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Income Taxes
9 Months Ended
Sep. 30, 2018
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes

For interim periods, we recognize an income tax provision (benefit) based on our estimated annual effective tax rate expected for the full year.

The Company recorded $0.1 million and less than $0.1 million in income tax expense for the three and nine months ended September 30, 2018, respectively, which resulted in effective tax rates of (0.9)% and (0.1)%, respectively. The Company recorded $1.7 million and $2.0 million in income tax benefit for the three and nine months ended September 30, 2017, respectively, which resulted in effective tax rates of 11.6% and 3.5%, respectively. The income tax benefit recorded during the three and nine months ended September 30, 2018, primarily relates to the change in indefinite-lived components and components expected to reverse outside of the net operating loss carryover period as part of the outside basis difference in our partnership interest in Evolent Health LLC. With the exception of these components, the Company continues to record a valuation allowance against the net deferred tax assets. As a result of the Tax Cuts and Jobs Act (the “Tax Act”) enacted on December 22, 2017, and subsequent state jurisdictions conforming to certain provisions of the Tax Act with respect to the indefinite carryforward period and 80% taxable income limitation on NOLs arising after December 31, 2017, these components of the deferred tax liabilities are comprised of the entire nonconforming state indefinite-lived components and those outside of the NOL carryforward period and a portion of our federal and conforming states components that could not be used as a source of income. As of December 31, 2017, the Company had recorded a provisional estimate of the financial statement impact of the Tax Act in accordance with SEC Staff Accounting Bulletin No. 118. During the three and nine months ended September 30, 2018, the change in the initial provisional estimates is immaterial. The Company will continue to evaluate any further adjustments necessary through 2018.

As a result of the increase in our ownership of Evolent Health LLC following the March 2018 Private Sale discussed in Note 4 above, the Company reduced the indefinite portion of the deferred tax liability related to the book basis compared to the tax basis in our partnership interest in Evolent Health LLC by approximately $0.9 million for the nine months ended September 30, 2018. The effect of this change in the deferred tax liability was recorded as additional paid-in capital.
As a result of the increase in our ownership of Evolent Health LLC following the August 2017 Primary and 2017 Secondary Offerings discussed in Note 4 above, the Company reduced the indefinite portion of the deferred tax liability related to the book basis compared to the tax basis in our partnership interest in Evolent Health LLC by $13.1 million for the nine months ended September 30, 2017. The effect of this change in the deferred tax liability was recorded as $12.8 million of additional paid-in capital and $0.3 million of income tax benefit.

As of December 31, 2017, the Company had unrecognized tax benefits of $0.8 million that, if recognized, would not affect the effective tax rate. As of September 30, 2018, the Company has released all unrecognized tax benefits due to the filing of a federal income tax automatic accounting method change application. The Company is not currently subject to income tax audits in any U.S., state, or foreign jurisdictions for any tax year.

Tax Receivables Agreement

In connection with the Offering Reorganization, the Company entered into the TRA with certain of its investors, which provides for the payment by the Company to these investors of 85% of the amount of the tax benefits, if any, that the Company is deemed to realize as a result of increases in our tax basis related to exchanges of Class B common units as well as tax benefits attributable to the future utilization of pre-IPO NOLs. See Note 9 above and “Part II - Item 8. Financial Statements and Supplementary Data - Note 12” in our 2017 Form 10-K for discussion of our TRA.