Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for the years prior to 2014. With few exceptions, the Company is no longer subject to U.S. state income tax examinations for the years prior to 2013.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Act) was signed into law. The 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 tax rate from 35% to 21%, for tax years beginning after December 31, 2017. As a result of the enacted rate change, we recorded a benefit of $596.6 million in deferred income tax expense for the change in the net deferred tax liability at the 21% tax rate. The Act also provides for acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes beginning in 2018. These prospective changes include an increased limitation on deductibility of executive compensation, a limitation on the deductibility of interest expense, new rules surrounding meals and entertainment expense and fines and penalties. Also, while net operating losses generated in the future may be carried forward indefinitely under the new law, there is a limitation on the amount that may be used in any given year. The Act may also have an impact on projected future taxable income that could affect valuation allowance considerations. In addition to the Federal law, the Company awaits guidance from the states in which it files on how components of the Act may be treated in these jurisdictions.
The $596.6 million tax benefit represents what the Company believes is the impact of the Act, the key component being re-measurement of deferred tax balances to the new corporate rate. As the benefit is based on currently available information and interpretations, which are continuing to evolve, the benefit should be considered provisional. The Company will continue to analyze additional information and guidance related to the Act as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. The final impacts may differ from the recorded amounts as of December 31, 2017, and the Company will continue to refine such amounts within the measurement period provided by Staff Accounting Bulletin No. 118. The Company expects to complete the analysis no later than the fourth quarter of 2018.
Total income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015 was included within the following sections of the consolidated financial statements as follows (in millions):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Earnings (loss) from continuing operations | $ | (496.8 | ) | | $ | (3.3 | ) | | $ | 113.8 |
|
Net loss from discontinued operations | 30.7 |
| | 2.4 |
| | (0.7 | ) |
Stockholders’ equity | — |
| | (2.1 | ) | | (2.2 | ) |
Total | $ | (466.1 | ) | | $ | (3.0 | ) | | $ | 110.9 |
|
Income tax expense (benefit) from continuing operations for the years ended December 31, 2017, 2016 and 2015 was comprised of the following (in millions): |
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 2.4 |
| | $ | 62.9 |
| | $ | 83.2 |
|
State | 0.5 |
| | 10.5 |
| | 14.3 |
|
Deferred: | | | | | |
Federal | (543.9 | ) | | (66.7 | ) | | 11.7 |
|
State | 44.2 |
| | (10.0 | ) | | 4.6 |
|
Income tax expense (benefit) | $ | (496.8 | ) | | $ | (3.3 | ) | | $ | 113.8 |
|
Income tax expense (benefit) from continuing operations for the years ended December 31, 2017, 2016 and 2015 differed from the amount computed by applying the U.S. federal income tax rate of 35% to earnings or loss before income taxes as a result of the following (in millions):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Statutory federal income tax | $ | (10.8 | ) | | $ | 69.4 |
| | $ | 173.6 |
|
Less federal income tax assumed directly by noncontrolling interests | (70.7 | ) | | (78.4 | ) | | (76.4 | ) |
State income taxes, net of federal income tax benefit | 17.1 |
| | 1.0 |
| | 11.6 |
|
Increase (decrease) in valuation allowances | — |
| | (11.0 | ) | | 0.3 |
|
Transaction-related items | 0.5 |
| | 13.5 |
| | 1.1 |
|
Impairment of goodwill | 147.7 |
| | — |
| | — |
|
U.S. Tax Reform - corporate rate reduction | (596.6 | ) | | — |
| | — |
|
Interest related to unrecognized tax benefits | — |
| | — |
| | (0.5 | ) |
Other | 16.0 |
| | 2.2 |
| | 4.1 |
|
Income tax expense (benefit) | $ | (496.8 | ) | | $ | (3.3 | ) | | $ | 113.8 |
|
The Company applies recognition thresholds and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return as it relates to accounting for uncertainty in income taxes. In addition, it is the Company’s policy to recognize interest accrued and penalties, if any, related to unrecognized benefits as income tax expense in its statement of operations.
An increase in interest and penalty obligations of $0.1 million was recognized in the consolidated statements of operations for the years ended December 31, 2017 and decreases of $0.1 million and $0.2 million were recognized in the consolidated statements of operations for the years ended December 31, 2016 and 2015, respectively, resulting in a total recognition of interest and penalty obligations of approximately $2.3 million and $1.7 million in the consolidated balance sheet at December 31, 2017 and 2016, respectively.
A reconciliation of the beginning and ending amount of the liability associated with unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 is as follows (in millions):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Balance at beginning of year | $ | 4.4 |
| | $ | 3.4 |
| | $ | 7.3 |
|
Additions for current year acquisitions | — |
| | 14.9 |
| | — |
|
Additions for tax positions of current year | 0.1 |
| | — |
| | — |
|
Decreases for amounts classified as held for sale | — |
| | (12.8 | ) | | — |
|
Increases (decreases) for tax positions taken during a prior period | — |
| | — |
| | (1.0 | ) |
Lapse of statute of limitations | (2.1 | ) | | (1.1 | ) | | (2.9 | ) |
Balance at end of year | $ | 2.4 |
| | $ | 4.4 |
| | $ | 3.4 |
|
The Company estimates that the range of the possible change in unrecognized tax benefits within the next 12 months is a net decrease of $0.1 million to $0.4 million, as a result of a lapse of the statute of limitations and settlements primarily with state taxing authorities. The total amount of unrecognized tax benefits that would affect the Company’s effective tax rate if recognized is approximately $2.4 million.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 were as follows (in millions): |
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets: | | | |
|
Allowance for uncollectible accounts | $ | 21.4 |
| | $ | 9.5 |
|
Share-based compensation | 51.8 |
| | 86.4 |
|
Deferred compensation | 25.1 |
| | 45.1 |
|
Accrued liabilities and other | 34.8 |
| | 50.1 |
|
Medical malpractice | 47.4 |
| | 50.2 |
|
Operating and capital loss carryforwards | 84.0 |
| | 48.2 |
|
Valuation allowances | (30.5 | ) | | (11.8 | ) |
Total deferred tax assets | 234.0 |
|
| 277.7 |
|
Deferred tax liabilities: | | | |
Prepaid expenses and other | 7.7 |
| | 2.6 |
|
Accrual to cash | 130.7 |
| | 172.8 |
|
Property and equipment | 79.3 |
| | 49.0 |
|
Outside basis difference in stock | 9.4 |
| | — |
|
Intangible assets | 1,096.2 |
| | 1,397.0 |
|
Total deferred tax liabilities | 1,323.3 |
| | 1,621.4 |
|
Net deferred tax liabilities | $ | 1,089.3 |
| | $ | 1,343.7 |
|
A valuation allowance is established when it is "more likely than not" that all, or a portion, of net deferred tax assets will not be realized. The Company has determined that it is more likely than not that certain deferred tax assets may not be realized. Therefore, a valuation allowance of $30.5 million and $11.8 million has been established as of December 31, 2017 and 2016, respectively. The Company has federal net operating and capital loss carryforwards of $297.6 million, which expire in the years 2018 to 2037. The Company has state net operating loss and credit carryforwards which expire in the years 2018 to 2037.