Income Taxes
The components of the provision for income taxes for the years ended December 31, 2017, 2016, and 2015, were as follows:
|
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income before income taxes: | | | | | |
Domestic | $ | 717,496 |
| | $ | 942,436 |
| | $ | 1,289,612 |
|
Foreign | 106,018 |
| | 218,275 |
| | — |
|
Total | $ | 823,514 |
| | $ | 1,160,711 |
| | $ | 1,289,612 |
|
Current income tax expense (benefit): | | |
| | |
Federal | $ | (6,140 | ) | | $ | 2,481 |
| | $ | 33,798 |
|
State | (6,436 | ) | | 3,273 |
| | 4,491 |
|
Foreign | 4,273 |
| | 8,738 |
| | — |
|
Total current income tax expense (benefit) | $ | (8,303 | ) | | $ | 14,492 |
| | $ | 38,289 |
|
Deferred income tax expense (benefit): | | | | | |
Federal | (386,703 | ) | | 343,816 |
| | 387,686 |
|
State | 30,953 |
| | 35,944 |
| | 39,597 |
|
Foreign | (39 | ) | | (7 | ) | | — |
|
Total deferred income tax expense (benefit) | (355,789 | ) | | 379,753 |
| | 427,283 |
|
Total income tax expense (benefit) | $ | (364,092 | ) | | $ | 394,245 |
| | $ | 465,572 |
|
In December 2015, the Company formed a wholly-owned foreign subsidiary that is licensed in Puerto Rico as an IFE ("International Financial Entity") under the Government approved Act Number 273. This classification results in the granting of a tax decree securing a 4% fixed income tax rate and a number of non income tax benefits for an initial period of fifteen (15) years.
The Company provides U.S. income taxes on earnings of foreign subsidiaries unless the subsidiaries' earnings are considered indefinitely reinvested outside of the United States. The Company has historically provided deferred taxes under ASC 740-30-25, formerly APB 23, for the presumed repatriation to the United States earnings from the Company’s Puerto Rican subsidiary, SCI. In June 2017, the Company asserted that undistributed net earnings of SCI would be indefinitely reinvested outside the United States. This change in assertion was primarily driven by the Company's future United States cash projections and the Company’s intent to indefinitely reinvest the earnings outside of the United States. The Company had $156.7 million of undistributed net earnings and a $52.8 million unrecorded deferred tax liability at September 30, 2017.
During the three months ended December 31, 2017, the Company changed its assertion to reflect a change in management’s strategic objective to no longer permanently reinvest the earnings. Under ASC 740-30 (formerly APB 23), unremitted earnings that are no longer permanently invested would become subject to deferred income taxes under United States law. As a result of this change, the Company recognized $55.7 million of additional income tax expense during the three months ended December 31, 2017 to record the applicable U.S. deferred income tax liability.
As of December 31, 2017 and 2016, the Company has no earnings which are considered indefinitely reinvested.
The reconciliation of the federal statutory income tax rate to the Company’s effective income tax rates for the years ended December 31, 2017, 2016, and 2015, is as follows:
|
| | | | | | | | |
| For the Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State and local income taxes — net of federal income tax benefit | 2.3 |
| | 2.5 |
| | 2.3 |
|
Valuation allowance | — |
| | (2.2 | ) | | (0.2 | ) |
Electric vehicle credit | (2.9 | ) | | (2.3 | ) | | (1.8 | ) |
Tax reform - deferred impact | (82.3 | ) | | — |
| | — |
|
Tax reform - transition tax | 3.1 |
| | — |
| | — |
|
Other | 0.6 |
| | 1.0 |
| | 0.8 |
|
Effective income tax rate | (44.2 | )% | | 34.0 | % | | 36.1 | % |
On December 22, 2017, H.R.1, known as the "Tax Cuts and Jobs Act," was signed into law. The Tax Cuts and Jobs Act permanently lowered the corporate tax rate from the previous rate of 35 percent to 21 percent, effective for tax years beginning January 1, 2018. As a result of the reduction of the corporate tax rate, U.S. GAAP require companies to revalue their deferred tax assets and liabilities with resulting tax effects accounted for in the reporting period of enactment. The Company recorded a one-time $677,509 benefit primarily due to the revaluation of its U.S. deferred tax liabilities at the lower 21% U.S. federal corporate income tax rate. The Tax Cuts and Jobs Act also created a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. The Company recorded a $25,143 expense related to its Puerto Rican subsidiary, SCI.
