tronc, Inc.

INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21%, effective for tax years beginning after December 31, 2017. Under Staff Accounting Bulletin 118, the Company has included the estimated impact of the Act in the year end income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing. Accordingly, the Company has recorded $10.8 million as additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The additional provision amount results from the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future. The Company continues to analyze the impact of the Act, which could result in additional adjustments in future periods.

The following is a reconciliation of income taxes computed at the U.S. federal statutory rate to income tax expense reported in the Consolidated Statements of Income (Loss) (in thousands):



	Year ended
	December 31, 2017			December 25, 2016			December 27, 2015
Income (loss) before income taxes	$	37,216		$	25,461		$	(3,195	)
Federal income taxes at the statutory tax rate (35%)	13,026			8,911			(1,118		)
State and local income taxes, net of federal tax benefit	2,581			1,511			(380		)
Impact of U.S. tax reform	10,815			—			—
Tax on stock buyback premium	2,111			—			—
Tax on stock-based equity exercised	1,307			414			—
Nondeductible entertainment expenses	996			901			1,043
Tax basis adjustment	—			7,063			—
Other, net	845			124			25
Income tax expense (benefit)	$	31,681		$	18,924		$	(430	)
Effective tax rate	85.1		%	74.3		%	13.5		%

The effective tax rate on pretax income (loss) was 85.1%, 74.3% and 13.5%in the years ended December 31, 2017, December 25, 2016, and December 27, 2015 respectively. For 2017, the rate differs from the U.S. federal statutory rate of 35% primarily due to a $10.8 million adjustment to the Company’s deferred taxes to reflect the new tax law changes as described above, premium on stock buyback expense being a nondeductible permanent difference for the calculation of income taxes, state taxes, net of federal benefit, and nondeductible expenses. For 2016, the rate differs from the U.S. federal statutory rate of 35% primarily due to a $7.1 million charge to adjust the Company’s deferred taxes, as described below, state income taxes, net of federal benefit, and nondeductible expenses. For 2015, the rate differs from the U.S. federal statutory rate of 35% primarily due to the pretax loss in 2015. In the case of a pretax loss, the unfavorable permanent differences, such as non-deductible meals and entertainment expense, have the effect of decreasing the tax benefit which, in turn, decreases the effective tax rate.

Historical Tax Information—The Company filed an election effective December 30, 2013 to be taxed as a C corporation and has computed income taxes as a separate return filing group for 2014. Prior to the spin-off, current income taxes payable were settled with TCO through the equity (deficit) account.

During September 2016, TCO reached a resolution with the Internal Revenue Service (“IRS”) regarding a pre-spin tax issue. In connection with the resolution and in conjunction with the tax rules applicable to emergence from bankruptcy, TCO has adjusted the previously determined tax basis of its assets as of December 31, 2012. This adjustment affected the tax basis of the assets and liabilities, including the deferred tax liability, transferred to the Company as part of TCO’s August 4, 2014 spin-off of its publishing operations. As a result of the IRS resolution, the Company recorded a reduction in the tax basis of the shares in the Company transferred from TCO against the basis in TPC stock, a subsidiary of the Company, by $17.7 million, which resulted in an additional $7.1 million deferred tax liability and a $7.1 million charge to tax expense during the year ended December 25, 2016.

Components of income tax expense (benefit) were as follows (in thousands):



	Year ended
	December 31, 2017			December 25, 2016			December 27, 2015
Current:
U.S. federal	$	(1,190	)	$	(2,853	)	$	(808	)
State and local	115			(852		)	431
Foreign	59			67			108
Sub-total	(1,016		)	(3,638		)	(269		)
Deferred:
U.S. federal	29,204			17,948			854
State and local	3,493			4,614			(1,015		)
Sub-total	32,697			22,562			(161		)
Total income tax expense (benefit)	$	31,681		$	18,924		$	(430	)

Significant components of tronc’s net deferred tax assets and liabilities were as follows (in thousands):



	December 31, 2017		December 25, 2016
Deferred tax assets:
Employee compensation and benefits	$	22,795	$	33,554
Pension	29,938		37,472
Other future deductible items	4,475		6,148
Accounts receivable	4,615		6,834
Net operating loss carryforwards	1,006		2,277
Postretirement and postemployment benefits other than pensions	501		3,859
Investments	95		1,160
Total deferred tax assets	63,425		91,304
Deferred tax liabilities:
Net properties	24,550		16,378
Net intangibles	4,055		3,886
Tax basis in TCP, LLC	4,909		7,063
Total deferred tax liabilities	33,514		27,327
Net deferred tax assets	$	29,911	$	63,977

Accounting for Uncertain Tax Positions—tronc accounts for uncertain tax positions in accordance with ASC Topic 740, “Income Taxes,” which addresses the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under ASC Topic 740, a company may recognize the tax benefit of an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. ASC Topic 740 requires the tax benefit recognized in the financial statements to be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC Topic 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure. The Company has no uncertain tax positions at December 31, 2017 and December 25, 2016.