(14) Income taxes
Income before the provision for income taxes as shown in the accompanying consolidated statements of operations is as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Domestic |
|
$ |
426,873 |
|
|
$ |
88,016 |
|
|
$ |
48,716 |
|
|
Foreign |
|
|
2,308 |
|
|
|
1,892 |
|
|
|
(1,438 |
) |
|
Total income before the provision for income taxes |
|
|
429,181 |
|
|
|
89,908 |
|
|
|
47,278 |
|
The provision (benefit) for income taxes consists of the following:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(2,600 |
) |
|
$ |
1,206 |
|
|
$ |
686 |
|
|
State |
|
|
2,941 |
|
|
|
1,428 |
|
|
|
2,188 |
|
|
Foreign |
|
|
817 |
|
|
|
421 |
|
|
|
139 |
|
|
Total current tax expense |
|
|
1,158 |
|
|
|
3,055 |
|
|
|
3,013 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
365,470 |
|
|
|
11,633 |
|
|
|
5,636 |
|
|
State |
|
|
6,857 |
|
|
|
3,755 |
|
|
|
935 |
|
|
Foreign |
|
|
95 |
|
|
|
218 |
|
|
|
(436 |
) |
|
Total deferred tax expense |
|
|
372,422 |
|
|
|
15,606 |
|
|
|
6,135 |
|
|
Provision for income taxes |
|
$ |
373,580 |
|
|
$ |
18,661 |
|
|
$ |
9,148 |
|
As a result of the recapitalization transactions, the Company became the sole managing member of Pla-Fit Holdings, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Pla-Fit Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Pla-Fit Holdings is passed through to and included in the taxable income or loss of its members, including the Company following the recapitalization transactions, on a pro rata basis. Planet Fitness, Inc. is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income of Pla-Fit Holdings following the recapitalization transactions. The Company is also subject to taxes in foreign jurisdictions.
On December 22, 2017, the 2017 Tax Act was enacted, making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% beginning on January 1, 2018, the transition of U.S international taxation from a worldwide tax system to a modified territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. We have calculated our best estimate of the impact of the 2017 Tax Act in our year end income tax provision in accordance with our understanding of the law and available guidance and as a result have recorded $334,619 as additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted, of which $334,022 related to the remeasurement of certain deferred tax assets and liabilities, and $597 related to mandatory repatriation. The 2017 Tax Act also caused a remeasurement of our tax benefit arrangements, as discussed in more detail below.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. 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 2017 Tax Act. The Company has analyzed the 2017 Tax Act and made reasonable estimates of the effects on our consolidated financial statements and tax disclosures, including changes to our existing deferred tax balances, the mandatory repatriation tax and remeasurement of our tax benefit arrangements. The Company will continue to analyze the effects of the 2017 Tax Act on its consolidated financial statements. Any additional impacts from the enactment of the Tax Act will be recorded as they are identified during the measurement period and we may record additional provisional amounts or adjustments to provisional amounts during 2018.
A reconciliation of the U.S. statutory income tax rate to the Company’s effective tax rate is as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. statutory tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
State and local taxes, net of federal benefit |
|
|
1.0 |
% |
|
|
4.9 |
% |
|
|
6.2 |
% |
|
State rate change impact on deferred taxes |
|
|
0.8 |
% |
|
|
(1.4 |
)% |
|
|
6.9 |
% |
|
Federal rate change impact on deferred taxes |
|
|
77.8 |
% |
|
|
— |
% |
|
|
— |
% |
|
Tax benefit arrangement liability adjustment |
|
|
(25.8 |
)% |
|
|
— |
% |
|
|
(2.1 |
)% |
|
Foreign tax rate differential |
|
|
— |
% |
|
|
(0.3 |
)% |
|
|
0.3 |
% |
|
Withholding taxes and other |
|
|
0.1 |
% |
|
|
— |
% |
|
|
0.2 |
% |
|
Reserve for uncertain tax position |
|
|
0.1 |
% |
|
|
3.1 |
% |
|
|
— |
% |
|
Income attributable to non-controlling interests |
|
|
(1.9 |
)% |
|
|
(20.5 |
)% |
|
|
(27.1 |
)% |
|
Effective tax rate |
|
|
87.1 |
% |
|
|
20.8 |
% |
|
|
19.4 |
% |
The Company incurs U.S. federal and state income taxes on its pro rata share of income flowed through from Pla-Fit Holdings. Our current tax rate on such income was approximately 39.5%, 39.5%, and 39.4% for the years ended December 31, 2017, 2016 and 2015, respectively. The provision for income taxes also reflects a state tax rate of 2.1%, 2.0% and 2.5% for the years ended December 31, 2017, 2016 and 2015, respectively, applied to non-controlling interests, representing the remaining percentage of income before taxes, excluding income from variable interest entities, related to Pla-Fit Holdings. As of December 31, 2017, the Company recorded U.S. tax on mandatory repatriation of the undistributed earnings of foreign operations as well as foreign withholding tax. Undistributed earnings of foreign operations were not material for the year ended December 31, 2016.
Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the accompanying consolidated balance sheets. These temporary differences result in taxable or deductible amounts in future years. Details of the Company’s deferred tax assets and liabilities are summarized as follows:
|
|
|
Year Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Accrued expense and reserves |
|
$ |
1,422 |
|
|
$ |
865 |
|
|
Deferred revenue |
|
|
1,900 |
|
|
|
2,029 |
|
|
Goodwill and intangible assets |
|
|
404,547 |
|
|
|
406,447 |
|
|
Net operating loss |
|
|
603 |
|
|
|
22 |
|
|
Other |
|
|
3,619 |
|
|
|
4,218 |
|
|
Deferred tax assets |
|
$ |
412,091 |
|
|
$ |
413,581 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Prepaid expenses |
|
|
(773 |
) |
|
|
(781 |
) |
|
Property and equipment |
|
|
(5,165 |
) |
|
|
(3,631 |
) |
|
Total deferred tax liabilities |
|
$ |
(5,938 |
) |
|
$ |
(4,412 |
) |
|
Total deferred tax assets and liabilities |
|
$ |
406,153 |
|
|
$ |
409,169 |
|
|
|
|
|
|
|
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
Deferred income taxes - non-current assets |
|
$ |
407,782 |
|
|
$ |
410,407 |
|
|
Deferred income taxes - non-current liabilities |
|
|
(1,629 |
) |
|
|
(1,238 |
) |
|
Total deferred tax assets and liabilities |
|
$ |
406,153 |
|
|
$ |
409,169 |
|
The Company has net operating loss carryforwards related to its U.S. operations of approximately $2,725, which begin to expire in 2037. The Company believes as of December 31, 2017 it is more likely than not that the results of future operations will generate sufficient taxable income to realize all deferred tax assets, and as such no value allowance has been recorded.
A summary of the changes in the Company’s unrecognized tax positions is as follows:
|
|
|
Year Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Balance at beginning of year |
|
$ |
2,608 |
|
|
$ |
300 |
|
|
Increases related to prior year tax positions |
|
|
— |
|
|
|
2,308 |
|
|
Balance at end of year |
|
$ |
2,608 |
|
|
$ |
2,608 |
|
During the year ended December 31, 2017, the Company recognized $152 within current tax expense related to the interest on a reserve for an uncertain tax position. The uncertain tax position relates to a potential liability associated with a 2012 state filing position currently under audit by the taxing authorities. While the Company believes it is more likely than not that its position will be sustained, the amount recorded after assessing the likelihood of various potential outcomes is based upon the facts and circumstances known as of December 31, 2017. In connection with the 2012 Acquisition of Pla-Fit Holdings on November 8, 2012 by TSG, the sellers are obligated to indemnify the Company for certain pre-acquisition tax liabilities. The Company has therefore recorded an asset and corresponding other income of $152 in connection with the indemnification in the year ended December 31, 2017.
The Company recognizes interest and penalties, if applicable, related to uncertain tax positions as a component of income tax expense. Interest and penalties recorded for the years ended December 31, 2017 and 2016 were $152 and $465, respectively. Interest and penalties for the year ended December 31, 2015 were not material.
As of December 31, 2017 and 2016, the total liability related to uncertain tax positions was $2,608, excluding interest. The amount of unrecognized tax benefits as of December 31, 2017 that, if recognized, would reduce income tax expense is $2,608. As of December 31, 2017, the Company anticipates that the liability for unrecognized tax benefits could decrease by up to $2,608 within the next twelve months due to the expiration of certain statutes of limitation or the settlement of examinations or issues with tax authorities.
