Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted, substantially changing the U.S. tax system. The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The 2017 Tax Act also provides immediate expensing for certain qualified assets acquired and placed into service after September 27, 2017 as well as prospective changes beginning in 2018, including acceleration of tax revenue recognition, additional limitations on deductibility of executive compensation and limitations on the deductibility of interest.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with SAB No. 118.
The changes to existing U.S. tax laws as a result of the 2017 Tax Act, which we believe have the most significant impact on the Company’s federal income taxes for the year ended December 31, 2017 are as follows:
Reduction of the U.S. Corporate Income Tax Rate and Deferred Tax Effects
The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 35 percent to 21 percent, resulting in a $53.4 million increase in income tax benefit for the year ended December 31, 2017 and a corresponding $53.4 million decrease in net deferred tax liabilities as of December 31, 2017. While we have made a reasonable estimate of the impact of the 2017 Tax Act on deferred tax assets and liabilities, that estimate could change as we complete our analyses of all impacts of the 2017 Tax Act, including, but not limited to, our calculation of immediate expensing for certain qualified assets acquired and placed into service after September 27, 2017, additional limitations on deductibility of executive compensation and the state tax effect of adjustments made to federal temporary differences. As we finalize our analysis of the tax law changes in the 2017 Tax Act, including the impact on our current year tax return filing positions throughout the 2018 fiscal year, we will update our provisional amounts for this remeasurement.
The Company will continue to analyze the effects of the 2017 Tax Act on its financial statements and operations. Additional impacts, discussed above, will be recorded as they are identified during the measurement period as provided for in SAB 118, which extends to one year from the enactment date.
Total income taxes for the years ended December 31, 2017, 2016 and 2015 were allocated as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
(in thousands) | | | | | |
Income tax (benefit) expense on continuing operations | $ | (53,133 | ) | | $ | 2,840 |
| | $ | 27,726 |
|
Shareholders’ equity, for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes | — |
| | — |
| | (679 | ) |
Other comprehensive income for changes in cash flow hedge | 522 |
| | 4,162 |
| | (476 | ) |
| $ | (52,611 | ) | | $ | 7,002 |
| | $ | 26,571 |
|
The Company and its subsidiaries file income tax returns in several jurisdictions. The provision for the federal and state income taxes attributable to income from continuing operations consists of the following components:
|
| | | | | | | | | | | |
| Years Ended December 31, |
(in thousands) | 2017 | | 2016 | | 2015 |
Current expense | | | | | |
Federal taxes | $ | 1,552 |
| | $ | 44,779 |
| | $ | 23,579 |
|
State taxes | (630 | ) | | 10,936 |
| | 5,275 |
|
Total current provision | 922 |
| | 55,715 |
| | 28,854 |
|
Deferred expense (benefit) | |
| | |
| | |
|
Federal taxes | (52,886 | ) | | (47,056 | ) | | (744 | ) |
State taxes | (1,169 | ) | | (5,819 | ) | | (384 | ) |
Total deferred provision | (54,055 | ) | | (52,875 | ) | | (1,128 | ) |
Income tax expense (benefit) on continuing operations | $ | (53,133 | ) | | $ | 2,840 |
| | $ | 27,726 |
|
Effective tax rate | (400.8 | )% | | 146.0 | % | | 40.4 | % |
A reconciliation of income taxes determined by applying the federal and state tax rates to income from continuing operations is as follows for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
($ in thousands) | | | | | |
Computed “expected” tax expense (35%) | $ | 4,640 |
| | $ | 681 |
| | $ | 24,007 |
|
State income taxes, net of federal tax effect | (1,129 | ) | | 6 |
| | 3,179 |
|
Changes in state DTL for mergers | — |
| | 3,320 |
| | — |
|
Excess share based compensation | (3,314 | ) | | (1,709 | ) | | — |
|
Nondeductible merger expenses | — |
| | 801 |
| | — |
|
Revaluation of U.S. deferred income taxes | (53,449 | ) | | — |
| | — |
|
Other, net | 119 |
| | (259 | ) | | 540 |
|
Income tax expense (benefit) on continuing operations | $ | (53,133 | ) | | $ | 2,840 |
| | $ | 27,726 |
|
The effective tax rate decreased in 2017 primarily due to approximately $53.4 million of tax benefits recorded in connection with the 2017 Tax Act, as a result of the revaluation of deferred tax assets and liabilities, and excess tax benefits from stock based compensation resulting from the adoption of ASU 2016-09, "Compensation-Stock Compensation", by the Company in 2016.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax purposes. Net deferred tax assets and liabilities are classified as non-current in the consolidated balance sheets. Deferred tax assets and liabilities are measured based on the enacted tax rates that will apply in the years in which the temporary differences are expected to be reversed into income or deducted. As such, during December 2017, the Company recorded provisional amounts to its deferred tax assets and liabilities as a result of the enactment of the 2017 Tax Act.
Net deferred tax assets and liabilities consist of the following temporary differences at December 31, 2017 and 2016:
|
| | | | | | | |
| December 31, | | December 31, |
(in thousands) | 2017 | | 2016 |
Deferred tax assets: | | | |
Deferred revenues | $ | 3,907 |
| | $ | 8,849 |
|
Net operating loss carry-forwards | 14,983 |
| | 29,472 |
|
Accruals and reserves | 5,189 |
| | 10,517 |
|
Pension benefits | 3,556 |
| | 6,994 |
|
Asset retirement obligations | 4,608 |
| | 8,495 |
|
Total gross deferred tax assets | 32,243 |
| | 64,327 |
|
Less valuation allowance | (862 | ) | | (709 | ) |
Net deferred tax assets | 31,381 |
| | 63,618 |
|
| | | |
Deferred tax liabilities: | |
| | |
|
Plant-in-service | 89,494 |
| | 139,753 |
|
Intangible assets | 37,682 |
| | 70,799 |
|
Interest rate swaps | 3,511 |
| | 4,433 |
|
Other, net | 1,573 |
| | 470 |
|
Total gross deferred tax liabilities | 132,260 |
| | 215,455 |
|
Net deferred tax liabilities | $ | 100,879 |
| | $ | 151,837 |
|
In assessing the ability to realize deferred tax assets, 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 generating future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, taxable income in prior carryback years if available and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods for which the deferred tax assets are deductible, the Company believes it more likely than not that the net deferred tax assets will be realized with the exception of certain state net operating losses in jurisdictions where the Company no longer operates. The Company has a deferred tax asset of $15.0 million related to federal and various state net operating losses, of which $0.9 million is associated with a valuation allowance. As of December 31, 2017, the Company had approximately $63.3 million of federal net operating losses expiring through 2035. The Company also had approximately $34.2 million of state net operating losses expiring through 2036.
As of December 31, 2017 and 2016, the Company had no unrecognized tax benefits. It is the Company’s policy to record interest and penalties related to unrecognized tax benefits in selling, general, and administrative expenses.
The Company files U.S. federal income tax returns and various state and local income tax returns. The Company is not currently subject to state or federal income tax audits as of December 31, 2017. The Company's returns are generally open to examination from 2014 forward and the net operating losses acquired in the acquisition of nTelos are open to examination from 2002 forward. Tax returns for open tax years related to federal and state jurisdictions remain subject to examination, but the amounts currently subject to examination are not considered material.