NOTE 13—INCOME TAXES

 

Income Tax Expense

 

The Company calculates its provision for federal and state income taxes based on current tax law. The reported tax provision differs from the amounts currently receivable or payable because some income and expense items are recognized in different time periods for financial reporting purposes than for income tax purposes. The following is a summary of income tax expense for the years ended December 31, 2017, 2016, and 2015:

 

 

In 2016, the Company adopted a new accounting standard that requires excess tax benefits from stock compensation to be recorded as a reduction to income tax expense instead of being recorded directly to equity. Excess tax benefits recognized for the years ended December 31, 2017 and 2016 reduced income tax expense by $9.5 million and $0.6 million, respectively. In the reconciliation of income tax expense presented below, the reduction of income tax expense from excess tax benefits recognized is included as a component of the “Other” line item.

 

In December 2017, the Tax Cuts and Jobs Act (“Tax Reform”) was enacted. The Tax Reform significantly reduced the Federal income tax rate from 35.0% to 21.0%. GAAP requires an entity to account for the impact of a tax law change in the period of enactment. Accordingly, the Company revalued its deferred tax assets and deferred tax liabilities using the new Federal income tax rate of 21.0%, which is the rate at which the Company expects the deferred assets and liabilities to reverse in the future. Deferred tax assets decreased as the future benefit from these assets will be less than previously expected, resulting in an increase to deferred tax expense. Deferred tax liabilities also decreased as the future payment of taxes from these liabilities will be less than previously expected, resulting in a decrease to deferred tax expense. As the Company had more deferred tax liabilities than deferred tax assets as of December 31, 2017, the impact of Tax Reform on deferred tax expense was an overall significant decrease in deferred tax expense as shown above.

 

A reconciliation of the statutory federal tax expense to the income tax expense in the accompanying statements of income follows:

 

 

Deferred Tax Assets/Liabilities

 

The tax effects of temporary differences between reported earnings and taxable earnings consisted of the following:  

 

The Company believes it is more likely than not that it will generate sufficient taxable income in future periods to realize the deferred tax assets, even after consideration of Tax Reform. The significant decrease in the deferred tax liabilities, net shown above is related to the revaluation of the Company’s deferred tax assets and deferred tax liabilities from the enactment of Tax Reform.

 

Tax Uncertainties

 

The Company periodically assesses its liabilities and contingencies for all periods open to examination by tax authorities based on the latest available information. Where the Company believes it is more likely than not that a tax position will not be sustained, management records its best estimate of the resulting tax liability, including interest, in the consolidated financial statements. As of December 31, 2017, based on all known facts and circumstances and current tax law, management believes that there are no tax positions for which it is reasonably possible that the unrecognized tax benefits will significantly increase or decrease over the next 12 months, producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition, or cash flows.