11. Income Taxes

 

The components of consolidated income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015 are as follows:

 

 

 

On December 22, 2017, President Trump signed the TCJA into law.  Among other things, the TCJA reduces the corporate federal tax rate from 35% to 21%.  The change in the federal tax rate required the Company to remeasure its deferred tax assets and liabilities, resulting in a decrease to the net deferred tax asset, with a corresponding increase to tax expense of $7.2 million.  Included in the remeasurement of deferred tax assets and liabilities were items that were originally established through OCI.  This results in a disproportionate tax effect for those items still recorded in AOCI.  Under current GAAP, those items would continue to be reported in AOCI until such time as the underlying transactions were settled and would then be reclassified as a component of the provision for income taxes.  However, in February 2018, the FASB voted to approve an ASU that would allow companies to reclassify the stranded tax effects from the TCJA from AOCI to retained earnings.

 

Also on December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the TCJA’s impact. SAB 118 provides a measurement period, which in no case should extend beyond one year from the TCJA enactment, during which a company acting in good faith may complete the accounting for the impacts of the TCJA. In accordance with SAB 118, the Company will reflect the income tax effects of the TCJA in the reporting period in which the accounting is complete.  The Company's accounting for the  impact on its net deferred tax assets is based upon reasonable estimates of the tax effects of the TCJA; however, its estimates may change upon the finalization of its implementation and additional interpretive guidance from regulatory authorities. Among other things, the Company needs to obtain year-end partnership statements. The Company will complete its accounting for the TCJA during 2018 as provided in SAB 118 and will reflect any adjustments to its provisional amounts as an adjustment to the provision for taxes in the reporting period in which the amounts are finally determined.

 

At December 31, 2017, the Company did not have any net operating loss carryforwards from any tax jurisdiction.  The deferred tax benefit relating to discontinued operations includes deferred tax expense of $0.8 million for the year ended December 31, 2015. 

 

A deferred tax asset or liability is recognized for the tax consequences of temporary differences in the recognition of revenue and expense, and unrealized gains and losses, for financial and tax reporting purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets may not be realized.

 

The Company conducted an analysis to assess the need of a valuation allowance at December 31, 2017, 2016 and 2015.  As part of this assessment, all available evidence, including both positive and negative, was considered to determine whether based on the weight of such evidence, a valuation allowance for deferred tax assets was needed.  In accordance with ASC Topic 740-10, Income Taxes (ASC 740), a valuation allowance is deemed to be needed when, based on the weight of the available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or all of a deferred tax asset will not be realized.  The future realization of the tax benefit depends on the existence of sufficient taxable income within the carryback and carryforward periods.

 

At December 31, 2017 and 2016, the Company was in a positive three-year cumulative income position, had availability in its carryback years to absorb potential deferred income tax asset reversals and had financial forecasts of pre-tax income that were sufficient to absorb the deferred income tax assets.  Accordingly, the Company determined that a valuation allowance was not warranted at December 31, 2017 and 2016.

 

In the first quarter of 2016, the Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which requires the recognition of all excess tax benefits or tax deficiencies in the income statement as income tax expense/benefit. Upon exercise or vesting of a share-based award, an excess tax benefit will be recognized if the tax deduction exceeds the compensation expense that was previously recorded for financial statement purposes.  Under previous GAAP, any excess tax benefits were recognized in additional paid-in capital to offset current-period and subsequent-period tax deficiencies.  Tax benefits of $0.7 million and $0.3 million were recorded during the years ended December 31, 2017 and 2016 as a result of share awards vested/exercised during the respective years.

 

The net change in deferred taxes related to investment securities available for sale and cash flow hedges is included in other comprehensive income. The temporary differences, tax effected, which give rise to the Company’s net deferred tax assets at December 31, 2017 and 2016 are as follows:

 

 

 

A reconciliation of the statutory tax rate to the Company’s effective income tax rate for the years ended December 31, 2017, 2016 and 2015 is shown below:

 

 

 

ASC 740 prescribes a recognition 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. At December 31, 2017, 2016 and 2015, the Company did not have any unrecognized benefits. 

 

 

Penalties and interest are classified as income tax expense when incurred. There were no interest and penalties accrued during the years ended December 31, 2017, 2016 and 2015.   

 

The Company files income tax returns in the U.S. federal jurisdiction and in several state jurisdictions.

 

The following are the major tax jurisdictions in which the Company and its affiliates operate and the earliest tax year subject to examination: