Income Taxes
The components of income tax expense (benefit) on continuing operations were as follows.
|
| | | | | | | | | | | |
| Year Ended December 31, |
2017 | | 2016 | | 2015 |
Current Income Taxes | | | | | |
Federal | $ | 52 |
| | $ | 14 |
| | $ | 59 |
|
State | 7 |
| | 4 |
| | 4 |
|
Total current income taxes | 59 |
| | 18 |
| | 63 |
|
| | | | | |
Deferred Income Taxes | | | | | |
Federal | (43 | ) | | (4 | ) | | (50 | ) |
State | (3 | ) | | (1 | ) | | (2 | ) |
Total deferred income taxes | (46 | ) | | (5 | ) | | (52 | ) |
Total provision for income taxes | $ | 13 |
| | $ | 13 |
| | $ | 11 |
|
Income tax expense differs from the amounts computed by applying the U.S. federal corporate tax rate of 35.0% as follows for the years indicated.
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| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Tax Expense at Federal Statutory Rate | $ | 15 |
| | 35 | % | | $ | 10 |
| | 35.0 | % | | $ | 19 |
| | 35.0 | % |
Effect of: | | | | | | | | | | | |
State taxes, net of federal benefit | 1 |
| | 1.9 | % | | 1 |
| | 5.0 | % | | — |
| | (0.4 | )% |
Non-controlling interests | — |
| | (0.3 | )% | | 1 |
| | 3.4 | % | | (2 | ) | | (2.7 | )% |
Decrease of federal valuation allowance | (1 | ) | | (1.2 | )% | | — |
| | — | % | | (3 | ) | | (6.1 | )% |
Deferred adjustments | — |
| | — | % | | 1 |
| | 2.3 | % | | (5 | ) | | (10.1 | )% |
Federal tax reform impact | (5 | ) | | (12.6 | )% | | — |
| | — | % | | — |
| | — | % |
Current payable adjustments | — |
| | — | % | | 1 |
| | 1.9 | % | | 2 |
| | 4.0 | % |
Adjustments related to uncertain tax positions | 1 |
| | 2.4 | % | | — |
| | — | % | | — |
| | — | % |
Other, net | 2 |
| | 3.7 | % | | (1 | ) | | (2.4 | )% | | — |
| | 0.6 | % |
Total income tax expense | $ | 13 |
| | 28.9 | % | | $ | 13 |
| | 45.2 | % | | $ | 11 |
| | 20.3 | % |
Impact of Tax Reform
On December 22, 2017, the Tax Reform Act was enacted and it significantly revised the U.S. corporate income tax regime by lowering the U.S. corporate tax rate from 35% to 21%, imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries, creating new taxes on certain foreign sourced earnings, as well as other changes. Pursuant to the guidance within SAB 118, as of December 31, 2017, the Company has not completed the accounting for the tax effects of enactment of the Tax Reform Act; however, the Company has been able to make reasonable estimates of the impact of the Tax Reform Act. The Company has recorded provisional amounts for the remeasurement of existing deferred tax balances, the transition tax, uncertain tax positions, valuation allowance, and reassessment of permanently reinvested earnings, among others. As a result of the Tax Reform Act, the Company recorded a tax benefit of $8 due to the remeasurement of deferred tax balances, a tax expense of $0.2 due to the transition tax on deemed repatriation of foreign earnings, and a tax expense of $3 due to changes to Internal Revenue Code Section 162(m). No income taxes in addition to the transition tax have been recorded for any undistributed foreign earnings or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Because of the complexity of the new Global Intangible Low-Taxed Income (GILTI) tax rules, the Company continues to evaluate this provision of the Tax Reform Act and the application of ASC Topic 740 Accounting for Income Taxes. The Company has not made any adjustments related to potential GILTI tax and has not adopted an accounting policy regarding whether to record deferred tax on GILTI. The provisional amounts are based on the Company’s current best estimates and may change as the Company receives additional clarification and implementation guidance. The Company will continue to refine its calculations as additional analysis is completed. In addition, these estimates may also be affected as the Company continues to gain a more thorough understanding of the tax law. Any subsequent adjustment to these amounts through December 22, 2018 will be included in income from operations as an adjustment to tax expense.
