10.INCOME TAXES

 

Income tax expense (benefit) consists of the following components:

 

 

The following is a reconciliation of the federal statutory tax rate to the effective tax rate for the years ended December 31, 2017, 2016 and 2015:

 

 

Deferred Taxes

 

The components of the net deferred tax liability are as follows:

 

 

The Tax Cuts and Jobs Act of 2017 (the “Tax Act”), was signed into law on December 22, 2017, making significant changes to the U.S. tax law. The new tax legislation contains several key tax provisions including, but not limited to, a reduction of the corporate income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017, as well as a variety of other changes including acceleration of expensing of certain business assets acquired and placed in service after September 27, 2017, limitation of the tax deductibility of interest expense, and reductions in the amount of executive pay that could qualify as a tax deduction. The Company has calculated the provisional amount of the impact of the Tax Act in its year end income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date of this filing and as a result has recorded a non-cash tax benefit estimate of $112.9 million (corresponding federal and state impact is $(123.0) million and $10.1 million, respectively) as a reduction in income tax expense in the fourth quarter of 2017.  This provisional income tax benefit reflects the impact of re-measurement of the Company’s deferred tax assets and liabilities to the enacted tax rate at which the balances are expected to reverse. In addition, we recorded valuation allowances of $0.9 million against state NOL and state tax credit carryforwards that we no longer expect to be able to realize based upon the Tax Act and new information evaluated in the fourth quarter of 2017. The provisional tax impact of the Tax Act is based on a preliminary review of the new law and is subject to revision based upon further analysis of the Tax Act. The Company’s re-measurement of deferred tax assets and liabilities is provisional along with the reversal of certain deferred tax balances including but not limited to fixed assets and stock compensation.  We will continue to analyze information and evaluate aspects of the Tax Act and the impact to our deferred tax assets and liabilities. Additionally, there is currently uncertainty as to what portions, if any, of the Tax Act will be adopted by the U.S. state and local taxing authorities.  The state tax implications of the Tax Act are provisional and are subject to further analysis as guidance is published by the states in response to the Tax Act. Additional time is needed to gather the information necessary to finalize the computations of the impact of the Tax Act. The changes included in the Tax Act are broad and complex. The impact of the Tax Act may differ from the above estimate due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, regulatory guidance that may be issued, or any updates or changes to estimates the Company has utilized to calculate the impacts.

 

ASC 740 requires us to recognize the effect of the tax law changes in the period of enactment. However, on December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act.  SAB 118 will allow us to record provisional amounts during a measurement period which is similar to the measurement period used when accounting for business combinations. SAB 118 would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts.  Any subsequent adjustment to these amounts will be recorded to tax expense in 2018 when the analysis is complete.

 

Deferred income taxes are provided for the temporary differences between assets and liabilities recognized for financial reporting purposes and assets and liabilities recognized for tax purposes.  The ultimate realization of deferred tax assets depends upon taxable income during the future periods in which those temporary differences become deductible.  To determine whether deferred tax assets can be realized, management assesses whether it is more likely than not that some portion or all of the deferred tax assets will not be realized, taking into consideration the scheduled reversal of deferred tax liabilities, projected future taxable income and tax-planning strategies.

 

Based upon historical taxable income, taxable temporary differences, available and prudent tax planning strategies and projections for future pre-tax book income over the periods that the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these temporary differences.  However, management may reduce the amount of deferred tax assets it considers realizable in the near term if estimates of future taxable income during the carryforward period are reduced.  Estimates of future taxable income are based on the estimated recognition of taxable temporary differences, available and prudent tax planning strategies and projections of future pre-tax book income.  The amount of estimated future taxable income is expected to allow for the full utilization of the NOL carryforward, partial utilization of the state NOL carryforwards and partial utilization of the state credit carryforwards, as described below.

 

Consolidated and its wholly owned subsidiaries, which file a consolidated federal income tax return, estimates it has available federal NOL carryforwards as of December 31, 2017 of $296.5 million and related deferred tax assets of $62.3 million.  The federal NOL carryforwards expire from 2018 to 2036.

 

ETFL, a nonconsolidated subsidiary for federal income tax return purposes, estimates it has available NOL carryforwards as of December 31, 2017 of $1.4 million and related deferred tax assets of $0.3 million. ETFL’s federal NOL carryforwards expire from 2021 to 2024.

 

We estimate that we have available state NOL carryforwards as of December 31, 2017 of $305.5 million and related deferred tax assets of $20.6 million.  The state NOL carryforwards expire from 2018 to 2038. Management believes that it is more likely than not that we will not be able to realize state NOL carryforwards of $89.7 million and related deferred tax asset of $6.2 million and have placed a valuation allowance on this amount.  The related NOL carryforwards expire from 2018 to 2036.  If or when recognized, the tax benefits related to any reversal of the valuation allowance will be accounted for as a reduction of income tax expense.

 

We estimate that we have available federal alternative minimum tax (“AMT”) credit carryforwards as of December 31, 2017 of $2.9 million and related deferred tax assets of $2.9 million.  The newly enacted Tax Act repeals the AMT regime for tax years beginning after December 31, 2017.  The remaining AMT credit carryforward will be fully refundable to the Company in future tax years based on the provisions of the Tax Act.

 

We estimate that we have available state tax credit carryforwards as of December 31, 2017 of $9.9 million and related deferred tax assets of $7.2 million.  The state tax credit carryforwards are limited annually and expire from 2018 to 2027.  Management believes that it is more likely than not that we will not be able to realize state tax carryforwards of $2.7 million and related deferred tax asset of $1.9 million and has placed a valuation allowance on this amount.  The related state tax credit carryforwards expire from 2018 to 2022.  If or when recognized, the tax benefits related to any reversal of the valuation allowance will be accounted for as a reduction of income tax expense.

 

Unrecognized Tax Benefits

 

Under the accounting guidance applicable to uncertainty in income taxes, we have analyzed filing positions in all of the federal and state jurisdictions where we are required to file income tax returns as well as all open tax years in these jurisdictions.  This accounting guidance clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements; 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; and provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

Our unrecognized tax benefits as of December 31, 2017 and 2016 were $4.3 million and $0.1 million, respectively.  The net increase of $4.3 million to unrecognized tax benefits in 2017 was primarily due to the acquisition of FairPoint and was recorded in purchase accounting.  There were no material effects on the Company’s effective tax rate.  The net amount of unrecognized benefits that, if recognized, would result in an impact to the effective rate is $4.1 million compared to less than $0.1 million in 2016.

 

Our practice is to recognize interest and penalties related to income tax matters in interest expense and general and administrative expense, respectively.  During 2017 and 2016, we did not have a material liability for interest or penalties and had no material interest or penalty expense.

 

The periods subject to examination for our federal return are years 2014 through 2016.  The periods subject to examination for our state returns are years 2013 through 2016.  In addition, prior tax years may be subject to examination by federal or state taxing authorities if the Company's NOL carryovers from those prior years are utilized in the future.  We are currently under examination by a state taxing authority.  We do not expect any settlement or payment that may result from the examination to have a material effect on our results or cash flows.

 

We do not expect that the total unrecognized tax benefits and related accrued interest will significantly change due to the settlement of audits or the expiration of statute of limitations in the next twelve months. The net increase of $4.3 million to unrecognized tax benefits in 2017 was primarily due to the acquisition of FairPoint. There were no material effects on the Company’s effective tax rate.

 

The following is a reconciliation of the unrecognized tax benefits for the years ended December 31, 2017 and 2016: