Worldpay, Inc.

INCOME TAXES

In accordance with ASC Topic 740, Income Taxes, income taxes are recognized for the amount of taxes payable for the current year and for the impact of deferred tax liabilities and assets, which represent future tax consequences of events that have been recognized differently in the financial statements than for tax purposes. Deferred tax assets and liabilities are established using the enacted statutory tax rates and are adjusted for any changes in such rates in the period of change. Worldpay, Inc. is taxed as a C Corporation, which is subject to both federal and state taxation at a corporate level. Therefore, tax expense and deferred tax assets and liabilities reflect such status.

The Company uses the asset and liability method of accounting for income taxes. Under this 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 basis. 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.

On December 22, 2017, the President of the United States signed into law Tax Reform. Tax Reform amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions as well as reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate with an effective date of January 1, 2018. The Company’s net deferred tax asset prior to Tax Reform was based on a combined federal and state rate using the Company’s then-current enacted federal tax rate of 35%. As a result of the reduction in the corporate income tax rate from 35% to 21% under Tax Reform, the Company has adjusted its net deferred tax asset. The Company estimates that this will result in a reduction in the value of its net deferred tax asset of approximately $363.6 million, which is recorded as additional income tax expense in the Company’s consolidated statement of income for the year ended December 31, 2017. The Company’s revaluation of its deferred tax asset is subject to further clarification of Tax Reform through anticipated additional guidance and technical corrections. As a result, the actual impact on the net deferred tax asset as well as the impact on net income may vary from the estimated amount due to uncertainties in the Company’s preliminary review.

The following is a summary of applicable income taxes (in thousands):



	Year Ended December 31,
	2017		2016		2015
Current income tax expense:
U.S. income taxes	$	27,852	$	57,966	$	28,586
State and local income taxes	6,366		4,219		4,311
Total current tax expense	34,218		62,185		32,897
Deferred income tax expense (benefit):
U.S. income taxes	575,629		70,786		55,553
State and local income taxes	21,173		8,882		(273		)
Total deferred tax expense	596,802		79,668		55,280
Applicable income tax expense	$	631,020	$	141,853	$	88,177

A reconciliation of the U.S. income tax rate and the Company’s effective tax rate for all periods is provided below:



	Year Ended December 31,
	2017		2016		2015
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
State taxes-net of federal benefit	2.9		2.8		2.7
Effect of changes in deferred tax rates	44.0		0.1		(1.9	)
Non-controlling interest	(1.6	)	(4.6	)	(5.9	)
Other-net	(0.7	)	0.3		(0.3	)
Excess tax benefit from share-based compensation	(2.1	)	—		—
Effective tax rate	77.5	%	33.6	%	29.6	%

Deferred income tax assets and liabilities are comprised of the following as of December 31, 2017 and 2016 (in thousands):



	December 31, 2017			December 31, 2016
Deferred tax assets
Net operating losses	$	29,387		$	14,085
Employee benefits	1,247			69
Other assets	2,691			2,236
Other accruals and reserves	59,229			89,239
Partnership basis	732,956			771,311
Deferred tax assets	825,510			876,940
Deferred tax liabilities
Property and equipment	(31,439		)	(13,677		)
Goodwill and intangible assets	(120,164		)	(150,687		)
Deferred tax liability	(151,603		)	(164,364		)
Deferred tax asset-net	$	673,907		$	712,576

As part of certain acquisitions, the Company acquired federal and state tax loss carryforwards. As of December 31, 2017, the cumulative federal and state tax loss carryforwards were approximately $111.1 million and $144.8 million, respectively. Federal tax loss carryforwards will expire between 2030 and 2037 and state tax loss carryforwards will expire between 2020 and 2037.

The partnership basis included in the above table is the result of a difference between the tax basis and book basis of Worldpay, Inc.’s investment in Vantiv Holding. Vantiv Holding, a partnership for tax purposes, has an Internal Revenue Code election in place to adjust the tax basis of partnership property to fair market value related to the portion of the partnership interest transferred, through an exchange of units of Vantiv Holding by its members. Included in partnership basis in the table above are deferred tax assets resulting from the increase in tax basis generated by the exchange of units of Vantiv Holding by the Bank. See Note 7 - Tax Receivable Agreements for discussion of deferred tax assets as a result of the secondary offerings and exchange of units of Vantiv Holding.

Deferred tax assets are reviewed to determine whether the available evidence allows the Company to recognize the tax benefits. To the extent that a tax asset is not expected to be realized, the Company records a valuation allowance against the deferred tax assets. The Company has recorded no valuation allowance during the years ended December 31, 2017 or 2016.

A provision for federal, state and local income taxes has been recorded on the statements of income for the amounts of such taxes the Company is obligated to pay or amounts refundable to the Company. At December 31, 2017 and 2016, the Company had an income tax receivable of approximately $23.1 million and $8.3 million, respectively, which is included in other current assets on the Company’s consolidated statements of financial position.

The Company accounts for uncertainty in income taxes under ASC 740, Income Taxes. As of December 31, 2017 and 2016, the Company had no material uncertain tax positions. If a future liability does arise related to uncertainty in income taxes, the Company has elected an accounting policy to classify interest and penalties, if any, as income tax expense.