In 2017, the effective tax rate differed from the statutory tax rate primarily as a result of changes made by the Tax Reform Act, including deferred adjustments related to the remeasurement of deferred tax assets and liabilities as a result of the reduction of the U.S. corporate tax rate to 21%, as well as changes to Internal Revenue Code Section 162(m). The Company released a federal valuation allowance of $1 in 2017. In 2016, the effective tax rate differed from the statutory rate primarily due to state tax adjustments and the elimination of the book loss attributable to a less-than-wholly-owned subsidiary. Deferred income tax amounts at December 31, 2017 and 2016, reflect the effect of basis differences in assets and liabilities for financial reporting and income tax purposes and tax attribute carryforwards.
The Company regularly reviews the carrying amount of its deferred tax assets to determine if a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of the Company's deferred tax assets will not be realized in future periods, a valuation allowance is established. Management considers all available evidence, both positive and negative, in evaluating the need for a valuation allowance. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. The Company's evaluation is based on current tax laws as well as management's expectations of future performance.
The Company has federal net operating loss ("NOL") carryforwards (pre-tax) of approximately $151 and $162 as of December 31, 2017 and 2016, respectively. It is expected that the federal NOL carryforwards will begin to expire beginning with the 2027 tax year, if unused. The Company also has immaterial state NOL carryforwards that will begin to expire beginning with 2017 tax year, if unused. The federal NOL is limited under Sections 382 and 383 of the Internal Revenue Code as a result of the reorganization that occurred in advance of the Company's initial public offering, and the limitation is approximately $11 annually. The Company believes that it is more likely than not that a portion of the benefit from the federal NOL carryforwards that are limited by IRC Section 382 will not be realized. Accordingly, a federal and state valuation allowance of $2 and $2 respectively is recorded for these NOL carryforwards as of December 31, 2017. The Company expects future income will be sufficient to utilize all net operating losses generated subsequent to the initial public offering in 2012.
Temporary differences and carryforwards that give rise to deferred tax assets and liabilities are comprised of the following.
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| | | | | | | |
| Year Ended December 31, |
2017 | | 2016 |
Deferred Tax Assets | | | |
Effect of: | | | |
Loss carryforwards (federal, state and capital) | $ | 37 |
| | $ | 60 |
|
Loss reserves | 81 |
| | 104 |
|
Reverse mortgage premiums | 15 |
| | 25 |
|
Rent expense | 4 |
| | 5 |
|
Restricted share based compensation | 6 |
| | 9 |
|
Accruals | 10 |
| | 20 |
|
Partnership interests | 5 |
| | 9 |
|
Reverse mortgage purchase discount | 24 |
| | 14 |
|
Other, net | 3 |
| | 1 |
|
Total deferred tax assets | 185 |
| | 247 |
|
| | | |
Deferred Tax Liabilities | | | |
MSR amortization and mark-to-market, net | (174 | ) | | (267 | ) |
Depreciation and amortization, net | (20 | ) | | (34 | ) |
Prepaid assets | (2 | ) | | (1 | ) |
Goodwill and intangible assets | (1 | ) | | (3 | ) |
Total deferred tax liabilities | (197 | ) | | (305 | ) |
Valuation allowance | (4 | ) | | (4 | ) |
Net deferred tax liability | $ | (16 | ) | | $ | (62 | ) |
The Company files income tax returns in the U.S. federal jurisdiction and numerous U.S. state jurisdictions. During 2017, the Company completed an Internal Revenue Service (“IRS”) examination of certain components of the federal tax return for the tax year ended December 31, 2013. With few exceptions, as of December 31, 2017, the Company is no longer subject to U.S. federal and state income tax examinations for tax years prior to 2013.
As of December 31, 2017, the Company has recorded $19 of unrecognized tax benefits related to uncertain tax positions, including $2 in interest and penalties.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties.
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Unrecognized Tax Benefits | | | | | |
Balance - beginning of year | $ | — |
| | $ | — |
| | $ | — |
|
Increases in tax positions of current year | 1 |
| | — |
| | — |
|
Increases in tax positions of prior years | 20 |
| | — |
| | — |
|
Decreases in tax positions of prior years | — |
| | — |
| | — |
|
Settlements | (4 | ) | | — |
| | — |
|
Balance - end of year | $ | 17 |
| | $ | — |
| | $ | — |
|
The Company reasonably anticipates that $19 in unrecognized tax benefits, including interest and penalties of $2, may decrease within the next twelve months due to actions taken by the Company subsequent to year-end to remediate the uncertain tax position. If the Company were to recognize all unrecognized tax benefits as of December 31, 2017, the net effect would be an income tax benefit of approximately $6, exclusive of any benefits related to interest and penalties.