Note 15—Income Taxes

 

The Company files U.S. federal and state corporate income tax returns for PFSI and partnership returns for PennyMac. The Company’s federal tax returns are subject to examination for 2014 and forward and its state tax returns are generally subject to examination for 2013 and forward. PennyMac’s federal partnership returns are subject to examination for 2014 and forward, and its state tax returns are generally subject to examination for 2013 and forward. No returns are currently under examination.

 

The Company’s tax expense for the year ended December 31, 2017 was significantly impacted by the enactment on December 22, 2017 of H.R. 1, known as the Tax Cuts and Jobs Act (the “Tax Act”).  The Tax Act reduces the U.S. federal corporate tax rate to 21% from the previous maximum rate of 35%, effective January 1, 2018.

 

GAAP requires that the effect of tax legislation be recognized in the period in which the law was enacted.  In the fourth quarter of 2017, the Company recorded a tax benefit of $13.7 million due to a re-measurement of deferred tax assets and liabilities resulting from a decrease in the federal tax rate. The re-measurement of the deferred tax assets and liabilities is predominantly based on a reduction to the federal rate as described above which will result in lower tax expense when these deferred tax assets and liabilities are realized. The Company is not aware of any areas of significant interpretation or judgment in the calculation of this benefit. However, if any additional interpretive guidance is released from taxing authorities or accounting standard setters, it is possible these amounts could change the calculation of the tax benefit in future reporting periods.

 

The revaluation of the deferred tax asset resulting from PennyMac unitholder exchanges under the tax receivable agreement resulted in the repricing of the Company’s corresponding liability under the tax receivable agreement. The Company recorded a reduction of $32.0 million in the payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under the tax receivable agreement. 

 

The following table details the Company’s income tax expense:

 

 

The provision for deferred income taxes for the years ended December 31, 2017, 2016, and 2015 primarily relates to the Company’s investment in PennyMac partially offset by the Company’s generation and utilization of a net operating loss and generation of tax credits. The portion attributable to its investment in PennyMac primarily relates to MSRs that PennyMac received pursuant to sales of mortgage loans held for sale at fair value and Carried Interest from the Investment Funds.

 

The following table is a reconciliation of the Company’s provision for income taxes at statutory rates to the provision for income taxes at the Company’s effective tax rate:

 

 

The components of the Company’s provision for deferred income taxes are as follows:

 

 

 

The components of Income taxes payable are as follows:

 

 

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities are presented below:

 

 

The Company recorded a net deferred income tax liability in Income taxes payable in the consolidated balance sheet as of December 31, 2017 and 2016.

 

The Company recorded a deferred tax asset of $10.2 million related to a net operating loss of approximately $37.4 million, with $1.3 million and $36.1 million generally expiring in 2035 and 2037, respectively. Net operating losses arising in tax years beginning after December 31, 2017 are limited in annual use to 80% of taxable income (without regard to net operating less deduction) but can be carried forward indefinitely. The Company has tax credits of $0.6 million, which generally have no expiration date.

 

At December 31, 2017 and 2016, the Company had no unrecognized tax benefits and does not anticipate any unrecognized tax benefits. Should the recognition of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such expenses in the Company’s income tax accounts. No such accruals existed at December 31, 2017 and 2016.