11. Income Taxes
The United States enacted the U.S. Tax Cuts and Jobs Act on December 22, 2017. The U.S. Tax Cuts and Jobs Act reduces the U.S. federal corporate income tax rate from 35.0% to 21.0% beginning in 2018, requires companies to pay a one-time deemed repatriation tax on unremitted foreign earnings, repeals the corporate alternative minimum tax, provides full expensing of new and used assets, creates new sources of taxable income and deductions related to foreign operations, repeals or modifies certain deductions and credits, and modifies the use of federal net operating loss carryforwards (“NOLs”).
On December 22, 2017, the SEC issued guidance which allows us to record provisional amounts during a measurement period not to extend beyond one year following enactment. As a result of that guidance, and based on our interpretation of the U.S. Tax Cuts and Jobs Act, we have recorded provisional income tax benefits of $130.0 million in connection with the remeasurement of our U.S. net deferred tax liability. We have not recorded any provisional amount in connection with the one-time deemed repatriation tax on unremitted foreign earnings. The ultimate impact of the U.S. Tax Cuts and Jobs Act may differ from the amounts reflected in these financial statements due to additional regulatory guidance that may be issued, changes in interpretations and assumptions, additional analysis, and actions the Company may take as a result. The Company expects to update these provisional amounts as the analysis is finalized within the one-year measurement period.
A reconciliation of the provision (benefit) for income taxes applying the statutory federal income tax rate of 35.0% for each of the years ended December 31, is as follows:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(133 |
) |
|
$ |
(376 |
) |
|
$ |
52 |
|
|
State and local |
|
|
(99 |
) |
|
|
(298 |
) |
|
|
48 |
|
|
Foreign |
|
|
596 |
|
|
|
84 |
|
|
|
1,292 |
|
|
Total current expense |
|
|
364 |
|
|
|
(590 |
) |
|
|
1,392 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(87,185 |
) |
|
|
46,391 |
|
|
|
(24,425 |
) |
|
State and local |
|
|
1,868 |
|
|
|
(1,436 |
) |
|
|
(3,531 |
) |
|
Foreign |
|
|
3,987 |
|
|
|
2,426 |
|
|
|
2,058 |
|
|
Total deferred expense (benefit) |
|
|
(81,330 |
) |
|
|
47,381 |
|
|
|
(25,898 |
) |
|
Total income tax expense (benefit) |
|
$ |
(80,966 |
) |
|
$ |
46,791 |
|
|
$ |
(24,506 |
) |
The domestic and foreign earnings before income taxes are as follows:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Domestic |
|
$ |
104,321 |
|
|
$ |
61,006 |
|
|
$ |
(57,825 |
) |
|
Foreign |
|
|
39,051 |
|
|
|
28,410 |
|
|
|
40,605 |
|
|
Income (loss) before income taxes |
|
$ |
143,372 |
|
|
$ |
89,416 |
|
|
$ |
(17,220 |
) |
A reconciliation of differences between the U.S. federal statutory income tax rate and the effective income tax rates is presented as a percent of expense (benefit) as follows:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. federal statutory income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
(35.0 |
%) |
|
State and local taxes based on income, net of federal benefit |
|
|
0.3 |
% |
|
|
1.10 |
% |
|
|
(2.0 |
%) |
|
Change in deferred foreign and state tax rates |
|
|
0.6 |
% |
|
|
(2.2 |
%) |
|
|
(12.0 |
%) |
|
Nondeductible customer incentive related to Amazon |
|
|
5.0 |
% |
|
|
10.9 |
% |
|
|
0.0 |
% |
|
Nondeductible compensation expenses related to Amazon |
|
|
— |
|
|
|
13.0 |
% |
|
|
0.0 |
% |
|
Other nondeductible expenses |
|
|
1.4 |
% |
|
|
4.3 |
% |
|
|
10.2 |
% |
|
Extraterritorial income tax benefit |
|
|
— |
|
|
|
— |
|
|
|
(23.3 |
%) |
|
Tax incentives and additional deductions |
|
|
(0.6 |
%) |
|
|
(0.9 |
%) |
|
|
(4.9 |
%) |
|
Favorable resolution of income tax issues |
|
|
— |
|
|
|
— |
|
|
|
(13.8 |
%) |
|
Tax effect of foreign operations |
|
|
(7.7 |
%) |
|
|
(9.4 |
%) |
|
|
(66.4 |
%) |
|
Impact of U.S. Tax Cuts and Jobs Act |
|
|
(90.7 |
%) |
|
|
— |
|
|
|
— |
|
|
Other |
|
|
0.2 |
% |
|
|
0.5 |
% |
|
|
4.9 |
% |
|
Effective income tax rate |
|
|
(56.5 |
%) |
|
|
52.3 |
% |
|
|
(142.3 |
%) |
The effective income tax rate for the year ended December 31, 2017 differed from the U.S. statutory rate primarily due to the revaluation of our U.S. net deferred tax liability as a result of the U.S. Tax Cuts and Jobs Act, and to a lesser extent, nondeductible changes in the value of the Amazon Warrant liability (see Note 7). In 2016, we recorded a nondeductible customer incentive and nondeductible compensation expenses resulting from a change in control, as defined under certain of the Company’s benefit plans, both related to the Amazon transaction (see Note 7). We also generated non-recurring tax benefits from extraterritorial income (“ETI”) in 2015, which reduced our income tax rate in proportion to our income or loss in that year.
