INCOME TAXES
For the period January 1, 2017 through September 15, 2017 and the years ended December 31, 2016 and 2015, the Company files a consolidated federal income tax return and is the common parent for income tax purposes. Beginning with the period September 16, 2017 through December 31, 2017, the Company is included in the consolidated federal tax return of AEP (see Note 12 - Related Party Transactions "Tax Allocation Agreement"). The provision for income taxes is calculated by using a "separate return" method. Under this method, the Company is assumed to file a separate return with the tax authority, thereby reporting its taxable income or loss and paying the applicable tax to or receiving the appropriate refund from AEP. The current provision is the amount of tax payable or refundable on the basis of a hypothetical, current-year separate return. Deferred taxes are provided on temporary differences and on any carryforwards that could be claimed on the hypothetical return and assess the need for a valuation allowance on the basis of projected separate return assets.
For financial reporting purposes, income (loss) before income taxes includes the following components (in thousands):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | 142,923 |
| | $ | 72,028 |
| | $ | 69,253 |
|
Foreign | (2,070 | ) | | (4,834 | ) | | (4,761 | ) |
Total | $ | 140,853 |
| | $ | 67,194 |
| | $ | 64,492 |
|
The income tax expense (benefit) attributable to net income from continuing operations before income taxes is as follows (in thousands):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
|
Federal | $ | 22,043 |
| | $ | 3,270 |
| | $ | 6,289 |
|
State | 2,981 |
| | (1,126 | ) | | 2,920 |
|
Total current | 25,024 |
| | 2,144 |
| | 9,209 |
|
Deferred: | | | | | |
|
Federal | 65,268 |
| | 21,822 |
| | 17,297 |
|
State | 714 |
| | (316 | ) | | 586 |
|
Total deferred | 65,982 |
| | 21,506 |
| | 17,883 |
|
Expense (benefit) from income taxes | $ | 91,006 |
| | $ | 23,650 |
| | $ | 27,092 |
|
A reconciliation of the federal income tax statutory rate and the effective tax rate is as follows:
|
| | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Employment credits | (0.6 | ) | | (1.6 | ) | | (0.5 | ) |
Permanent differences | 0.7 |
| | 1.1 |
| | 0.5 |
|
Foreign rate differential | 0.1 |
| | 0.7 |
| | 0.5 |
|
State tax | 4.5 |
| | 0.2 |
| | 5.2 |
|
Prior year true-up | — |
| | (1.1 | ) | | 0.8 |
|
Valuation allowance | (2.5 | ) | | 0.9 |
| | 0.5 |
|
Tax rate change | 27.4 |
| | — |
| | — |
|
Effective tax rate | 64.6 | % | | 35.2 | % | | 42.0 | % |
The major tax-effected components of the net deferred tax asset (liability) are as follows (in thousands): |
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
|
Receivables | $ | 1,911 |
| | $ | 2,571 |
|
Accrued compensation | 2,932 |
| | 9,046 |
|
Reserves/accrued liabilities | 4,766 |
| | 7,454 |
|
Net operating loss carryforward | 38,018 |
| | 63,521 |
|
Property and equipment | 52,040 |
| | 92,566 |
|
Other assets | 4,457 |
| | 2,081 |
|
Gross deferred tax assets | 104,124 |
| | 177,239 |
|
Valuation allowance | (24,544 | ) | | (24,688 | ) |
Total deferred tax assets | $ | 79,580 |
| | $ | 152,551 |
|
| | | |
Deferred tax liabilities: | | | |
Deductible prepaid expenses | $ | (2,960 | ) | | $ | (4,650 | ) |
Intangible assets | (22,890 | ) | | (28,189 | ) |
Total deferred tax liabilities | (25,850 | ) | | (32,839 | ) |
Net deferred tax assets (liabilities) | $ | 53,730 |
| | $ | 119,712 |
|
On December 22, 2017, H.R.1, known as the Tax Cuts and Jobs Act (the “Act”), was signed into law. Among other things, the Act permanently lowers the corporate tax rate to 21% from the existing maximum rate of 35%, effective for tax years including or commencing January 1, 2018. As a result of the reduction of the corporate tax rate to 21%, the Company has re-valued its deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the reporting period of enactment. As a result of the re-valuation, the Company’s net deferred tax assets were reduced by $38.6 million with a corresponding increase to deferred tax expense. The Act also imposes a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Company has determined that there is no repatriation tax on our foreign subsidiaries.
The Company has federal net operating loss carryforwards pursuant to the acquisition of Adamar. Internal Revenue Code Section 382 ("Section 382") places certain limitations on the annual amount of net operating loss carryforwards that can be utilized when a change of ownership occurs. The Company believes its acquisition of Adamar was a change in ownership pursuant to Section 382. As a result of the annual limitation, the net operating loss carryforward amount available to be used in future periods is approximately $140.0 million and will begin to expire in 2027 and forward.
Accounting for uncertainty in income taxes prescribes a threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The accounting standards also require that the tax positions be assessed using a two-step process. A tax position is recognized if it meets a "more-likely-than-not" threshold and is measured at the largest amount of benefit that is greater than 50% likely of being realized. Uncertain tax positions must be reviewed at each balance sheet date. Liabilities recognized as a result of this analysis must generally be recorded separately from any current or deferred income tax accounts.
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is as follows (in thousands): |
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Unrecognized tax benefits, beginning of period | $ | 5,441 |
| | $ | — |
| | $ | — |
|
Increases based on tax positions related to the prior year | — |
| | 2,002 |
| | — |
|
Increases based on tax positions related to the current year | — |
| | 3,439 |
| | — |
|
Decreases based on tax positions related to the prior year | $ | (4,010 | ) | | | | |
Unrecognized tax benefits, end of period | $ | 1,431 |
| | $ | 5,441 |
| | $ | — |
|
The entire balance of unrecognized tax benefits, if recognized, would not materially affect the effective tax rate. We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. In the next twelve months, the Company expects the liability for the unrecognized tax benefits to be reduced by $1.4 million as a result of a lapse of the statute of limitations.
The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. Generally, the statute of limitations for examination of TEI's United States federal and state income tax returns is open for the years ended December 31, 2012. Management believes that adequate provision for income taxes and interest has been recorded in the accompanying financial statements.