8. Income taxes
On December 22, 2017 (the “Enactment Date”), H.R. 1, originally known as the Tax Cuts and Jobs Act, was enacted. The new law (Public Law No. 115-97 hereinafter referred to as the “Tax Act”) includes significant changes to the U.S. corporate income tax system including, but not limited to, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. The majority of the provisions in the Tax Act are effective January 1, 2018.
In response to the Tax Act, the Securities and Exchange Commission (“SEC”) issued guidance on accounting for the effects of the Tax Act. As required under the guidance, we have recorded a provisional tax benefit for the impact of the Tax Act of approximately $1,381.0 million during the fourth quarter of 2017. This amount is primarily comprised of the provisional remeasurement of federal net deferred tax liabilities resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35%, after taking into account the mandatory one-time tax on the accumulated earnings of our foreign subsidiaries (“the Transition Tax”). The amount of this Transition Tax is not material. As we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes in the period in which the adjustments are made.
In addition, we are still evaluating the Global Intangible Low Tax Income (“GILTI”) provisions of the Tax Act and their impact, if any, on our consolidated financial statements, including whether we adopt an accounting policy to treat such taxes as a current-period expense when incurred or whether such amounts should be factored into our measurement of deferred taxes. As a result, we have not included an estimate of the tax expense/benefit related to this item for the period ended December 31, 2017.
The provision for income taxes consists of the following: |
| | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2017 | | 2016 | | 2015 |
Income (loss) before income taxes: | | | | | |
United States | $ | 4,921.6 |
| | $ | 4,422.6 |
| | $ | 3,870.6 |
|
Foreign | 7.4 |
| | 4.5 |
| | (6.8 | ) |
Total | $ | 4,929.0 |
| | $ | 4,427.1 |
| | $ | 3,863.8 |
|
Current provision: | | | | | |
Federal | $ | 1,991.9 |
| | $ | 1,456.2 |
| | $ | 1,722.0 |
|
State | 79.3 |
| | 37.9 |
| | 102.7 |
|
Foreign | 5.0 |
| | 2.8 |
| | 1.7 |
|
Total current provision | 2,076.2 |
| | 1,496.9 |
| | 1,826.4 |
|
Deferred benefit: | | | | | |
Federal | (1,677.3 | ) | | (392.6 | ) | | (429.0 | ) |
State | (1.6 | ) | | (104.7 | ) | | (32.9 | ) |
Foreign | — |
| | (0.1 | ) | | (0.2 | ) |
Total deferred benefit | (1,678.9 | ) | | (497.4 | ) | | (462.1 | ) |
Total current and deferred provision | $ | 397.3 |
| | $ | 999.5 |
| | $ | 1,364.3 |
|
The Tax Act requires Express Scripts include in 2017 federal taxable income its pro-rata share of undistributed and previously untaxed post-1986 foreign earnings. Accordingly, we have included a discrete tax charge of $4.7 million in our 2017 tax provision. This amount is a provisional estimate for the Transition Tax as described above. We no longer consider our foreign earnings to be indefinitely reinvested and have recorded a provision for United States federal and state income taxes thereon. In previous years, we considered our foreign earnings to be indefinitely reinvested, and accordingly had not recorded a provision for United States federal and state income taxes thereon.
A reconciliation of the statutory federal income tax rate and the effective tax rate follows (the effect of foreign taxes on the effective tax rate for 2017, 2016 and 2015 is not material):
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Statutory federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State taxes, net of federal benefit | 2.1 |
| | 0.4 |
| | 0.7 |
|
Non-controlling interest | (0.1 | ) | | (0.2 | ) | | (0.2 | ) |
Impact of the Tax Act | (28.0 | ) | | — |
| | — |
|
Recognition of previously unrecognized PolyMedica Corporation (Liberty) tax benefit | — |
| | (11.6 | ) | | — |
|
Other, net | (0.9 | ) | | (1.0 | ) | | (0.2 | ) |
Effective tax rate | 8.1 | % | | 22.6 | % | | 35.3 | % |
During 2017, we recognized a net discrete benefit of $1,402.4 million primarily attributable to the deferred tax implications of the Tax Act. During 2016, we recognized a net discrete benefit of $633.9 million primarily attributable to changes in our unrecognized tax benefits as a result of our realization of the previously unrecognized PolyMedica Corporation (Liberty) tax benefit, various state audit settlements, lapses in statutes of limitations, and deferred tax implications of newly enacted state laws and filing methodologies.
