(18) INCOME TAXES
The Company's income tax expense is attributable to the activities of the Company, PHSI and PSCI, all of which are subchapter C corporations. Under the provisions of federal and state statutes, Premier LP is not subject to federal and state income taxes. For federal and state income tax purposes, income realized by Premier LP is taxable to its partners. The Company, PHSI and PSCI are subject to U.S. federal and state income taxes.
Significant components of the consolidated expense for income taxes are as follows (in thousands):
|
| | | | | | | | | |
| Year Ended June 30, |
| 2017 | 2016 | 2015 |
Current: | | | |
Federal | $ | 16,638 |
| $ | 19,765 |
| $ | 15,240 |
|
State | 4,614 |
| 4,242 |
| 2,808 |
|
Total current expense | 21,252 |
| 24,007 |
| 18,048 |
|
Deferred: | | | |
Federal | 49,392 |
| 15,703 |
| 15,770 |
|
State | 11,170 |
| 10,011 |
| 2,524 |
|
Total deferred expense | 60,562 |
| 25,714 |
| 18,294 |
|
Provision for income taxes | $ | 81,814 |
| $ | 49,721 |
| $ | 36,342 |
|
The Company's effective income tax rate differs from income taxes recorded at the statutory rate primarily due to partnership income not subject to federal income taxes. A reconciliation of the amount at the statutory federal income tax rate to the actual tax expense is as follows, (in thousands):
|
| | | | | | | | | |
| Year Ended June 30, |
| 2017 | 2016 | 2015 |
Computed tax expense | $ | 185,952 |
| $ | 99,709 |
| $ | 94,895 |
|
Partnership income (federal) not subject to tax to the Company | (85,142 | ) | (85,063 | ) | (82,751 | ) |
State taxes (net of federal benefit) | 9,823 |
| 664 |
| 1,961 |
|
Remeasurement gain and other permanent items | (78,998 | ) | 1,051 |
| 1,840 |
|
Research and development credits | (2,239 | ) | (1,562 | ) | (2,160 | ) |
Expense (benefit) on subsidiaries treated separately for income tax purposes | 18,660 |
| (7,497 | ) | (6,323 | ) |
Change in valuation allowance | 26,829 |
| 36,279 |
| 28,210 |
|
Deferred tax revaluation | 9,950 |
| 8,080 |
| — |
|
Other | (3,021 | ) | (1,940 | ) | 670 |
|
Provision for income taxes | $ | 81,814 |
| $ | 49,721 |
| $ | 36,342 |
|
Effective income tax rate | 15.4 | % | 17.5 | % | 13.4 | % |
The decrease in the effective tax rate from the prior year is primarily attributable to the $78.1 million income tax benefit associated with the one-time gain related to the remeasurement of the 50% equity method investment in Innovatix to fair value upon acquisition of Innovatix and Essensa. This decrease is partially offset by $26.1 million in income tax expense related to the subsidiaries being treated separately for income tax purposes.
Deferred Income Taxes
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of June 30, 2017 and 2016 are presented below (in thousands):
|
| | | | | | |
| June 30, |
| 2017 | 2016 |
Deferred tax asset | | |
Partnership basis differences in Premier LP | $ | 473,193 |
| $ | 413,408 |
|
Stock compensation | 23,037 |
| 36,884 |
|
Accrued expenses | 44,096 |
| 33,438 |
|
Net operating losses and credits | 47,629 |
| 24,753 |
|
Other | 11,856 |
| 5,073 |
|
Total deferred tax assets | 599,811 |
| 513,556 |
|
Valuation allowance for deferred tax assets | (91,787 | ) | (64,958 | ) |
Net deferred tax assets | 508,024 |
| 448,598 |
|
Deferred tax liability | | |
Purchased intangible assets and depreciation | (71,994 | ) | (25,749 | ) |
Other liabilities | (1,774 | ) | — |
|
Net deferred tax asset | $ | 434,256 |
| $ | 422,849 |
|
At June 30, 2017, the Company had federal and state net operating loss carryforwards of $101.9 million and $113.6 million, respectively, primarily attributable to PHSI. The resulting federal and state deferred tax assets are approximately $35.7 million and $4.6 million, respectively. The federal and state net operating loss carryforwards expire between the years ended June 30, 2018 through June 30, 2036, unless utilized. A valuation allowance was established for a portion of federal and state losses as the Company believes it is more likely than not that all or a portion of these losses will not be realized in the near future.
