Income Taxes
We are included in the consolidated federal tax return of Caesars, but file a separate New Jersey tax return for CERP. We record income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the expected future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and as attributable to operating loss and tax credit carryforwards. We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the more likely than not realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused, and tax planning alternatives.
The effect on the income tax provision and deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We have provided a valuation allowance on federal and state deferred tax assets which were not deemed realizable based upon estimates of future taxable income.
We report unrecognized tax benefits within accrued expenses and deferred credits and other in our balance sheets, separate from related income tax payable, which is also reported within accrued expenses, or deferred income taxes. Reserve amounts relate to any potential income tax liabilities resulting from uncertain tax positions, as well as potential interest or penalties associated with those liabilities.
We are under regular and recurring audit by the Internal Revenue Service and various state taxing authorities on open tax positions, and it is possible that the amount of the liability for unrecognized tax benefits could change during the next 12 months.
Components of Income/(Loss) Before Income Taxes |
| | | | | | | | | | | |
| Years Ended December 31, |
(In millions) | 2016 | | 2015 | | 2014 |
Income/(loss) before income taxes | $ | (138 | ) | | $ | 11 |
| | $ | (433 | ) |
Income Tax Benefit/(Provision) |
| | | | | | | | | | | |
| Years Ended December 31, |
(In millions) | 2016 | | 2015 | | 2014 |
Current: | | | | | |
Federal | $ | (76 | ) | | $ | (99 | ) | | $ | 2 |
|
State | — |
| | — |
| | 21 |
|
| (76 | ) | | (99 | ) | | 23 |
|
Deferred | 128 |
| | 94 |
| | 5 |
|
Income tax benefit/(provision) | $ | 52 |
| | $ | (5 | ) | | $ | 28 |
|
Allocation of Income Tax Benefit/(Provision) |
| | | | | | | | | | | |
| Years Ended December 31, |
(In millions) | 2016 |
| 2015 |
| 2014 |
Income tax benefit/(provision) applicable to: |
|
|
|
|
|
|
|
|
Income before income taxes | $ | 52 |
| | $ | (5 | ) | | $ | 28 |
|
Effective Income Tax Rate Reconciliation |
| | | | | | | | |
| Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
Statutory tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Increases/(decreases) in tax resulting from: | | | | | |
State taxes, net of federal tax benefit | 1.2 |
| | 17.5 |
| | (6.6 | ) |
Nondeductible goodwill impairment | — |
| | — |
| | (23.4 | ) |
Change in valuation allowance | — |
| | — |
| | (1.7 | ) |
Nondeductible expenses | (0.4 | ) | | 1.5 |
| | (0.1 | ) |
Federal tax credits | 1.4 |
| | (11.3 | ) | | 0.3 |
|
Reserve for uncertain tax positions | 0.1 |
| | — |
| | 3.0 |
|
Other | 0.4 |
| | 2.8 |
| | — |
|
Effective tax rate | 37.7 | % | | 45.5 | % | | 6.5 | % |
Temporary Differences Resulting in Deferred Tax Assets and Liabilities |
| | | | | | | |
| As of December 31, |
(In millions) | 2016 | | 2015 |
Deferred tax assets: | | | |
Compensation programs | $ | 12 |
| | $ | 10 |
|
Accrued restructuring and support expenses and other | 47 |
| | — |
|
Allowance for doubtful accounts | 7 |
| | 10 |
|
CRDA investment obligation | 5 |
| | 3 |
|
Other | 1 |
| | 1 |
|
State net operating loss carry forwards | 2 |
| | 3 |
|
| 74 |
| | 27 |
|
Valuation allowance | (8 | ) | | (8 | ) |
| 66 |
| | 19 |
|
Deferred tax liabilities: | | | |
Depreciation and other property related items | 912 |
| | 919 |
|
Intangibles | 88 |
| | 106 |
|
Prepaid expenses | 9 |
| | 9 |
|
Debt costs | 97 |
| | 152 |
|
| 1,106 |
| | 1,186 |
|
Net deferred tax liability | $ | 1,040 |
| | $ | 1,167 |
|
Reconciliation of Unrecognized Tax Benefits |
| | | | | | | | | | | |
| Years Ended December 31, |
(In millions) | 2016 | | 2015 | | 2014 |
Balance as of beginning of year | $ | 3 |
| | $ | 3 |
| | $ | 13 |
|
Additions based on tax positions related to the current year | — |
| | — |
| | 1 |
|
Expiration of statutes | — |
| | — |
| | (11 | ) |
Balance as of year end | $ | 3 |
| | $ | 3 |
| | $ | 3 |
|
We accrue interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2016, 2015, and 2014 there was no accrual required for interest and penalties. As of December 31, 2016, 2015 and 2014, there were no unrecognized tax benefits that, if recognized, would impact the effective tax rate.
We believe that it is reasonably possible that the total amount of unrecognized tax benefits as of December 31, 2016 will not materially change within the next 12 months. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although we believe that an adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on our earnings. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, thus having a favorable impact on earnings.
As of December 31, 2016, CERP had state net operating loss (“NOL”) carryforwards of $38 million, which will begin to expire in 2034. We believe it is more likely than not that CERP will realize the tax benefit of the state NOL deferred tax assets as CERP has sufficient sources of future state taxable income through reversing taxable temporary differences.
CERP is included in the CEC consolidated tax return filing. We have allocated taxes based upon the separate return method for CERP financial reporting purposes. Historically, we have treated taxes paid or refunds received by CEC for CERP as equity contributions or distributions. Although there is no formal tax sharing agreement in place between the CERP entities and CEC for federal income tax purposes, CERP may make payments to CEC or its subsidiaries for federal, state, or local taxes that would have been paid if CERP was a standalone taxpayer.
The tax years that remain open for examination for our major jurisdictions are 2012 through 2015 for New Jersey. The tax years of 2010 through 2015 remain open for examination for U.S. tax purposes.