The deferred tax assets and liabilities recorded in our consolidated balance sheet are as follows:
|
| | | | | | | |
| December 31, |
(in millions) | 2017 | | 2016 |
Deferred tax assets: | | | |
Allowance for doubtful accounts | $ | 10.4 |
| | $ | 11.1 |
|
Note premium | 3.6 |
| | 24.7 |
|
Tax attributes | 164.9 |
| | 72.6 |
|
Equity compensation | 95.4 |
| | 148.5 |
|
Accrued expenses | 149.6 |
| | 293.4 |
|
Benefit of uncertain tax positions | 67.1 |
| | 132.4 |
|
Other | 38.0 |
| | 47.8 |
|
Gross deferred tax assets | 529.0 |
| | 730.5 |
|
Less valuation allowance | 124.0 |
| | 31.2 |
|
Net deferred tax assets | 405.0 |
| | 699.3 |
|
Deferred tax liabilities: | | | |
Depreciation, property and computer software differences | (187.4 | ) | | (278.6 | ) |
Goodwill and intangible assets | (2,365.4 | ) | | (3,945.6 | ) |
Outside basis difference in eviCore | (357.0 | ) | | — |
|
Other | (27.5 | ) | | (47.3 | ) |
Gross deferred tax liabilities | (2,937.3 | ) | | (4,271.5 | ) |
Net deferred tax liabilities | $ | (2,532.3 | ) | | $ | (3,572.2 | ) |
Deferred taxes were classified in the consolidated balance sheet as follows: |
| | | | | | | |
| December 31, |
(in millions) | 2017 | | 2016 |
Other assets | $ | 30.1 |
| | $ | 31.1 |
|
Deferred taxes | (2,562.4 | ) | | (3,603.3 | ) |
Net deferred tax liabilities | $ | (2,532.3 | ) | | $ | (3,572.2 | ) |
As part of the acquisition of eviCore described in Note 3 - Acquisitions and divestiture, we acquired a number of partnerships, now wholly-owned, resulting in differences in book and tax basis. Accordingly, as of December 31, 2017, we have a deferred tax liability of $357.0 million. As of December 31, 2017, we have deferred tax assets for federal and state capital loss carryforwards related to the sale of UBC of approximately $87.8 million and $15.6 million, respectively, as well as deferred tax assets for federal, and state net operating loss carryforwards of approximately $17.5 million and $44.0 million, respectively. The federal and state capital loss carryforwards, if otherwise not utilized, will expire in 2022. The federal and state net operating loss carryforwards, if otherwise not utilized, will expire between 2018 and 2035. We have provided a valuation allowance, primarily related to the utilization of the capital loss generated by the sale of UBC, of $124.0 million against these deferred tax assets. During 2017, our valuation allowance related to federal and state capital loss carryforwards and federal and state net operating losses increased by $92.8 million of which $14.7 million affected our tax rate.
A reconciliation of our beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | |
(in millions) | 2017 | | 2016 | | 2015 |
Balance at beginning of year | $ | 538.0 |
| | $ | 1,038.4 |
| | $ | 1,117.2 |
|
Additions for tax positions related to prior years | 153.3 |
| | 102.5 |
| | 55.8 |
|
Reductions for tax positions related to prior years(1) | (62.6 | ) | | (630.8 | ) | | (112.7 | ) |
Additions for tax positions related to the current year | 99.1 |
| | 72.7 |
| | 45.7 |
|
Reductions attributable to settlements with taxing authorities | (7.7 | ) | | (18.1 | ) | | (14.3 | ) |
Reductions as a result of a lapse of the applicable statute of limitations | (31.7 | ) | | (26.7 | ) | | (53.3 | ) |
Balance at end of year | $ | 688.4 |
| | $ | 538.0 |
| | $ | 1,038.4 |
|
| |
(1) | Amounts for 2016 include reductions related to a claimed loss in 2012 on the divestiture of PolyMedica Corporation (Liberty). |
All but an immaterial amount of our unrecognized tax benefits of $688.4 million would impact our effective tax rate, if recognized.
During 2016, we resolved the tax treatment of our 2012 divestiture of PolyMedica Corporation (Liberty). Accordingly, we recognized a net tax benefit of approximately $511.0 million, which impacted our effective tax rate.
We also reached final settlement on various state examinations. These state settlements resulted in a reduction to our unrecognized tax benefits of $7.7 million, none of which impacted our effective tax rate. In addition, as a result of these settlements, we reduced our prior year gross state tax positions by $41.5 million, which resulted in a net tax benefit of approximately $27.0 million that impacted our effective rate.
We recorded a benefit of $5.9 million of interest and penalties to the provision for income taxes in our consolidated statement of operations for the year ended December 31, 2017, as compared to a benefit of $26.8 million and $4.4 million for the years ended December 31, 2016 and 2015, respectively. This resulted in $82.8 million and $88.5 million of accrued interest and penalties in our consolidated balance sheet at December 31, 2017 and 2016, respectively.
We are subject to examination by various federal, state and local tax authorities. With few exceptions, we are no longer subject to tax examinations by tax authorities for years before 2010. The Internal Revenue Service is currently examining ESI’s 2010 and 2011 and Express Scripts’s combined 2012-2015 consolidated United States federal income tax returns. Our federal income tax audit uncertainties primarily relate to both the valuation and timing of deductions, while various state income tax audit uncertainties primarily relate to the attribution of overall taxable income to those states. We have taken positions in certain taxing jurisdictions for which it is reasonably possible the total amounts of unrecognized tax benefits may decrease up to $170.7 million within the next twelve months due to the conclusion of various examinations as well as lapses in various statutes of limitations.