Income Taxes
The components of the benefit from income taxes are comprised of the following for the years ended December 31:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current | | | | | |
Federal | $ | (1.1 | ) | | $ | (0.1 | ) | | $ | 0.4 |
|
State | 1.2 |
| | 0.5 |
| | 1.8 |
|
| 0.1 |
| | 0.4 |
| | 2.2 |
|
Deferred | | | | | |
Federal | (44.8 | ) | | (23.4 | ) | | (17.4 | ) |
State | 3.5 |
| | (2.7 | ) | | (4.2 | ) |
| (41.3 | ) | | (26.1 | ) | | (21.6 | ) |
Benefit from income taxes | $ | (41.2 | ) | | $ | (25.7 | ) | | $ | (19.4 | ) |
For fiscal 2017, 2016 and 2015, the federal statutory rate in effect was 35%. A reconciliation between the benefit from income taxes and the expected tax benefit using the federal statutory rate in effect for the years ended December 31 is as follows:
|
| | | | | | | | | | | |
| 2017 |
| 2016 |
| 2015 |
Amount computed using statutory rates | $ | (1.0 | ) |
| $ | (19.6 | ) |
| $ | (18.6 | ) |
State income taxes, net of federal benefit | (3.3 | ) |
| (6.0 | ) |
| (5.1 | ) |
Benefit from stock option exercises | — |
|
| (4.3 | ) |
| — |
|
Net effect of changes in tax rates | (0.3 | ) |
| (0.7 | ) |
| 1.7 |
|
Uncertain tax positions and interest | 0.5 |
|
| 0.4 |
|
| 1.0 |
|
Nondeductible expenses | 1.5 |
|
| 1.2 |
|
| 1.8 |
|
Net effect of change in U.S. Tax Law | (40.4 | ) |
| — |
|
| — |
|
Other | 0.6 |
|
| (0.2 | ) |
| 0.7 |
|
Valuation allowance | 1.2 |
|
| 3.5 |
|
| (0.9 | ) |
Benefit from income taxes | $ | (41.2 | ) |
| $ | (25.7 | ) |
| $ | (19.4 | ) |
The Company’s deferred tax assets and liabilities relate to the following sources and differences between financial accounting and the tax basis of the Company’s assets and liabilities at December 31:
|
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets | | | |
Allowance for doubtful accounts | $ | 1.4 |
| | $ | 1.6 |
|
Insurance reserve | 11.8 |
| | 16.2 |
|
Net operating loss | 103.4 |
| | 203.3 |
|
Capital loss carryforward | 42.8 |
| | 68.9 |
|
Accrued bonus and vacation | 4.5 |
| | 7.3 |
|
Stock compensation | 3.7 |
| | 2.0 |
|
Tax credits | 3.1 |
| | 7.2 |
|
Other | 11.9 |
| | 12.5 |
|
Total deferred tax assets | 182.6 |
| | 319.0 |
|
Valuation allowance | (60.0 | ) | | (98.7 | ) |
Deferred tax assets less valuation allowance | 122.6 |
| | 220.3 |
|
Deferred tax liabilities | | | |
Fixed asset basis | (66.4 | ) | | (106.8 | ) |
Intangible basis | (73.9 | ) | | (117.2 | ) |
Landfill and environmental remediation liabilities | (62.0 | ) | | (100.5 | ) |
Other | (8.9 | ) | | (8.6 | ) |
Deferred tax liabilities | (211.2 | ) | | (333.1 | ) |
Net deferred tax liability | $ | (88.6 | ) | | $ | (112.8 | ) |
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "TCJA" or the "Act") was signed into law making significant changes to the Internal Revenue Code. These changes include, but are not limited to, reducing the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017, allowing an immediate expensing of certain tangible assets placed in service before 2023, limiting the deduction of net interest expense, limiting the use of newly-generating net operating losses to offset 80% of future taxable income, repealing the corporate Alternative Minimum Tax ("AMT"), providing for the refund of AMT Credits and making substantial changes to the U.S. taxation of foreign operations.
The SEC staff issued Staff Accounting Bulletin ("SAB") 118, which provides clarifying guidance on accounting for the tax effects of the TCJA. SAB 118 allows for a measurement period, not to extend beyond one year from the enactment date, for companies to complete the accounting for the provision of the Act under ASC 740. In accordance with SAB 118, to the extent a company has not completed its analysis of the Act but can provide a reasonable estimate, it must record a provisional estimate in its financial statements.
The Company has calculated its best estimate of the impact of the Act in its year end income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing. The Company's 2017 financial results include a $40.5 non-cash tax benefit, primarily from revaluing the Company's net deferred tax assets, liabilities, and certain associated valuation allowances to reflect the recently enacted 21% federal corporate tax rate. Due to the Act's taxation of deemed repatriation on foreign earnings, the Company expects to pay a one-time tax of $0.1 related to its Bahamas operations.
