ) |
|
| | | | | | | | | | | |
| 2016 |
| Federal | | State | | Total |
Current income tax expense | $ | 121 |
| | $ | — |
| | $ | 121 |
|
Deferred income tax benefit | (1,285 | ) | | (123 | ) | | $ | (1,408 | ) |
Income tax benefit | $ | (1,164 | ) | | $ | (123 | ) | | $ | (1,287 | ) |
|
| | | | | | | | | | | |
| 2015 |
| Federal | | State | | Total |
Current income tax expense | $ | 63 |
| | $ | — |
| | $ | 63 |
|
Deferred income tax expense | 17,735 |
| | 2,825 |
| | 20,560 |
|
Income tax expense | $ | 17,798 |
| | $ | 2,825 |
| | $ | 20,623 |
|
The income tax benefit for the years ended December 31, 2017, 2016, and 2015 differs from the amount that would be computed using the federal statutory income tax rate due to the following (in thousands):
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Computed federal tax expense (benefit) at statutory rate | $ | 1,343 |
| | $ | (1,291 | ) | | $ | 14,275 |
|
State income taxes - net of federal tax benefit | 126 |
| | (123 | ) | | 1,865 |
|
Gain on condemnation of Valencia | — |
| | — |
| | 4,312 |
|
Federal tax rate change | (2,296 | ) | | — |
| | — |
|
IRC Section 453A interest | 113 |
| | 121 |
| | 63 |
|
Equity compensation | 83 |
| | — |
| | — |
|
Other differences | 30 |
| | 6 |
| | 108 |
|
Income tax expense | $ | (601 | ) | | $ | (1,287 | ) | | $ | 20,623 |
|
ASC Topic 740, Income Taxes, prescribes the method to determine whether a deferred tax asset is realizable and significant weight is given to evidence that it can be objectively verified. As of December 31, 2017 and 2016, the Company’s valuation allowance totaled zero and $8,500, respectively, which related to state net operating loss carryforwards expected to expire prior to utilization.
The following table summarizes the Company’s temporary differences between book and tax accounting that give rise to the deferred tax assets and deferred tax liabilities, including the valuation allowance, as of December 31, 2017 and 2016 (in thousands):
|
| | | | | | | |
| December 31, 2017 | | December 31, 2016 |
DEFERRED TAX ASSETS: | | | |
Taxable meter deposits | $ | 33 |
| | $ | 40 |
|
Net operating loss carry forwards | 2,087 |
| | 4,976 |
|
Balterra intangible asset acquisition | 224 |
| | 336 |
|
Deferred gain on Sale of GWM | 1,132 |
| | 1,652 |
|
Deferred gain on ICFA funds received | 4,911 |
| | 7,350 |
|
Equity investment loss | 341 |
| | 459 |
|
Other | 1,040 |
| | 1,404 |
|
Total deferred tax assets | 9,768 |
| | 16,217 |
|
Valuation allowance | — |
| | (9 | ) |
Net deferred tax asset | 9,768 |
| | 16,208 |
|
DEFERRED TAX LIABILITIES: | | | |
Regulatory asset | (315 | ) | | — |
|
CP Water intangible asset acquisition | (381 | ) | | (571 | ) |
ICFA intangible asset | (577 | ) | | (502 | ) |
Property, plant and equipment | (4,392 | ) | | (642 | ) |
Gain on condemnation of Valencia | (7,217 | ) | | (17,078 | ) |
Total deferred tax liabilities | (12,882 | ) | | (18,793 | ) |
Net deferred tax liability | $ | (3,114 | ) | | $ | (2,585 | ) |
As of December 31, 2017, we have approximately $9.4 million in federal net operating loss (“NOL”) carry forwards and $3.2 million in state NOLs available to offset future taxable income, with federal and state NOLs expiring in 2031-2036.
The effective tax rates used for the years ended December 31, 2017, 2016, and 2015 were (15.2%), 33.9%, and 49.1%, respectively. The income tax provision was computed based on the Company’s estimated effective tax rate and forecasted income expected for the full year, including the impact of any unusual, infrequent, or non-recurring items. The effective tax rate for the year ended December 31, 2017 was less than the federal statutory rate of 34% primarily due to the impact of federal tax reform.