Income Taxes

12 Months Ended

Dec. 31, 2020

The Company uses the asset and liability method to account for income taxes. Under this method, deferred income 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. Any change in tax rates that could impact deferred tax assets or liabilities are recognized in the same period the change occurs. If a net operating loss ("NOL") and/or interest limitation ("163(j)") carryforward exists, the Company makes a determination as to whether that NOL and/or 163(j) carryforward will be utilized in the future. A valuation allowance is established for certain net operating loss and interest limitation carryforwards when their recoverability is deemed to be uncertain. The carrying value of the net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to adjust its deferred tax valuation allowances.

The Company, or one or more of its subsidiaries, files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for years prior to 2017 or state income tax examinations for years prior to 2016.

The Company and certain of its subsidiaries file a consolidated federal income tax return. The partnerships, limited liability companies, and certain non-consolidated physician practice corporations also file separate income tax returns. The Company's allocable portion of each partnership's and limited liability company's income or loss is included in taxable income of the Company. The remaining income or loss of each partnership and limited liability company is allocated to the other owners.

The Company made income tax payments of $1.7 million, $1.6 million and $2.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Income tax (benefit) expense is comprised of the following (in millions):


	Year Ended December 31,
	2020		2019		2018

Current:
Federal	$	(0.2)	$	(0.2)	$	(0.3)
State	1.9		1.7		1.5
Deferred:
Federal	(22.2)		3.2		16.5
State	0.4		4.8		8.7
Total income tax (benefit) expense	$	(20.1)	$	9.5	$	26.4

A reconciliation of the provision for income taxes as reported in the consolidated statements of operations and the amount of income tax (benefit) expense computed by multiplying consolidated income (loss) in each year by the U.S. federal statutory rate of 21% (2020, 2019 and 2018) follows (in millions):


	Year Ended December 31,
	2020		2019		2018

Tax (benefit) expense at U.S.federal statutory rate	$	(4.0)	$	11.5	$	(14.5)
State income tax, net of U.S. federal tax benefit	2.4		5.7		10.0
Change in valuation allowance	4.1		13.6		26.9
Net income attributable to non-controlling interests	(24.8)		(25.2)		(23.1)
Changes in measurement of uncertain tax positions	—		(0.1)		(0.1)
Stock option compensation	1.2		1.3		0.5
Differences related to divested facilities	(0.7)		0.1		6.0
Tax return reconciling differences	—		1.1		1.7
Change in effective tax rate	(0.8)		0.3		0.5
Tax Receivable Agreement liability	0.9		1.6		0.9
Goodwill impairment	4.3		0.5		8.9
Litigation settlement	(3.7)		—		8.6
Other	1.0		(0.9)		0.1
Total income tax (benefit) expense	$	(20.1)	$	9.5	$	26.4

The components of temporary differences and the approximate tax effects that give rise to the Company’s net deferred tax asset are as follows (in millions):


	December 31,
	2020		2019

Deferred tax assets:
Medical malpractice liability	$	4.0	$	3.5
Accrued vacation and incentive compensation	3.2		2.3
Net operating loss carryforwards	164.7		143.0
Allowance for bad debts	2.5		2.2
Capital loss carryforwards	1.7		2.0
Amortization of intangible assets	2.2		0.3
Deferred financing costs	7.9		9.5
Section 163(j) interest	69.8		54.7
Interest rate swap liability	15.8		12.9
TRA liability	1.0		1.2
Right of use	50.6		52.1
Affiliate indebtedness receivable	—		6.8
Other deferred assets	16.4		9.0
Total gross deferred tax assets	339.8		299.5
Less: Valuation allowance	(91.1)		(77.9)
Total deferred tax assets	248.7		221.6
Deferred tax liabilities:
Depreciation on property and equipment	(1.8)		(2.8)
Basis differences of partnerships and joint ventures	(73.6)		(67.5)
Right of use	(47.5)		(51.5)
Other deferred liabilities	(1.0)		(1.1)
Total deferred tax liabilities	(123.9)		(122.9)
Net deferred tax assets	$	124.8	$	98.7

The Company had federal NOL carryforwards of $615.7 million as of December 31, 2020, of which $516.2 million expire between 2026 and 2037. The remaining federal NOL carryforwards, which were generated subsequent to 2017, do not expire. The Company had state NOL carryforwards of $678.9 million as of December 31, 2020, which expire between 2021 and 2040. The Company had capital loss carryforwards of $6.2 million as of December 31, 2020, which expire between 2021 and 2023. The Company had federal and state credit carryforwards of $0.7 million as of December 31, 2020. The federal credits do not expire, and the state credits expire between 2021 and 2031. The Company had IRC Section 163(j) interest limitation carryforwards of $278.4 million as of December 31, 2020, which do not expire.

The Company has recorded a valuation allowance against deferred tax assets at December 31, 2020 and 2019 totaling $91.1 million and $77.9 million, respectively, which represents an increase of $13.2 million. The valuation allowance continues to be provided for certain deferred tax assets for which the Company believes it is more likely than not that the tax benefits will not be realized, which are primarily Section 163(j) interest carryforwards, certain state NOLs and capital loss carryforwards.

The Company has evaluated the realizability of its deferred tax assets based on sources of positive and negative evidence, and determined that it is more likely than not that the NOL carryforwards will be realized. The determination was made based upon projections of future book and taxable income. If the Company's expectations for future operating results on a consolidated basis or at the state jurisdiction level vary from actual results due to changes in health care regulations, general economic conditions, or other factors, the Company may need to adjust the valuation allowance, for all or a portion of its deferred tax assets. The Company's income tax expense in future periods will be reduced or increased to the extent of offsetting decreases or increases, respectively, in its valuation allowance in the period when the change in circumstances occurs. These changes could have a significant impact on the Company's future earnings.

Included in the increase in the valuation allowance for the year ended December 31, 2020 was an increase of approximately $2.8 million that was recorded to additional-paid-in-capital as the result of the tax effect of the interest rate swap liability. Approximately $16.8 million of the valuation allowance as of December 31, 2020 is recorded against deferred tax assets that, if subsequently recognized, will be credited directly to contributed capital.

A reconciliation of the beginning and ending liability for gross unrecognized tax benefits for the years ended December 31, 2020 and 2019 is as follows (in millions):


	December 31,
	2020		2019

Unrecognized tax benefits at beginning of year	$	0.1	$	0.1
Reductions for tax positions of prior year	—		—
Unrecognized tax benefits at end of year	$	0.1	$	0.1

The Company recognizes interest and penalties related to uncertain tax positions in its provision for income taxes in the consolidated statements of operations. For both years ended December 31, 2020 and 2019, the Company had approximately $0.1 million each of accrued interest and penalties related to uncertain tax positions. The total amount of accrued liabilities related to uncertain tax positions that would affect the Company's effective tax rate, if recognized, is $0.1 million as of both December 31, 2020 and 2019. The reserves are included in long-term taxes payable in the consolidated balance sheet as of December 31, 2020.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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