Note 16. Income Taxes
We have elected on our U.S. federal income tax return to be treated as a REIT and thus have no provision for U.S. federal income tax related to activities of the REIT and its passthrough subsidiaries. The REIT and certain of its subsidiaries are subject to certain state and local income taxes, franchise taxes, and gross receipts taxes. Our TRSs are subject to U.S. federal, state and local corporate income taxes.
Income tax expense (benefit) for the years ended December 31, 2017 and 2016 and for the period from April 24, 2015 to December 31, 2015 as reported in the accompanying Consolidated Statement of Income was comprised of the following:
|
|
|
Year Ended December 31, |
|
|
Period from |
|
||||||
|
(Thousands) |
|
2017 |
|
|
2016 |
|
|
April 24 - December 31, 2015 |
|
|||
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
1,456 |
|
|
$ |
1,596 |
|
|
$ |
1,208 |
|
|
State |
|
|
866 |
|
|
|
1,107 |
|
|
|
741 |
|
|
Total current expense |
|
|
2,322 |
|
|
|
2,703 |
|
|
|
1,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(36,956 |
) |
|
|
(1,488 |
) |
|
|
(770 |
) |
|
State |
|
|
(3,837 |
) |
|
|
(698 |
) |
|
|
(441 |
) |
|
Foreign |
|
|
(378 |
) |
|
|
- |
|
|
|
- |
|
|
Total deferred expense |
|
|
(41,171 |
) |
|
|
(2,186 |
) |
|
|
(1,211 |
) |
|
Total income tax (benefit) expense |
|
$ |
(38,849 |
) |
|
$ |
517 |
|
|
$ |
738 |
|
An income tax expense reconciliation between the U.S. statutory tax rate and the effective tax rate is as follows:
|
|
|
Year Ended December 31, |
|
|
Period from |
|
||||||
|
(Thousands) |
|
2017 |
|
|
2016 |
|
|
April 24 - December 31, 2015 |
|
|||
|
Income from continuing operations, before tax |
|
$ |
(47,667 |
) |
|
$ |
305 |
|
|
$ |
24,795 |
|
|
Income tax at U.S. statutory federal rate |
|
|
(16,687 |
) |
|
|
107 |
|
|
|
8,665 |
|
|
Increases (decreases) resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal benefit |
|
|
(429 |
) |
|
|
(224 |
) |
|
|
266 |
|
|
Benefit of REIT status |
|
|
8,836 |
|
|
|
(4,016 |
) |
|
|
(8,193 |
) |
|
Capitalized transaction costs |
|
|
(4,820 |
) |
|
|
(3,915 |
) |
|
|
- |
|
|
Change in valuation allowance |
|
|
(8,176 |
) |
|
|
8,176 |
|
|
|
- |
|
|
Adjustment of deferred tax balances |
|
|
(217 |
) |
|
|
149 |
|
|
|
- |
|
|
Permanent differences |
|
|
60 |
|
|
|
52 |
|
|
|
- |
|
|
Foreign taxes |
|
|
(378 |
) |
|
|
- |
|
|
|
- |
|
|
Rate differential |
|
|
(17,038 |
) |
|
|
188 |
|
|
|
- |
|
|
Income tax (benefit) expense |
|
$ |
(38,849 |
) |
|
$ |
517 |
|
|
$ |
738 |
|
The effective tax rate on income from continuing operations differs from tax at the statutory rate primarily due to our status as a REIT, certain capitalized costs incurred to acquire assets that were transferred to a TRS, changes in valuation allowance related to deferred tax assets of a TRS, and the impact of corporate tax reform, discussed below.
The Tax Cuts and Jobs Act (“Tax Bill”) was enacted on December 22, 2017. The Tax Bill reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.
At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Tax Bill; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment.
For the items for which we were able to determine a reasonable estimate, we recognized a non-cash provisional benefit in the amount of $17.0 million due to the revaluing of the Company’s deferred tax liabilities, which is included as a component of income tax expense from continuing operations. Given the current structure of the Company, it is anticipated that there will be limited to no impact related to the one-time transition tax on historic foreign earnings.