The TCJA provides for the refund of AMT Credits in tax years 2018-2021. The Company has $3.1 of recognized AMT Credits which are included in the noncurrent deferred income tax accounts.
The Company's provisional estimate of the impacts of the TCJA may be impacted by future guidance issued by the U.S. Treasury Department, Internal Revenue Services, Financial Standards Accounting Board and other standard setting bodies. The Company is still analyzing certain aspects of the Act and is refining its calculations, which could potentially affect the provisional measurement of these balances. The completion of the Company's 2017 income tax returns by the third quarter 2018 may also impact the provisional amounts that have been recorded.
Effective for the fourth quarter of 2016, the Company adopted Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting. This standard requires the Company to account for all of the tax effects related to share-based compensation through the statement of operations. For fiscal 2016, the adoption of this standard caused $4.7 to be recognized as a component of the benefit from income taxes.
The amounts recorded as deferred tax assets as of December 31, 2017 and 2016 represent the amounts of tax benefits of existing deductible temporary differences or net operating and capital loss carryforwards. Realization of deferred tax assets is dependent upon the generation of sufficient taxable income prior to expiration of any loss carryforwards. A valuation allowance has been recorded against deferred tax assets as of December 31, 2017 in the amount of $60.0. The valuation allowance for the year ended December 31, 2016 was $98.7. The valuation allowance decreased by $38.7 in 2017 primarily as a result of tax reform and unrecognized tax benefits. The Company has established valuation allowances for uncertainties in realizing the benefit of certain tax loss and credit carryforwards. While the Company expects to realize the deferred tax assets, net of the valuation allowances, changes in estimates of future taxable income or in tax laws may alter this expectation.
The Company had available federal net operating loss ("NOL") carryforwards from continuing operations of approximately $344.1 and $476.6 at December 31, 2017 and 2016 respectively. The Company’s federal net operating losses have expiration dates beginning in the year 2021 through 2036 if not utilized against taxable income. The capital loss of $175.9 expires in 2018, if not utilized against capital gains.
With the completion of the initial public offering in the fourth quarter of 2016, the Company experienced an ownership change pursuant to Section 382 of the Internal Revenue Code ("IRC"). This limitation is not expected to have an impact on the Company's ability to fully utilize its NOLs before expiration. Additionally, the Company has grown through a series of acquisitions and mergers and has had change of control events that resulted in limitations on the utilization of NOLs pursuant to Section 382 of the IRC. Approximately $58.8 of the NOLs from continuing operations are limited under the SRLY rules of the IRC. These NOLs are only available to be utilized against taxable income of the HWStar Waste Holdings, Corp. and subsidiaries thereof, a wholly-owned subsidiary of the Company. At this time, the Company expects to fully utilize these NOLs.
A predecessor of the Company had a transaction on November 1, 2005 that was treated as a reorganization. The Company estimates that it is subject to an annual limitation of approximately $4.2 on NOLs of approximately $29.1 originating prior to November 1, 2005.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for fiscal 2017, 2016 and 2015 is as follows: |
| | | | | | | | | | | |
| 2017 |
| 2016 |
| 2015 |
Balance at January 1, | $ | 7.5 |
|
| $ | 7.3 |
|
| $ | 6.2 |
|
Additions based on tax positions of prior years | 20.4 |
|
| 0.1 |
|
| 0.5 |
|
Change to prior tax positions due to tax rate changes | (0.4 | ) |
| — |
|
| — |
|
Additions based on tax positions of current year | — |
|
| 0.1 |
|
| 0.6 |
|
Balance at December 31, | $ | 27.5 |
|
| $ | 7.5 |
|
| $ | 7.3 |
|
These liabilities are included as a component of other liabilities and deferred income taxes in the Company's consolidated balance sheet. The Company does not anticipate that settlement of the liabilities will require payment of cash within the next twelve months. As of December 31, 2017, $25.1 of the net unrecognized benefit, if recognized in future periods, would impact the Company's effective rate.
The Company recognizes interest expense related to unrecognized tax benefits in tax expense. During the tax years ended December 31, 2017, 2016 and 2015, respectively, the Company recognized approximately $0.5, $0.2, and $0.2, respectively, of such interest expense as a component of the “Provision for Income Taxes”.
The Company had approximately $2.8 and $2.5 of accrued interest and $0.5 and $0.4 of accrued penalties in its balance sheet as of December 31, 2017 and 2016, respectively.
The Company and its subsidiaries are subject to income tax in the United States at the federal, state, and local jurisdictional levels. The company has open tax years dating back to 2003. There were no settlements of federal or state audits during 2017. Prior to the acquisition in fiscal 2012, Veolia ES Solid Waste division was part of a consolidated group and is still subject to IRS and state examinations dating back to 2004. Pursuant to the terms of the acquisition of Veolia ES Solid Waste, Inc., the Company is entitled to certain indemnifications for Veolia ES Solid Waste Division's pre-acquisition tax liabilities.