Prior to the U.S. Tax Cuts and Jobs Act, we indefinitely reinvested outside of the U.S. the net earnings of our foreign Dry Leasing subsidiaries. Historically, we have not provided for U.S. taxes on the unremitted earnings of foreign subsidiaries that have not been previously taxed because we intended to invest such unremitted earnings indefinitely outside of the U.S. As a result of the U.S. Tax Cuts and Jobs Act, we are assessing our intent to invest such unremitted earnings outside the U.S. It is impracticable to provide for U.S. taxes on these unremitted earnings under the U.S. Tax Cuts and Jobs Act without regulatory guidance and additional analysis. We may repatriate the earnings of our foreign subsidiaries to the extent the associated taxes are insignificant.
Deferred tax assets and liabilities represent the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.
The net noncurrent deferred tax asset (liability) was comprised of the following as of December 31:
|
|
|
Assets (Liabilities) |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards and credits |
|
$ |
345,245 |
|
|
$ |
454,749 |
|
|
Accrued compensation |
|
|
11,514 |
|
|
|
17,036 |
|
|
Accrued legal settlements |
|
|
6,596 |
|
|
|
25,442 |
|
|
Aircraft leases |
|
|
17,323 |
|
|
|
16,109 |
|
|
Goodwill and other intangibles |
|
|
7,267 |
|
|
|
15,798 |
|
|
Interest rate derivatives |
|
|
1,532 |
|
|
|
3,124 |
|
|
Long-term debt |
|
|
1,923 |
|
|
|
3,409 |
|
|
Obsolescence reserve |
|
|
5,734 |
|
|
|
7,804 |
|
|
Stock-based compensation |
|
|
3,296 |
|
|
|
6,731 |
|
|
Other |
|
|
977 |
|
|
|
685 |
|
|
Total deferred tax assets |
|
|
401,407 |
|
|
|
550,887 |
|
|
Valuation allowance |
|
|
(30,869 |
) |
|
|
(49,396 |
) |
|
Net deferred tax assets |
|
$ |
370,538 |
|
|
$ |
501,491 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Fixed assets |
|
$ |
(562,210 |
) |
|
$ |
(778,905 |
) |
|
Accrued expenses |
|
|
- |
|
|
|
(10 |
) |
|
Acquisition of EETC debt |
|
|
(1,247 |
) |
|
|
(4,079 |
) |
|
Incentive related to Amazon |
|
|
(6,709 |
) |
|
|
(6,829 |
) |
|
Deferred maintenance |
|
|
(14,151 |
) |
|
|
(8,614 |
) |
|
Total deferred tax liabilities |
|
$ |
(584,317 |
) |
|
$ |
(798,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes included within following balance sheet line items: |
|
|
|
|
|
|
|
|
|
Deferred taxes |
|
$ |
(214,694 |
) |
|
$ |
(298,165 |
) |
|
Deferred costs and other assets |
|
|
915 |
|
|
|
1,219 |
|
|
Net deferred tax assets (liabilities) |
|
$ |
(213,779 |
) |
|
$ |
(296,946 |
) |
As of December 31, 2017 and 2016, we had U.S. NOLs, net of unrecognized tax benefits and valuation allowances, of approximately $1.2 billion and $1.0 billion, respectively, which will expire through 2037, if not utilized. The increase in NOLs during 2017 resulted primarily from accelerated tax depreciation. We had alternative minimum tax credits of $4.5 million and $4.7 million as of December 31, 2017 and 2016, respectively, with no expiration date. Pursuant to the U.S. Tax Cuts and Jobs Act, these credits are refundable on our income tax returns from 2018 through 2021. Additionally, we had foreign NOLs for Hong Kong and Singapore of approximately $465.3 million and $463.5 million as of December 31, 2017 and 2016, respectively, with no expiration date.
