Deferred tax assets and liabilities reflect the effects of tax losses, credits, and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The current and deferred portions (in thousands) of federal, foreign and state income tax benefit or expense are as follows: |
| | | | | | | | |
| | For the Year Ended December 31, |
| | 2016 | | 2015 |
Federal income tax benefit (expense): | | | | |
Current tax benefit (expense) | | $ | 59 |
| | $ | 3,421 |
|
Deferred tax benefit (expense) | | 5,884 |
| | (3,824 | ) |
Total federal income tax benefit (expense) | | $ | 5,943 |
| | $ | (403 | ) |
Foreign income tax benefit (expense): | | | | |
Current tax expense | | $ | (41 | ) | | $ | (53 | ) |
Deferred tax benefit (expense) | | 3 |
| | (1,775 | ) |
Total foreign income tax expense | | $ | (38 | ) | | $ | (1,828 | ) |
State and other income tax benefit (expense): | | | | |
Current tax benefit (expense) | | $ | (116 | ) | | $ | 28 |
|
Deferred tax benefit | | 226 |
| | 374 |
|
Total state and other income tax benefit | | $ | 110 |
| | $ | 402 |
|
Total income tax benefit (expense) | | $ | 6,015 |
| | $ | (1,829 | ) |
We experienced an effective income tax benefit rate of 48.7% for the year ended December 31, 2016, compared to an effective income tax expense rate of 51.7% for the year ended December 31, 2015. Our effective income tax benefit rate for the year ended December 31, 2016 is above the statutory rate principally due to the income of our U.K. subsidiary (1) that is not subject to tax in the U.S., and (2) the U.K. tax on which was fully offset by the release of U.K. valuation allowances. Our effective income tax expense rate for the year ended December 31, 2015 reflects in part, the establishment of a valuation allowance against our U.K.-related deferred tax assets.
We report potential accrued interest and penalties related to both our accrued liabilities for uncertain tax positions and unpaid tax liabilities, as well as any net payments of income tax-related interest and penalties, within our income tax benefit or expense line item on our consolidated statements of operations. We likewise report the reversal of such accrued interest and penalties within the income tax benefit or expense line item to the extent that we resolve our liabilities for uncertain tax positions or unpaid tax liabilities in a manner favorable to our accruals therefor. During the years ended December 31, 2016 and 2015, $0.4 million and $0.3 million, respectively, of net income tax-related interest and penalties are included within those years’ respective income tax benefit and expense line items.
In December 2014, we reached a settlement with the IRS concerning the tax treatment of net operating losses that we incurred in 2007 and 2008 and carried back to obtain refunds of federal income taxes paid in earlier years dating back to 2003. Our net unpaid income tax assessment associated with that settlement was $7.3 million at December 31, 2016; this amount excludes unpaid interest and penalties on the tax assessment, the accruals for which aggregated $3.4 million at December 31, 2016. An IRS examination team denied amended return claims we filed that would have eliminated the $7.3 million assessment (and corresponding interest and penalties), and we filed a protest with IRS Appeals. Pending the resolution of this matter, and as is customary in such cases, the IRS filed a lien in respect of the $7.3 million assessment described herein. To the extent we are unsuccessful in resolving this matter with IRS Appeals to our satisfaction, we plan to litigate this matter.
The following table reconciles our effective income tax benefit rate for 2016 and our effective income tax expense rate for 2015 to the federal statutory rate:
|
| | | | | | |
| | For the Year Ended December 31, |
| | 2016 | | 2015 |
Statutory benefit (expense) rate | | 35.0 | % | | (35.0 | )% |
(Increase) decrease in statutory tax rate and increase (decrease) in statutory tax benefit rate resulting from: | | | | |
|
Changes in valuation allowances | | 6.2 |
| | (46.8 | ) |
Interest and penalties related to uncertain tax positions | | (0.1 | ) | | 21.2 |
|
Foreign income taxes | | 7.5 |
| | (1.5 | ) |
Permanent and other differences | | (0.5 | ) | | 3.1 |
|
State and other income taxes, net | | 0.6 |
| | 7.3 |
|
Effective benefit (expense) rate | | 48.7 | % | | (51.7 | )% |
As of December 31, 2016 and December 31, 2015, the significant components (in thousands) of our deferred tax assets and liabilities were:
|
| | | | | | | | |
| | As of December 31, |
| | 2016 | | 2015 |
Deferred tax assets: | | | | |
Software development costs/fixed assets | | $ | — |
| | $ | 345 |
|
Goodwill and intangible assets | | 3,798 |
| | 3,455 |
|
Provision for loan loss | | 18,353 |
| | 16,107 |
|
Equity-based compensation | | 670 |
| | 287 |
|
Accrued expenses | | 1,678 |
| | 1,249 |
|
Other | | — |
| | 288 |
|
Accruals for state taxes and interest associated with unrecognized tax benefits | | 286 |
| | 610 |
|
Federal net operating loss carry-forward | | 70,778 |
| | 75,687 |
|
Federal credit carry-forward | | 2,145 |
| | 2,381 |
|
Foreign net operating loss carry-forward | | 374 |
| | 637 |
|
State tax benefits | | 35,409 |
| | 36,384 |
|
Deferred tax assets, gross | | $ | 133,491 |
| | $ | 137,430 |
|
Valuation allowances | | (33,924 | ) | | (35,971 | ) |
Deferred tax assets net of valuation allowance | | $ | 99,567 |
| | $ | 101,459 |
|
Deferred tax liabilities: | | | | |
Prepaid expenses and other | | $ | (184 | ) | | $ | (267 | ) |
Software development costs/fixed assets | | (157 | ) | | — |
|
Equity in income of equity-method investee | | (1,455 | ) | | (1,347 | ) |
Other | | (58 | ) | | — |
|
Credit card fair value election differences | | (42,939 | ) | | (38,717 | ) |
Deferred costs | | (696 | ) | | (681 | ) |
Convertible senior notes | | (28,921 | ) | | (28,154 | ) |
Cancellation of indebtedness income | | (29,491 | ) | | (42,822 | ) |
Deferred tax liabilities, gross | | $ | (103,901 | ) | | $ | (111,988 | ) |
Deferred tax liabilities, net | | $ | (4,334 | ) | | $ | (10,529 | ) |
Certain of our deferred tax assets relate to federal, foreign and state net operating losses as noted in the above table, and we have no other net operating losses or credit carry-forwards other than those noted herein. We have recorded a deferred tax asset of $70.8 million reflecting the tax benefit of federal net operating loss carryforwards, which expire in varying amounts between 2029 and 2033. Our $33.9 million of deferred tax asset valuation allowances are primarily the result of uncertainties regarding the future realization of recorded tax benefits, principally net operating losses and credits from operations in various states and foreign jurisdictions (including U.S. territories), and it is more likely than not that these recorded tax benefits will not be utilized to reduce future state and foreign tax liabilities in these jurisdictions.
We conduct business globally, and as a result, our subsidiaries file federal, state and/or foreign income tax returns. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the U.S., the U.K., and various U.S. territories. With a few exceptions of a non-material nature, and with the exception of our 2008 tax-settlement-related claims discussed previously, we are no longer subject to federal, state, local, or foreign income tax examinations for years prior to 2012.
Reconciliations (in thousands) of unrecognized tax benefits from the beginning to the end of 2016 and 2015, respectively, are as follows:
|
| | | | | | | | |
| | 2016 | | 2015 |
Balance at January 1, | | $ | (1,798 | ) | | $ | (5,245 | ) |
Reductions based on tax positions related to prior years | | 1,167 |
| | 2,658 |
|
Additions based on tax positions related to prior years | | — |
| | (160 | ) |
Additions based on tax positions related to the current year | | (82 | ) | | (70 | ) |
Interest and penalties accrued | | (105 | ) | | (197 | ) |
Settlement | | — |
| | 1,216 |
|
Balance at December 31, | | $ | (818 | ) | | $ | (1,798 | ) |
Unrecognized tax benefits that, if recognized, would affect the effective tax rate totaled $0.8 million and $1.8 million at December 31, 2016 and 2015, respectively.
Absent the effects of potential agreements to extend statutes of limitations periods, the total amount of unrecognized tax benefits with respect to certain of our unrecognized tax positions will significantly change as a result of the lapse of applicable limitations periods in the next 12 months. However, it is not reasonably possible to determine which (if any) limitations periods will lapse in the next 12 months due to the effect of existing and new tax audits and tax agency determinations. Moreover, the net amount of such change cannot be reasonably estimated because our operations over the next 12 months may cause other changes to the total amount of unrecognized tax benefits. Due to the complexity of the tax rules underlying our uncertain tax position liabilities, and the unclear timing of tax audits, tax agency determinations, and other events (such as the outcomes of tax controversies involving related issues with unrelated taxpayers), we cannot establish reasonably reliable estimates for the periods in which the cash settlement of our uncertain tax position liabilities will occur.