Note 23 – Income Taxes
Components of the federal and state income tax provisions for the periods indicated are as follows:
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current expense (benefit) |
$ |
(4.4 |
) |
|
$ |
(62.8 |
) |
|
$ |
15.0 |
|
|
Deferred expense (benefit) |
|
(392.7 |
) |
|
|
(37.8 |
) |
|
|
24.6 |
|
|
Total income tax expense (benefit) |
$ |
(397.1 |
) |
|
$ |
(100.6 |
) |
|
$ |
39.6 |
|
Our deferred income tax assets and liabilities at December 31, 2017 and 2016 consist of differences related to the timing of recognition of certain types of costs as follows:
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss |
|
278.1 |
|
|
|
101.2 |
|
|
Tax credits |
|
- |
|
|
|
3.9 |
|
|
Other |
|
2.7 |
|
|
|
3.5 |
|
|
Deferred tax assets before valuation allowance |
$ |
280.8 |
|
|
$ |
108.6 |
|
|
Valuation allowance |
|
(2.7 |
) |
|
|
(3.5 |
) |
|
Deferred tax assets |
|
278.1 |
|
|
|
105.1 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Investments (1) |
|
(768.9 |
) |
|
|
(1,002.6 |
) |
|
Property, plant, and equipment |
|
(16.4 |
) |
|
|
(25.3 |
) |
|
Other |
|
28.2 |
|
|
|
(18.4 |
) |
|
Deferred tax liabilities |
|
(757.1 |
) |
|
|
(1,046.3 |
) |
|
Net deferred tax asset (liability) |
$ |
(479.0 |
) |
|
|
(941.2 |
) |
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability) |
|
|
|
|
|
|
|
|
Federal |
$ |
(386.1 |
) |
|
$ |
(833.2 |
) |
|
Foreign |
|
0.6 |
|
|
|
0.6 |
|
|
State |
|
(93.5 |
) |
|
|
(108.6 |
) |
|
Long-term deferred tax liability, net |
$ |
(479.0 |
) |
|
$ |
(941.2 |
) |
|
(1) |
Our deferred tax liability attributable to investments reflects the differences between the book and tax carrying values of our investment in the Partnership. |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the Internal Revenue Code of 1986, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits are realized; (3) creating a new limitation on deductible interest expense; and (4) changing rules related to uses and limitation of net operating loss carryforwards created in tax years beginning after December 31, 2017.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with our initial analysis of the impact of the Tax Act, we recorded a discrete net deferred tax benefit of $269.5 million in the period ending December 31, 2017. This net deferred tax benefit consists of the corporate tax rate reduction. For various reasons that are discussed more fully below, we have not completed our accounting for the income tax effects of certain elements of the Tax Act. We were able to make reasonable estimates that we recorded as provisional adjustments with regard to said elements.
Our accounting for the following elements of the Tax Act is complete:
|
|
• |
We reclassified $4.2 million of alternative minimum tax credits from deferred tax assets to long term assets. We expect to receive this amount as a refund in the years ended 2019, 2020 and 2021. |
Our accounting for the following elements of the Tax Act is incomplete. However, we are able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments as follows:
|
|
• |
Reduction of U.S. federal corporate tax rate: The Tax Act reduces the corporate tax rate to 21%, effective January 1, 2018. We recorded a provisional deferred tax benefit of $269.5 million for the year ended December 31, 2017. While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analyses related to the Tax Act including but not limited to changes to our cost recovery assumptions and the state tax effect of adjustments to federal temporary differences. |
|
|
• |
Cost recovery: We have not yet completely inventoried and analyzed our 2017 capital expenditures that qualify for bonus expensing. We have recorded a provisional tax depreciation expense of $1.9 billion which does not include full expensing of all qualifying capital expenditures. |
|
|
• |
Internal Revenue Code (“IRC”) Section 162(m) Limitations: Congress enacted several modifications to the compensation deduction limitation for covered employees under IRC Section 162(m). The modifications do not apply to compensation agreements entered into on or before November 2, 2017. Targa’s covered employees’ compensation is attributable to compensation agreements entered into on or before November 2, 2017. Consequently, we have not recorded a provisional adjustment as we continue to assess the applicability of the modifications in the context of Targa’s pre-November 2, 2017, compensation agreements and all facts and circumstances. |
We have net operating loss carryforwards of $1.3 billion, which expire between 2036 and 2037.
