9. Income Taxes

Provision for Income Taxes

The provision for income taxes relating to continuing operations consists of the following (in thousands):

 

The provision for income taxes for the years ended December 31, 2017,  2016 and 2015 resulted in effective tax rates on continuing operations of 45.2%,  35.8% and 35.2%, respectively. The reasons for the differences between these effective tax rates and the 35% federal statutory rate are as follows (in thousands):

 

While we believe we were able to make reasonable estimates of the impact of the recently enacted Tax Cuts and Jobs Act in these financial statements, the amounts recorded are provisional and the final impact may differ from these estimates due to, among other things, changes in our interpretations and assumptions and additional guidance that may be issued by regulatory authorities.

Deferred Tax Assets (Liabilities)

Significant components of the deferred tax assets and deferred tax liabilities as reflected on the balance sheets are as follows (in thousands):

 

The deferred tax assets and liabilities as of December 31, 2017 were remeasured to account for the corporate tax rate reduction to 21%, resulting in an increase to the provision for income taxes of $9.5 million. The deferred tax assets and liabilities reflected above are included in the consolidated balance sheets as follows (in thousands):

 

As of December 31, 2017, we had $6.0 million of future tax benefits related to $71.8 million of available state and Puerto Rican net operating loss carryforwards (“NOLs”), which begin to expire between 2018 and 2037. Valuation allowances of $3.5 million have been recorded against certain state NOLs and deferred tax assets and all of our Puerto Rican NOLs. We recorded an increase in valuation allowances of $0.3 million for the year ended December 31, 2017. The $2.5 million deferred tax asset for state NOLs, net of related valuation allowances, reflects our conclusion that it is more-likely-than-not these assets will be realized based upon expected future earnings in certain subsidiaries.

We update this assessment of the realizability of deferred tax assets relating to state NOLs annually. A return to profitability in our entities with valuation allowances on their NOLs and other deferred tax assets would result in a reversal of a portion of the valuation allowance relating to realized deferred tax assets. A sustained period of profitability could cause a change in our judgment of the remaining deferred tax assets. If that were to occur, then it is likely that we would reverse some or all of the remaining valuation allowances.

Liabilities for Uncertain Tax Positions

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding accrued interest and penalties, is as follows (in thousands):

As of December 31, 2017 and 2016, we had $8.9 million and $0.2 million, respectively, of unrecognized tax benefits, most of which, if recognized in future periods, would not impact our effective tax rate. We also had accrued $0.7 million and $0.4 million for potential interest and penalties related to the unrecognized tax benefits as of December 31, 2017 and 2016, respectively. These liabilities are included in “Other Long‑Term Liabilities” in the consolidated balance sheets. We recognize potential interest and penalties related to unrecognized tax benefits in our provision for income taxes.

We expect to recognize a decrease in unrecognized tax benefits of up to $8.7 million within the next twelve months due to the filing of a federal income tax automatic accounting method change application. Approximately $3.0 million of the decrease is expected to impact our effective tax rate.  

We are subject to taxation in the United States and various state jurisdictions. In the fourth quarter of 2017, we received a ‘no change letter’ from the Internal Revenue Service upon completion of its examination of the 2015 tax year. We remain open to examination by various state tax authorities for the 2009 tax year forward.