Due to the complexities involved in accounting for the enactment of the Tax Cuts and Jobs Act, SEC Staff Accounting Bulletin (SAB) 118 clarifies accounting for income taxes under ASC Topic 740, Income Taxes (ASC 740), if information is not yet available or complete and provides for up to a one-year period in which to complete the required analyses and accounting (the measurement period). SAB 118 describes three scenarios (or buckets) associated with a company’s status of accounting for income tax reform: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply ASC 740, based on the provisions of the tax laws that were in effect immediately prior to the Tax Cuts and Jobs Act being enacted.
The Company has obtained and analyzed all currently available information to record the effect of the change in tax law. However, should the Internal Revenue Service (IRS) issue further guidance or interpretation of relevant aspects of the new tax law, we may adjust these amounts.
The Tax Cuts and Jobs Act also requires a U.S. shareholder of a controlled foreign corporation (CFC) to include in income, as a deemed dividend, the global intangible low-taxed income (GILTI) of the CFC. This provision is effective for taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. The Company has elected to treat taxes due on future U.S. inclusions in taxable income under the GILTI provision as a current period expense when incurred.
The Company is a party to a tax sharing agreement requiring that the unitary state tax liability among affiliates included in unitary state tax returns be allocated using the hypothetical separate company tax calculation method. Under the hypothetical separate company method, the Company recorded a deemed contribution from affiliates in the amount of $1,304, which is included in additional paid-in capital section in the accompanying consolidated balance sheets. At December 31, 2017 and 2016, the Company had a net receivable from affiliates under the tax sharing agreement of $467 and $1,087, respectively, which was included in Related party taxes receivable in the consolidated balance sheet.
The tax effects of temporary differences between the financial reporting and income tax basis of assets and liabilities at December 31, 2017 and 2016, are as follows:
|
| | | | | | | |
| December 31,
2017 | | December 31,
2016 |
Deferred tax assets: | | |
|
Debt issuance costs | $ | 4,181 |
| | $ | 5,001 |
|
Receivables | 512,177 |
| | 474,366 |
|
Net operating loss carryforwards | 356,030 |
| | 603,136 |
|
Equity-based compensation | 14,258 |
| | 23,042 |
|
Credit carryforwards | 163,140 |
| | 127,933 |
|
Other | 32,264 |
| | 34,257 |
|
Total gross deferred tax assets | 1,082,050 |
| | 1,267,735 |
|
Deferred tax liabilities: | | | |
Capitalized origination costs | (4,229 | ) | | (10,804 | ) |
Goodwill | (11,278 | ) | | (15,375 | ) |
Leased vehicles | (1,942,273 | ) | | (2,421,114 | ) |
Furniture and equipment | (7,201 | ) | | (9,638 | ) |
Derivatives | (9,966 | ) | | (17,635 | ) |
Unremitted foreign earnings | — |
| | (67,720 | ) |
Other | (925 | ) | | (1,012 | ) |
Total gross deferred tax liabilities | (1,975,872 | ) | | (2,543,298 | ) |
Valuation allowance | (3,299 | ) | | (2,501 | ) |
Net deferred tax asset (liability) | $ | (897,121 | ) | | $ | (1,278,064 | ) |
At December 31, 2017 and 2016, the Company’s largest deferred tax liability was leased vehicles of $1,942,273 and $2,421,114, respectively. The decrease in this liability is primarily due to the enactment of the Tax Cuts and Jobs Act of 2017.
