Income Taxes
The income tax (benefit) expense for the years ended December 31, 2017, 2016 and 2015 consists of the following (in millions):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 10.4 |
| | $ | 15.3 |
| | $ | 0.5 |
|
State | 5.3 |
| | 6.0 |
| | 0.7 |
|
Foreign | 0.9 |
| | 1.0 |
| | 0.4 |
|
Total current | 16.6 |
| | 22.3 |
| | 1.6 |
|
| | | | | |
Deferred: | | | | | |
Federal | (87.5 | ) | | 5.0 |
| | 11.3 |
|
State | 9.1 |
| | (1.1 | ) | | 0.5 |
|
Foreign | — |
| | (0.4 | ) | | — |
|
Total deferred | (78.4 | ) | | 3.5 |
| | 11.8 |
|
Total income tax (benefit) expense | $ | (61.8 | ) | | $ | 25.8 |
| | $ | 13.4 |
|
For the period through May 25, 2015, the day prior to the IPO, BKFS LLC was treated as a partnership under applicable federal and state income tax laws. Corporate subsidiaries were subject to applicable U.S. federal, foreign and state taxation.
For periods after the IPO, Black Knight is treated as a corporation under applicable federal and state income tax laws. Following the Distribution and THL Interest Exchange, we no longer have any noncontrolling interests. Deferred tax assets and liabilities are recognized for temporary differences between the financial reporting basis and the tax basis of the corporate subsidiaries' assets and liabilities and expected benefits of utilizing net operating loss carryforwards.
A reconciliation of the federal statutory income tax rate of 35.0% to our effective income tax rate for the years ended December 31, 2017, 2016 and 2015 is as follows:
|
| | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal benefit | 2.9 |
| | 2.0 |
| | 1.3 |
|
Noncontrolling interests | (13.7 | ) | | (19.2 | ) | | (14.9 | ) |
Partnership income not subject to tax | — |
| | — |
| | (7.7 | ) |
Tax credits | (0.6 | ) | | (0.6 | ) | | (0.3 | ) |
Transaction costs | 1.4 |
| | — |
| | — |
|
Domestic production activities deduction | (0.5 | ) | | (1.1 | ) | | — |
|
Effect of Tax Reform Act | (57.6 | ) | | — |
| | — |
|
Other | 1.0 |
| | 0.1 |
| | 0.6 |
|
Effective tax rate | (32.1 | )% | | 16.2 | % | | 14.0 | % |
On December 22, 2017, the Tax Reform Act was signed into law. Among other provisions, the Tax Reform Act reduces the Federal statutory corporate income tax rate from 35% to 21%. During the fourth quarter of 2017, we recorded a one-time, non-cash net tax benefit of $110.9 million related to the revaluation of our deferred income tax assets and liabilities as a result of the Tax Reform Act.
Prior to the Distribution and THL Interest Exchange, our net deferred tax liability was primarily related to our investment in BKFS LLC. Following the Distribution, we indirectly own 100% of BKFS LLC and recorded a non-cash transaction resulting in an increase of $292.5 million to Deferred income taxes with an offset to Additional paid-in capital on the Consolidated Balance Sheets to reflect the difference in the tax and financial reporting basis of our assets and liabilities. As of December 31, 2017, the components of deferred tax assets primarily relate to deferred revenues, equity-based compensation and deferred compensation. As of December 31, 2017, the components of deferred tax liabilities primarily relate to depreciation and amortization of intangible assets and property and equipment and deferred contract costs.
The significant components of deferred tax assets and liabilities as of December 31, 2017 and 2016 consist of the following (in millions):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Deferred revenues | $ | 26.7 |
| | $ | — |
|
Net operating loss carryovers | 1.3 |
| | — |
|
State income tax | — |
| | 1.6 |
|
Other | 12.8 |
| | 0.4 |
|
Total deferred tax assets | 40.8 |
| | 2.0 |
|
Deferred tax liabilities: | | | |
Depreciation and amortization | (219.9 | ) | | — |
|
Deferred contract costs | (36.2 | ) | | — |
|
Partnership basis | — |
| | (9.9 | ) |
Other | (9.3 | ) | | — |
|
Total deferred tax liabilities | (265.4 | ) | | (9.9 | ) |
Net deferred tax liability | $ | (224.6 | ) | | $ | (7.9 | ) |
ASC Topic 740-10, Accounting for Uncertain Tax Positions, requires that a tax position be recognized or derecognized based on a more likely than not threshold. This applies to positions taken or expected to be taken on a tax return. As a result of the Distribution, we recorded an $8.3 million contingent tax liability for an uncertain tax position that was previously recorded at BKHI. As part of the Distribution, we entered into a tax matters agreement with FNF (the "Tax Matters Agreement"). The agreement outlines requirements for items such as the filing of pre and post-spin tax returns, payment of tax liabilities, entitlements of refunds and certain other tax matters. Under the Tax Matters Agreement with FNF, we have an indemnification receivable for the full amount of the contingent tax liability included in Receivables from related parties on the Consolidated Balance Sheets as of December 31, 2017.There were no uncertain tax positions for us as of December 31, 2016.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017 and 2016 is as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Balance, January 1 | $ | — |
| | $ | — |
|
Additions based on tax positions of prior years | 8.3 |
| | — |
|
Balance, December 31 | $ | 8.3 |
| | $ | — |
|
As a result of the Distribution, we recorded a net operating loss carryover of $1.3 million from BKHI. Although the loss is limited under IRC Section 382, we expect it to be fully utilized before it expires in 2033.
We are currently under audit by the Internal Revenue Service ("IRS") for the 2014 and 2015 tax years. Our open tax years also include 2016 and 2017. We are currently under a state audit for Florida. We are not currently under audit for any other state jurisdiction or for India as of year end. We record interest and penalties related to income taxes, if any, as a component of Income tax (benefit) expense on the Consolidated Statements of Earnings and Comprehensive Earnings.
Tax Matters Agreement
Pursuant to the Tax Matters Agreement with FNF, we are obligated to indemnify FNF for (i) any action by Black Knight, or the failure to take any action within our control that negates the tax-free status of the transactions; or (ii) direct or indirect changes in ownership of Black Knight equity interests that cause the Distribution to be a taxable event to FNF as a result of the application of Section 355(e) of the Internal Revenue Code (“IRC”) or to be a taxable event as a result of a failure to satisfy the “continuity of interest” or “device” requirements for tax-free treatment under Section 355 of the IRC. No such events have occurred.
Tax Distributions
Prior to the Distribution, the taxable income of BKFS LLC was allocated to its members, including BKFS, and the members were required to reflect on their own income tax returns the items of income, gain, deduction and loss and other tax items of BKFS LLC that were allocated to them. BKFS LLC made tax distributions to its members for their allocable share of BKFS LLC's taxable income. Tax distributions are calculated based on allocations of income to a member for a particular taxable year without taking into account any losses allocated to the member in a prior taxable year. This practice is consistent with IRS regulations. Subject to certain reductions, tax distributions are generally made based on an assumed tax rate equal to the highest combined marginal federal, state and local income tax rate applicable to a U.S. corporation. BKFS LLC made tax distributions of $75.3 million, $48.6 million and $17.4 million during the years ended December 31, 2017, 2016 and 2015, respectively. The 2017 tax distributions were for the 2016 tax year and 2017 tax year relating to the period before the Distribution.