As a result of the TRC/TRP Merger, TRC acquired all of the common units of the Partnership owned by the public. In exchange for said units, TRC transferred its stock with a fair market value as of the close of business February 16, 2016, of approximately $1.8 billion and TRC assumed TRP's liabilities of approximately $5.4 billion, resulting in a purchase price of $7.3 billion. The transaction constitutes a taxable sale which resulted in an adjustment to the tax basis in the underlying assets deemed acquired in the common partnership unit acquisition. A deferred tax liability of approximately $865.0 million related to the book tax basis difference in this investment has been recorded, computed as $4.1 billion book basis in excess of $1.8 billion tax basis at TRC's statutory rate of 37.34% at the time of the transaction.
As part of the TPL merger in 2015, we acquired TPL Arkoma Inc., a corporate subsidiary subject to federal and state income tax. Our corporate subsidiary accounts for income taxes under the asset and liability method and provides deferred income taxes for all significant temporary differences.
As of December 31, 2017, TPL Arkoma, Inc. had net operating loss carry forwards for federal income tax purposes of approximately $53.0 million, which expire at various dates from 2029 to 2037. Management believes it more likely than not that the deferred tax asset will be fully utilized.
Set forth below is the reconciliation between our income tax provision (benefit) computed at the United States statutory rate on income before income taxes and the income tax provision in our Consolidated Statements of Operations for the periods indicated:
|
Income tax reconciliation: |
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Income (loss) before income taxes |
$ |
(292.9 |
) |
|
$ |
(259.7 |
) |
|
$ |
(111.8 |
) |
|
Less: Net income attributable to noncontrolling interest |
|
(50.2 |
) |
|
|
(28.2 |
) |
|
|
209.7 |
|
|
Less: TPL Arkoma, Inc. income to TRC |
|
— |
|
|
|
0.8 |
|
|
|
0.5 |
|
|
Less: Income taxes included in noncontrolling interest |
|
— |
|
|
|
— |
|
|
|
(0.6 |
) |
|
Income attributable to TRC (excluding TPL Arkoma, Inc.) before income taxes |
|
(343.1 |
) |
|
|
(287.1 |
) |
|
|
97.8 |
|
|
Income from TPL Arkoma, Inc. |
|
— |
|
|
|
(0.8 |
) |
|
|
(7.6 |
) |
|
Income attributable to TRC and TPL Arkoma, Inc. before income taxes |
|
(343.1 |
) |
|
|
(287.9 |
) |
|
|
90.2 |
|
|
Federal statutory income tax rate |
|
35 |
% |
|
|
35 |
% |
|
|
35 |
% |
|
Provision for federal income taxes |
|
(120.1 |
) |
|
|
(100.8 |
) |
|
|
31.6 |
|
|
State income taxes, net of federal tax benefit |
|
(11.7 |
) |
|
|
(6.1 |
) |
|
|
3.5 |
|
|
Amortization of deferred charge on 2010 transactions |
|
— |
|
|
|
4.7 |
|
|
|
4.7 |
|
|
Tax reform rate change |
|
(269.5 |
) |
|
|
— |
|
|
|
— |
|
|
Other, net |
|
4.2 |
|
|
|
1.6 |
|
|
|
(0.2 |
) |
|
Income tax provision (benefit) |
$ |
(397.1 |
) |
|
$ |
(100.6 |
) |
|
$ |
39.6 |
|
We have not identified any uncertain tax positions. We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material adverse effect on our financial condition, results of operations or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded.