Entity information:

• Entity registrant name: KINDRED HEALTHCARE, INC
• CIK: 0001060009
• SEC filing page: http://www.sec.gov/Archives/edgar/data/1060009/000156459018003936/0001564590-18-003936-index.htm
• XBRL Instance: http://www.sec.gov/Archives/edgar/data/1060009/000156459018003936/knd-20171231.xml
• XBRL Cloud Viewer: https://edgardashboard.xbrlcloud.com/flex/viewer/XBRLViewer.html#instance=http://www.sec.gov/Archives/edgar/data/1060009/000156459018003936/knd-20171231.xml
• EDGAR Dashboard: https://edgardashboard.xbrlcloud.com/edgar-dashboard/?cik=0001060009
• Generator: Donnelley Financial Solutions
• Total assets: 5,232,717,000
• Income tax expense (benefit): -157,116,000
• Found reconcilation from statutory to effective rates: True
• Found income tax policy: Coming soon!

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NOTE 11 – INCOME TAXES

The Tax Reform Act, which was enacted on December 22, 2017, is generally effective in 2018 and makes broad and significantly complex changes to the federal corporate tax system, including the reduction in the U.S. federal corporate income tax rate from 35% to 21% and the limitation on the deductibility of interest expense. The Company estimated the impact of the Tax Reform Act to deferred income taxes on its December 31, 2017 balance sheet in accordance with its understanding of the Tax Reform Act and guidance available as of the date of this filing. As a result, the Company has recorded an estimated $130.5 million income tax benefit related to reducing certain deferred income tax liabilities in the fourth quarter of 2017.

In December 2017, the FASB issued authoritative guidance to address the application of 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 Reform Act. In accordance with this authoritative guidance, the Company has determined that the $130.5 million income tax benefit recorded in connection with the assessment of the valuation allowance is a provisional amount and a reasonable estimate that may change. Additional work is necessary to complete a more detailed analysis of the Tax Reform Act.

The estimated impact of $130.5 million from the Tax Reform Act resulted from both the reassessment of the deferred income tax valuation allowance and the change in the income tax rate. The removal of the carryforward period for federal net operating losses (“NOLs”) under the Tax Reform Act resulted in a portion of the remaining deferred tax liability becoming available as a source-of-income that can be used to offset certain deferred tax assets. This change resulted in the Company releasing $118.4 million of its deferred income tax valuation allowance. The change in the income tax rate from 35% to 21% resulted in the Company’s deferred liability being reduced by $12.1 million.

NOTE 11 – INCOME TAXES (Continued)

At each balance sheet date, management assesses all available positive and negative evidence to determine whether a valuation allowance is needed against its deferred tax assets. The authoritative guidance requires evidence related to events that have actually happened to be weighted more significantly than evidence that is projected or expected to happen. A significant piece of negative evidence according to this weighting standard is if there are cumulative losses in the two most recent years and the current year, which was the case for the Company at December 31, 2017 and December 31, 2016. The Company’s outlook of taxable income for 2016 changed after the Company recorded $286.8 million of goodwill and property and equipment impairment charges and announced the planned SNF Divestiture and related expected loss on divestiture for tax purposes. Accordingly, a full valuation allowance was recorded at both December 31, 2017 and December 31, 2016. The amount of deferred tax asset considered realizable, however, could be adjusted if the weighting of the positive and negative evidence changes.

The Company’s valuation allowance was reduced to $378.8 million at December 31, 2017 from $423.1 million at December 31, 2016. The Company recorded an increase to the valuation allowance of $ 246.4 million before the impact of the Tax Reform Act, which required a reduction in the valuation allowance of $290.7 million, comprised of both the $130.5 million decrease in deferred tax liabilities discussed above and a $160.2 million decrease to deferred tax assets and related valuation allowance based upon the change in the U.S. corporate income tax rate from 35% to 21%.