We participate in an aircraft leasing incentive program in Singapore which entitles us to a reduced tax rate of 10.0% on our Singapore Dry Leasing income. Our participation is set to expire on July 31, 2018 at which time we expect it to be renewed at a further reduced rate of 8.0%. Should the program not be renewed, the tax rate would revert to 17.0%. Either result will have a material impact on our 2018 results.
Section 382 of the Internal Revenue Code (the “Code”) imposes an annual limitation on the amount of a corporation’s U.S. federal taxable income that can be offset by NOLs if it experiences an “ownership change”, as defined. We experienced ownership changes, as defined, in 2004 and 2009. In addition, the acquisition of Southern Air in 2016 (see Note 4) constituted an ownership change for that entity. Accordingly, the use of NOLs generated prior to these ownership changes is subject to an annual limitation. If certain changes in our ownership occur prospectively, there could be an additional annual limitation on the amount of utilizable NOLs.
On each reporting date, management assesses whether we are more likely than not to realize some or all of our deferred tax assets. After our assessment, we maintained a valuation allowance of $30.9 million and $49.4 million against our deferred tax assets as of December 31, 2017 and 2016, respectively. The valuation allowance decreased by $18.5 million during the year ended December 31, 2017 primarily due to the change in the federal income tax rate under the U.S. Tax Cuts and Jobs Act and by $1.3 million during the year ended December 31, 2016. The valuation allowance is attributable to a limitation on NOL utilization resulting from the ownership change under Section 382. Due to this limitation, we expect a portion of our NOLs generated in 2004 and prior years to eventually expire unused.
A reconciliation of the beginning and ending unrecognized income tax benefits is as follows:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Beginning balance |
|
$ |
113,892 |
|
|
$ |
112,555 |
|
|
$ |
109,993 |
|
|
Additions for tax positions related to the current year |
|
|
1,366 |
|
|
|
1,587 |
|
|
|
551 |
|
|
Additions for tax positions related to prior years |
|
|
40 |
|
|
|
- |
|
|
|
5,503 |
|
|
Reductions for tax positions related to prior years |
|
|
(43,581 |
) |
|
|
(250 |
) |
|
|
(3,492 |
) |
|
Ending balance |
|
$ |
71,717 |
|
|
$ |
113,892 |
|
|
$ |
112,555 |
|
The decrease in unrecognized income tax benefits during 2017 for tax positions related to prior years is due to the change in the federal income tax rate under the U.S. Tax Cuts and Jobs Act.
If recognized, all of the unrecognized income tax benefits would favorably impact the effective income tax rate. We will maintain a liability for unrecognized income tax benefits until these uncertain positions are resolved or until the expiration of the applicable statute of limitations, if earlier.
Our policy is to record tax-related interest expense and penalties, if applicable, as a component of income tax expense. We recorded no interest benefit in 2017 or 2016. The cumulative liability for tax-related interest was $0.1 million as of December 31, 2017 and $0.1 million as of December 31, 2016. We have not recorded any liability for income tax-related penalties, and the tax authorities historically have not assessed any.
For U.S. federal income tax purposes, the 2012 through 2017 income tax years remain subject to examination. The Company is currently undergoing a federal income tax examination for the tax year ending 2015 as well as income tax examinations in Illinois and New Jersey. The Company files income tax returns in multiple foreign jurisdictions, primarily in Singapore and Hong Kong. The 2012 through 2017 Singapore income tax years and 2010 through 2017 Hong Kong income tax years are subject to examination. The Company is currently undergoing income tax examinations in Hong Kong for the periods 2010 through 2016.