At June 30, 2017, the Company had federal research and development credit carryforwards of $8.7 million. The federal credit carryforwards expire at various times between the years ended June 30, 2020 through June 30, 2037, unless utilized. A valuation allowance was established as the Company believes it is more likely than not that all or a portion of the federal and state credit carryforwards will not be realized in the near future.
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Annually, the Company assesses the future realization of the tax benefit of its existing deferred tax assets and determines whether a valuation allowance is needed. Based on the Company's assessment, we have concluded that it is more likely than not that a portion of the deferred tax assets will not be realized in the future. As a result, the Company recorded a valuation allowance of $91.8 million against its deferred tax assets at June 30, 2017, an increase of $26.8 million from the $65.0 million valuation allowance recorded as of June 30, 2016.
As of June 30, 2017 and 2016, the Company had net deferred tax assets of $434.3 million and $422.8 million, respectively. The June 30, 2017 balance was comprised of $482.5 million in deferred tax assets at Premier, Inc. offset by $48.2 million in deferred tax liabilities at PHSI and PSCI. The increase of $11.5 million in deferred tax assets was primarily attributable to $114.7 million of deferred tax assets recorded in connection with the exchanges of Class B common units pursuant to the Exchange Agreement that occurred during the twelve months ended June 30, 2017, partially offset by a $42.6 million deferred tax liability recorded upon acquisition of Innovatix primarily attributable to the excess of the financial reporting basis in the identifiable intangible assets over the tax basis. The deferred tax asset of $114.7 million associated with the exchanges of member owner Class B shares is directly reported to contributed capital and the $42.6 million deferred tax liability recorded in connection with the acquisition of Innovatix is reported to goodwill, resulting in a deferred income tax expense of $60.6 million during the year ended June 30, 2017 .
Unrecognized Tax Benefits
The Company recognizes income tax benefits for those income tax positions determined more likely than not to be sustained upon examination, based on the technical merits of the positions. The reserve for uncertain income tax positions is included in other liabilities in the Consolidated Balance Sheets. A reconciliation of the beginning and ending gross amounts of the Company's uncertain tax position reserves for the years ended June 30, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | |
| Year Ended June 30, |
| 2017 | 2016 | 2015 |
Beginning of year balance | $ | 4,381 |
| $ | 3,436 |
| $ | 1,438 |
|
Increases in prior period tax positions | 101 |
| 318 |
| 1,185 |
|
Decreases in prior period tax positions | (870 | ) | (201 | ) | — |
|
Decreases due to lapse in statute of limitations | (22 | ) | (721 | ) | (225 | ) |
Increases in current period tax positions | 1,453 |
| 1,549 |
| 1,038 |
|
End of year balance | $ | 5,043 |
| $ | 4,381 |
| $ | 3,436 |
|
If the Company were to recognize the benefits of these uncertain tax positions, the income tax provision and effective tax rate would be impacted by $4.1 million, $3.4 million and $3.2 million, including interest and penalties and net of the federal and state benefit for income taxes, for the years ended June 30, 2017, 2016 and 2015, respectively. The Company recognizes interest and penalties accrued on uncertain income tax positions as part of the income tax provision. The amount of accrued interest and penalties was $0.3 million and $0.4 million at June 30, 2017 and 2016.
The Company has determined that it is reasonably possible that its existing reserve for uncertain income tax positions at June 30, 2017 will change in the next twelve months, primarily related to ongoing state audits. The Company estimates the financial statement impact to be approximately $0.2 million.
Federal tax returns for tax years ended June 30, 2014, 2015 and 2016 remain open as of June 30, 2017. The Company is subject to ongoing state and local examinations for various periods. Activity related to these state and local examinations did not have a material impact on the Company's financial position or results of operations, nor does the company anticipate a material impact in the future.
The Company made cash tax payments of $26.1 million and $24.9 million during the years ended June 30, 2017 and 2016, respectively.