The Company has deferred tax liabilities related to tax amortization of acquired indefinite-lived intangible assets because these assets are not amortized for financial reporting purposes. The tax amortization in current and future years created a deferred tax liability which will reverse at the time of ultimate sale or book impairment. Prior to the Tax Reform Act, the uncertain timing of this reversal and the temporary difference associated with certain indefinite lived intangible assets could not be considered a source of future taxable income for purposes of determining the valuation allowance. As such, certain deferred tax liabilities could not be used to offset deferred tax assets. As a result of the Tax Reform Act, a portion of the Company’s federal indefinite-lived intangible assets can be used as a source of income. As a result of this change and other activity in 2017, the Company’s net deferred tax liability was reduced to $36.9 million at December 31, 2017 from $201.8 million at December 31, 2016. The deferred tax liability at December 31, 2017 is comprised of the entire state portion of indefinite-lived intangible assets and a portion of the Company’s federal indefinite-lived intangible assets that could not be used as a source of income. The deferred tax liability at December 31, 2016 is comprised entirely of both federal and state indefinite-lived intangible assets that could not be used as a source of income. This change in deferred tax liabilities available as a source of income relates to changes in carryforward periods and limitations that no longer exist. The new 80% limitation on NOLs creates a new limitation for federal purposes that must be considered.

Provision (benefit) for income taxes consists of the following (in thousands):

 

Reconciliation of federal statutory tax benefit to the provision (benefit) for income taxes follows (in thousands):

 

Other items consist of meals, entertainment, lobbying, and other permanent differences, which individually are deemed immaterial.

NOTE 11 – INCOME TAXES (Continued)

A summary of net deferred income tax assets (liabilities) by source included in the accompanying consolidated balance sheet at December 31 follows (in thousands):

Net deferred income tax liabilities totaling $36.9 million and $201.8 million at December 31, 2017 and 2016, respectively, were classified as noncurrent liabilities.

The Company identified deferred tax assets for federal income tax NOLs of $162.2 million (tax effected at 21%) and $162.4 million (tax effected at 35%) at December 31, 2017 and December 31, 2016, respectively, with corresponding deferred income tax valuation allowances of $162.2 million and $162.4 million at December 31, 2017 and December 31, 2016, respectively. The federal income tax NOLs expire in various amounts through 2037. The Company had deferred income tax assets for state income tax NOLs of $82.2 million and $60.4 million at December 31, 2017 and December 31, 2016, respectively, and corresponding deferred income tax valuation allowances of $82.0 million and $60.0 million at December 31, 2017 and December 31, 2016, respectively, for that portion of the net deferred income tax assets that the Company will likely not realize in the future.

The Company follows the provisions of the authoritative guidance for accounting for uncertainty in income taxes which clarifies the accounting for uncertain income tax issues recognized in an entity’s financial statements. The guidance 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 an income tax return.

A reconciliation of unrecognized tax benefits follows (in thousands):

 

The Company records accrued interest and penalties associated with uncertain tax positions as income tax expense in the consolidated statement of operations. Accrued interest related to uncertain tax provisions totaled $3.5 million as of December 31, 2017 and $3.3 million as of December 31, 2016.

The federal statute of limitations remains open for tax years 2014 through 2016. During 2017, the Company resolved federal income tax audits for the 2015 tax year. During 2017, Gentiva and its subsidiaries also resolved federal tax audits for the February 1, 2015 short-period tax return. The Company is currently under examination by the Internal Revenue Service (the “IRS”) for the 2016 and 2017 tax years. The Company has been accepted into the IRS Compliance Assurance Process (“CAP”) program for the 2016 through 2018 tax years. The CAP program is an enhanced, real-time review of a company’s tax positions and compliance. The Company expects participation in the CAP program will improve the timeliness of its federal tax examinations.

NOTE 11 – INCOME TAXES (Continued)

State jurisdictions generally have statutes of limitations for tax returns ranging from three to five years. The state impact of federal income tax changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Currently, the Company has various state income tax returns under examination.