The Company has a like-kind exchange program for the leased auto portfolio. Pursuant to the program, the Company disposes of vehicles and acquires replacement vehicles in a form whereby tax gains on disposal of eligible vehicles are deferred. To qualify for like-kind exchange treatment, the Company exchanges through a qualified intermediary eligible vehicles being disposed of with vehicles being acquired, allowing SC to generally carryover the tax basis of the vehicles sold (“like-kind exchanges”). The program results in a material deferral of federal and state income taxes, and a decrease in cash taxes in periods when the Company is not in a net operating loss (NOL) position. As part of the program, the proceeds from the sale of eligible vehicles are restricted for the acquisition of replacement vehicles and other specified applications. The Tax Cuts and Jobs Act permanently eliminated the ability to exchange personal property after January 1, 2018 which will result in the like-kind exchange program being discontinued in 2018.
The Company began generating qualified plug-in electric vehicle credits in 2013; the credit carryforwards will begin expiring in 2034.
At adoption of ASU 2016-09 on January 1, 2017, the cumulative-effect for previously unrecognized excess tax benefits totaled $26,552 net of tax, and was recognized, as an increase, through an adjustment in beginning retained earnings. The Company recorded excess tax deficiency, net of tax of $796 in the provision for income taxes rather than as a decrease to additional paid-in capital for the year ended December 31, 2017, on a prospective basis. Therefore, the prior period presented has not been adjusted.
At December 31, 2017, the Company has federal net operating loss carryforwards of $1,561,870, which may be offset against future taxable income. If not utilized in future years, these will expire in varying amounts through 2037. The Company has state net operating loss carryforwards of $432,877, which may be used against future taxable income. If not utilized in future years, these will expire in varying amounts through 2037.
As of December 31, 2017, the Company had recorded a valuation allowance for state tax net operating loss carryforwards for which it does not have a tax-planning strategy in place. A rollforward of the valuation allowance for the years ended December 31, 2017, 2016, and 2015 is as follows:
|
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Valuation allowance, beginning of year | $ | 2,501 |
| | $ | 30,489 |
| | $ | 32,901 |
|
Provision (release) | 798 |
| | (27,988 | ) | | (2,412 | ) |
Valuation allowance, end of year | $ | 3,299 |
| | $ | 2,501 |
| | $ | 30,489 |
|
A reconciliation of the beginning and ending balances of gross unrecognized tax benefits for each of the years ended December 31, 2017, 2016, and 2015 is as follows:
|
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Gross unrecognized tax benefits balance, January 1 | $ | 16,736 |
| | $ | 225 |
| | $ | 166 |
|
Additions for tax positions taken in the current year | — |
| | 16,606 |
| | — |
|
Additions for tax positions of prior years | 473 |
| | — |
| | 70 |
|
Reductions for tax positions of prior years | (589 | ) | | (34 | ) | | (11 | ) |
Reductions as a result of a lapse of the applicable statute of limitations | (1,874 | ) | | — |
| | — |
|
Settlements | — |
| | (61 | ) | | — |
|
Gross unrecognized tax benefits balance, December 31 | $ | 14,746 |
| | $ | 16,736 |
| | $ | 225 |
|
At December 31, 2017, 2016, and 2015, there were $14,615, $16,606 and $95, respectively, of net unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. Accrued interest and penalties associated with uncertain tax positions are recognized as a component of the income tax provision. Accrued interest and penalties of $653, $1,551, and $85 are included with the related tax liability line in the accompanying consolidated balance sheets as of December 31, 2017, 2016, 2015, respectively.
At December 31, 2017, the Company believes that it is reasonably possible that a portion of the balance of the gross unrecognized tax benefits could decrease to zero in the next twelve months due to ongoing activities with various taxing jurisdictions that the Company expects may give rise to settlements or the expiration of statute of limitations. The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law, and new authoritative rulings.
The Company is subject to examination by federal and state taxing authorities. Periods subsequent to December 31, 2010 are open for audit by the IRS. The SHUSA consolidated return, of which the Company is a part through December 31, 2011, is currently under IRS examination for 2011. The Company's separate returns for 2012, 2013, and 2014 are also under IRS examination. Periods subsequent to December 31, 2008, are open for audit by various state taxing authorities.