Future regulatory and rulemaking interpretations and decisions of the Tax Bill may impact the Company’s tax position. Therefore the estimated impact of provisions outside of the write-down of cumulative deferred tax liabilities remains uncertain. Corrective or supplemental legislation and its impact will be considered in the Company’s financial statements in the period ending September 30, 2018.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
The components of the Company's deferred tax assets and liabilities are as follows:
|
(Thousands) |
|
December 31, 2017 |
|
|
December 31, 2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
$ |
17,114 |
|
|
$ |
4,244 |
|
|
Accrued bonuses |
|
|
101 |
|
|
|
520 |
|
|
Goodwill |
|
|
- |
|
|
|
1,886 |
|
|
Stock based compensation |
|
|
506 |
|
|
|
179 |
|
|
Accrued expenses and other |
|
|
2,023 |
|
|
|
802 |
|
|
Asset retirement obligation |
|
|
1,341 |
|
|
|
790 |
|
|
Inventory reserve |
|
|
248 |
|
|
|
401 |
|
|
Net operating loss carryforwards |
|
|
36,229 |
|
|
|
39,916 |
|
|
Deferred tax assets |
|
|
57,562 |
|
|
|
48,738 |
|
|
Valuation allowance |
|
|
- |
|
|
|
(8,176 |
) |
|
Deferred tax assets, net of valuation allowance |
|
|
57,562 |
|
|
|
40,562 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Property, plant & equipment |
|
$ |
(43,817 |
) |
|
$ |
(20,923 |
) |
|
Customer list intangible |
|
|
(68,795 |
) |
|
|
(47,721 |
) |
|
Other intangible amortization |
|
|
(291 |
) |
|
|
(137 |
) |
|
Other |
|
|
(137 |
) |
|
|
(175 |
) |
|
Deferred tax liabilities |
|
$ |
(113,040 |
) |
|
$ |
(68,956 |
) |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability, net |
|
$ |
(55,478 |
) |
|
$ |
(28,394 |
) |
As of December 31, 2016, the Company’s deferred tax assets were primarily the result of U.S. federal and state NOL carryforwards. A valuation allowance of $8.2 million was recorded against its gross deferred tax asset balance as of December 31, 2016. During 2017, the Company recorded a full-year valuation allowance release of $8.2 million on the basis of management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized.
As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. Given the Company has significant deferred tax liabilities which are not limited by Sec. 269(a)(1) of the Code, management determined that sufficient positive evidence exists as of December 31, 2017, to conclude that it is more likely than not that additional deferred taxes of $8,176 are realizable, and therefore, removed the valuation allowance accordingly.
On August 31, 2016, we acquired 100% of the outstanding equity of Tower Cloud, Inc., which had federal NOL carryforwards of approximately $81.2 million at the date of the acquisition that will expire between 2026 and 2036. As a result of the change in ownership, the utilization of Tower Cloud, Inc. NOL carryforwards is subject to limitations imposed by the Code.
We have total federal NOL carryforwards as of December 31, 2017 of approximately $133.8 million which will expire between 2026 and 2037.
With the exception of Tower Cloud, Inc., our 2014 returns remain open to examination. As Tower Cloud, Inc. has NOLs available to carry forward, the applicable tax years will generally remain open to examination several years after the applicable loss carryforwards have been utilized or expire.
The Company or its subsidiaries file tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, and certain foreign jurisdictions. A reconciliation of the Company’s beginning and ending liability for unrecognized tax benefits is as follows:
|
(Thousands) |
|
2017 |
|
|
|
Balance at January 1 |
|
$ |
- |
|
|
Additions related to acquisitions |
|
|
3,036 |
|
|
Additions for tax positions for the current year |
|
|
- |
|
|
Additions for tax positions of prior years |
|
|
- |
|
|
Reductions for tax positions of prior years |
|
|
- |
|
|
Settlements |
|
|
- |
|
|
Balance at December 31 |
|
$ |
3,036 |
|
The Company’s entire liability for unrecognized tax benefit would affect the annual effective tax rate if recognized. The Company does not expect a significant change in the balance of unrecognized tax benefits within the next 12 months.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as additional tax expense. The Company recorded no interest expense or penalties for the period ending December 31, 2017. The Company’s balance of accrued interest and penalties related to unrecognized tax benefits as of December 31, 2017 was $2.3 million.