Nobilis Health Corp.

INCOME TAXES

The components of income (benefit) expense for the years-ended December 31, 2017, 2016 and 2015 are as follows (in thousands):



	Deferred			Current		Total

2017
Federal	$	11,695		$	56	$	11,751
States and Local	(12		)	1,261		1,249
Foreign	(742		)	—		(742		)
Change in deferred tax asset valuation allowance	742			—		742
Total	$	11,683		$	1,317	$	13,000

2016
Federal	$	3,625		$	23	$	3,648
States and Local	(242		)	1,081		839
Foreign	(259		)	—		(259		)
Change in deferred tax asset valuation allowance	259			—		259
Total	$	3,383		$	1,104	$	4,487

2015
Federal	$	8,215		$	509	$	8724
States and Local	—			1,330		1,330
Foreign	—			—		—
Change in deferred tax asset valuation allowance	(33,250		)	—		(33,250		)
Total	$	(25,035	)	$	1,839	$	(23,196	)

The following table shows the reconciliation between income tax expense reported in our consolidated statements of income and the income tax expense that would have resulted from applying the U.S. federal income tax rate of 34% to pre-tax income. Though the Company was incorporated in British Columbia, all of the Company’s subsidiaries are incorporated in the United States. Therefore, the Company reconciles the income before income taxes for U.S. tax purposes (in thousands, except percentages):



	2017			2016			2015

Net income before income tax	$	23,281		$	11,589		$	40,737

U.S. federal income tax rate	34		%	35		%	34		%

Expected U.S. federal income tax (recovery)	7,916			4,056			13,851
Permanent differences / discrete items	(86		)	(791		)	(1,873		)
State income tax (net of federal benefit)	706			585			649
Valuation allowance	742			259			(33,250		)
Change of federal tax rate	6,160			—			—
Noncontrolling interests	(2,054		)	7			(4,106		)
Others	(384		)	371			1,533
Total income tax expense (benefit)	$	13,000		$	4,487		$	(23,196	)

The table below sets forth the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities that are reported in our consolidated balance sheets (in thousands):



	2017			2016

Deferred tax assets (liabilities) :
Goodwill and fixed assets	$	1,555		$	8,768
Intangibles	697			785
Net operating loss carryforwards - U.S.	2,836			6,014
Interest carry-forward	—			1,405
Net operating loss carryforwards - Foreign	8,405			7,663
Allowance for bad debts	382			265
Equity compensation	2,872			4,074
Accrued bonus	530			325
Accrued to cash - 481a	(163		)	(532		)
Other	(120		)	16
AMT credit	588			532
Deferred lease liability	657			—
Retention tax credit	117			—
Valuation allowance	(8,405		)	(7,663		)
Net deferred tax assets	$	9,951		$	21,652

There was a partial valuation allowance as of December 31, 2017 and 2016, respectively. In assessing the need for a valuation allowance, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considered the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income, projections for future taxable income over the periods in which the deferred tax assets are deductible, and the scheduled reversal of deferred tax liabilities, management believes a partial valuation allowance is needed to offset the Canadian net operating loss carryforwards in 2017 and 2016, respectively.

The Company has Canadian net operating loss carryforwards of approximately $33.6 million which will begin to expire in 2028 and U.S. net operating loss carryforwards of approximately $13.5 million which will begin to expire in 2030. On September 30, 2010 the Company issued 18,778,446 common shares to entities controlled by the then Company Chairman resulting in a change of ownership greater than 50%. As a result, the U.S. net operating losses are limited by the Internal Revenue Code Section 382.

The Company files income tax returns in the U.S. federal jurisdiction, Canada federal jurisdiction, and several state jurisdictions. Our federal tax returns for 2016, 2015, and 2014 are open for review by taxing authorities. Our Canada and Texas tax returns for 2016, 2015, 2014, and 2013 are open for review by taxing authorities. The Company is not aware of potential interest, penalties or taxes for federal and Canada income tax returns.

The Company received notification from the Internal Revenue Service (IRS) to examine the December 31, 2014 and 2013 Federal income tax return. In addition, First Nobilis, LLC, a 51% owned entity, received notification from the IRS to examine its December 31, 2014 income tax return. Both cases have been closed with “no change”. Based on management tax analysis, the Company did not have any uncertain tax positions at December 31, 2017 and 2016.

The Tax Cuts and Jobs Act of 2017 was signed into law on December 22, 2017. The law includes significant changes to the U.S. corporate income tax system, including a federal corporate rate reduction from 35% to 21%, the elimination of the corporate alternative minimum tax, the acceleration of depreciation, limitations on the deductibility of interest expense and executive compensation, and the transition of U.S. international taxation from a worldwide tax system to a territorial tax system. In accordance with ASC 740, the impact of a change in tax law is recorded in the period of enactment. Consequently, the Company has recorded a tax expense of $6.2 million, primarily due to a re-measurement of deferred tax assets and liabilities at December 22, 2017.