Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 35% to 21%. At December 31, 2017, we have made a reasonable estimate of the effects on our existing deferred tax balances, and recognized a provisional benefit of $166.9 million which is included as a component of income tax benefit from continuing operations. We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21% for federal income taxes purposes. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances.
Significant components of Delek's deferred tax assets (liabilities) reported in the accompanying consolidated financial statements as of December 31, 2017 and 2016 were as follows (in millions):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Non-Current Deferred Taxes: | | | |
Property, plant and equipment, and intangibles | $ | (180.9 | ) | | $ | (214.2 | ) |
Partnership and equity investments | (83.7 | ) | | 105.0 |
|
Deferred revenues | (6.5 | ) | | (8.4 | ) |
Derivatives and hedging | 4.8 |
| | 18.8 |
|
Compensation and employee benefits | 15.9 |
| | 9.8 |
|
Net operating loss carryforwards | 26.5 |
| | 5.3 |
|
Reserves and accruals | 40.8 |
| | 7.1 |
|
Inventories | 4.4 |
| | 7.7 |
|
Other | — |
| | — |
|
Valuation allowance | (21.2 | ) | | (7.3 | ) |
Total net deferred tax liabilities | $ | (199.9 | ) | | $ | (76.2 | ) |
The difference between the actual income tax expense and the tax expense computed by applying the statutory federal income tax rate to income from continuing operations was attributable to the following (in millions):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Provision (benefit) for federal income taxes at statutory rate | $ | 104.7 |
| | $ | (137.0 | ) | | $ | 7.5 |
|
State income tax expense (benefit), net of federal tax provision | 4.9 |
| | (10.2 | ) | | 2.4 |
|
Income tax (benefit) expense attributable to non-controlling interest | (12.0 | ) | | (7.1 | ) | | (8.4 | ) |
Tax credits and incentives | (1.6 | ) | | (9.7 | ) | | (10.7 | ) |
Dividends received deduction | (2.8 | ) | | (5.7 | ) | | (4.2 | ) |
Executive compensation limitation | 1.5 |
| | 0.3 |
| | 1.0 |
|
Amortization - prepaid taxes | (2.4 | ) | | (3.5 | ) | | (4.1 | ) |
Reversal of deferred taxes related to equity method investment in Alon | 45.3 |
| | — |
| | — |
|
Impact of Tax Cuts and Jobs Act | (166.9 | ) | | — |
| | — |
|
Other items | 0.1 |
| | 1.4 |
| | 0.7 |
|
Income tax benefit | $ | (29.2 | ) | | $ | (171.5 | ) | | $ | (15.8 | ) |
Tax credits and incentives include work opportunity, research and development, E-85 and blocked pump tax credits, as well as incentives for the Company’s ethanol and biodiesel blending operations.
Income tax expense (benefit) from continuing operations was as follows (in millions):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current | $ | 18.8 |
| | $ | (18.3 | ) | | $ | (34.8 | ) |
Deferred | (48.0 | ) | | (153.2 | ) | | 19.0 |
|
| $ | (29.2 | ) | | $ | (171.5 | ) | | $ | (15.8 | ) |
Deferred income tax expense above was reflective of the changes in deferred tax assets and liabilities during the current period.
We carry valuation allowances against certain state deferred tax assets and net operating losses that may not be recoverable with future taxable income. During the years ended December 31, 2017 and 2016, we recorded increases to the valuation allowance related to continuing operations of $13.9 million and $2.8 million, respectively. The increase in 2017 was primarily to record a valuation allowance for certain state net operating losses of Alon USA Energy, Inc. and subsidiaries.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of 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, 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, management believes it is more likely than not Delek will realize the benefits of these deductible differences, net of the existing valuation allowance. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Subsequently recognized tax benefit or expense relating to the valuation allowance for deferred tax assets will be reported as an income tax benefit or expense in the consolidated statement of income.
State net operating loss carryforwards at December 31, 2017 totaled $615.5 million, a portion of which was subject to a valuation allowance. State net operating losses will begin expiring in 2019 through 2037.
Delek files a consolidated U.S. federal income tax return, as well as income tax returns in various state jurisdictions. Delek is no longer subject to U.S. federal income tax examinations by tax authorities for years through 2013. The Internal Revenue Service has examined Delek's income tax returns through the tax year ended 2013. In addition, the Company's federal tax returns for the tax years ended December 31, 2014 are currently subject to Joint Committee on Taxation review. The Company is under audit in the state of Texas for the years ended December 31, 2011 through December 31, 2014. No material adjustments have been identified at this time.
ASC 740 provides a recognition threshold and guidance for measurement of income tax positions taken or expected to be taken on a tax return. ASC 740 requires the elimination of the income tax benefits associated with any income tax position where it is not "more likely than not" that the position would be sustained upon examination by the taxing authorities.
Increases and decreases to the beginning balance of unrecognized tax benefits during the years ended December 31, 2017, 2016, and 2015 were as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Balance at the beginning of the year | $ | 1.7 |
| | $ | 0.2 |
| | $ | 2.7 |
|
Additions based on tax positions related to current year | 0.4 |
| | 1.5 |
| | — |
|
Additions for tax positions related to prior years and acquisitions | 4.2 |
| | — |
| | — |
|
Reductions for tax positions related to prior years | (0.2 | ) | | — |
| | (2.4 | ) |
Reductions for tax positions related to the lapse of applicable statute of limitations | — |
| | — |
| | (0.1 | ) |
Balance at the end of the year | $ | 6.1 |
| | $ | 1.7 |
| | $ | 0.2 |
|
The amount of the unrecognized benefit above, that if recognized would change the effective tax rate, is $4.6 million and $1.2 million as of December 31, 2017 and 2016, respectively.
Delek recognizes accrued interest and penalties related to unrecognized tax benefits as an adjustment to the current provision for income taxes. $0.5 million of interest was recognized related to unrecognized tax benefits during the year ended December 31, 2017 and a nominal amount of interest was recognized during the years ended December 31, 2016 and 2015.
Uncertain tax positions have been examined by Delek for any material changes in the next 12 months, and none are expected.