The Company and its subsidiaries file U.S. federal income tax returns, as well as tax returns in various state and foreign jurisdictions. Generally, the tax years 2014 through 2017 remain open to examination by the tax authorities in these jurisdictions. The Company is currently under audit in its primary state jurisdiction, New Hampshire, for 2012 and 2013.
Tax benefit arrangements
The Company’s acquisition of Holdings Units in connection with the IPO and future and certain past exchanges of Holdings Units for shares of the Company’s Class A common stock (or cash at the option of the Company) are expected to produce and have produced favorable tax attributes. In connection with the IPO, the Company entered into two tax receivable agreements. Under the first of those agreements, the Company generally is required to pay to the TRA Holders 85% of the applicable tax savings, if any, in U.S. federal and state income tax that the Company is deemed to realize as a result of certain tax attributes of their Holdings Units sold to the Company (or exchanged in a taxable sale) and that are created as a result of (i) the sales of their Holdings Units for shares of Class A common stock and (ii) tax benefits attributable to payments made under the tax receivable agreement (including imputed interest). Under the second tax receivable agreement, the Company generally is required to pay to the Direct TSG Investors 85% of the amount of tax savings, if any, that the Company is deemed to realize as a result of the tax attributes of the Holdings Units held in respect of the Direct TSG Investors’ interest in the Company, which resulted from the Direct TSG Investors’ purchase of interests in Pla-Fit Holdings in 2012, and certain other tax benefits. Under both agreements, the Company generally retains the benefit of the remaining 15% of the applicable tax savings. Also, pursuant to the exchange agreement (see Note 11), to the extent an exchange results in Pla-Fit Holdings, LLC incurring a current tax liability relating to the New Hampshire business profits tax, the TRA Holders have agreed that they will contribute to Pla-Fit Holdings, LLC an amount sufficient to pay such liability (up to 3.5% of the value receive upon exchange). If and when the Company subsequently realizes a related tax benefit, Pla-Fit Holdings, LLC will distribute the amount of any such tax benefit to the relevant TRA LLC Owner in respect of its contribution. Due to changes in New Hampshire tax law during 2016, the Company no longer expects to incur any such liability under the New Hampshire business profits tax. The Company recorded other income of $317,353, other expense of $72 and other income of $2,549 in the years ended December 31, 2017, 2016 and 2015, respectively, reflecting a change in the tax benefit obligation attributable to a change in the expected tax benefits. Included in this amount in 2017, was a gain of $316,813 related to the remeasurement of our tax benefit arrangements in connection with changes in the tax rate due to the 2017 Tax Act. This remeasurement gain, which is not subject to federal or state income tax, favorably impacted our effective federal and state income tax rates in 2017.
In connection with the exchanges that occurred in the secondary offerings and other exchanges during 2017 and 2016, 25,842,004 and 24,704,610 Holdings Units, respectively, were redeemed by the Continuing LLC Owners for newly-issued shares of Class A common stock, resulting in an increase in the tax basis of the net assets of Pla-Fit Holdings subject to the provisions of the tax receivable agreements. As a result of the change in Planet Fitness, Inc.’s ownership percentage of Pla-Fit Holdings that occurred in conjunction with the exchanges, we recorded a decrease to our net deferred tax assets of $24,371 and $25,046, during the years ended December 31, 2017 and 2016, respectively. As a result of these exchanges, during the years ended December 31, 2017 and 2016 we also recognized deferred tax assets in the amount of $394,108 and $332,471, respectively, and corresponding tax benefit arrangement liabilities of $341,089 and $285,730, respectively, representing 85% of the tax benefits due to the TRA Holders. The offset to the entries recorded in connection with exchanges in each year was to stockholders’ equity.
The tax benefit obligation was $431,360 and $419,071 as of December 31, 2017 and 2016, respectively.
Projected future payments under the tax benefit arrangements are as follows:
|
|
|
Amount |
|
|
|
2018 |
|
$ |
31,062 |
|
|
2019 |
|
|
23,298 |
|
|
2020 |
|
|
23,596 |
|
|
2021 |
|
|
24,010 |
|
|
2022 |
|
|
24,482 |
|
|
Thereafter |
|
|
304,912 |
|
|
Total |
|
$ |
431,360 |
|