Income Taxes

12 Months Ended

Dec. 31, 2019

Income Taxes

Income Taxes

15. Income Taxes

The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the difference is expected to reverse. Additionally, the impact on deferred tax assets and liabilities of changes in tax rates is reflected in the financial statements in the period that includes the date of enactment.

Revision of Prior Period Financial Statements

In connection with the preparation of its consolidated financial statements, the Company identified an immaterial error related to the recognition of deferred tax assets related to state bonus depreciation modification in certain states in prior periods. Accordingly, the Company has revised previously reported deferred income taxes, net and income tax benefit for such immaterial error, including the information presented within this note. Refer to Note 21 for further discussion.

Income Tax (Expense) Benefit

For the years ended December 31, 2019, 2018, and 2017, the Company recorded deferred income tax benefit (expense) as shown below. The tax provision in future periods will vary based on current and future temporary differences, as well as future operating results.

	Year ended December 31,
	2019		2018		2017
	(in millions)
Current tax (expense) benefit
Federal	$	—	$	8.8	$	(5.7)
State		2.8		(1.0)		(11.9)
Total Current		2.8		7.8		(17.6)
Deferred tax (expense) benefit
Federal		(8.1)		44.8		179.6
State		3.8		12.5		(3.7)
Total Deferred		(4.3)		57.3		175.9
Income tax (expense) benefit, net	$	(1.5)	$	65.1	$	158.3

The Company reported total income tax expense of $1.5 million, and total income tax benefit of $65.1 million, and $158.3 million during the years ended December 31, 2019, 2018 and 2017, respectively.

The Company’s effective tax rate differs from that derived by applying the applicable federal income tax rate of 21% for the years ended December 31, 2019 and 2018 and 35% for the year ended December 31, 2017, as follows:

	Year ended December 31,
	2019		2018		2017
	(in millions)
Statutory federal income taxes	$	(8.0)	$	32.0	$	(9.5)
State income taxes		(2.1)		11.9		(1.6)
Uncertain tax positions		3.7		(0.1)		(3.2)
Tax status & tax rate change		0.9		1.3		4.0
Other true-ups		0.8		1.0		1.2
Equity compensation		(0.3)		(1.9)		—
Other permanent differences		(0.4)		(0.3)		(0.5)
Goodwill impairment		—		(11.2)		(35.1)
Corporate Tax Reform		—		—		103.4
Change in valuation allowance		3.9		32.4		99.6
Income tax benefit, net	$	(1.5)	$	65.1	$	158.3

The $3.9 million change in valuation allowance as of December 31, 2019, is related to increases in state indefinite lived deferred tax assets related to net operating loss carryforwards and state bonus depreciation modification. Income tax benefit for the year ended December 31, 2017 was recognized primarily as a result of the enactment of Tax Reform in December 2017. Among other things, the primary provisions of Tax Reform impacting the Company are the reductions to the U.S. corporate income tax rate from 35% to 21% and temporary 100% bonus depreciation for certain assets. The change in tax law required the Company to re-measure existing net deferred tax liabilities using the lower rate in the period of enactment resulting in an income tax benefit of approximately $103.4 million to reflect these changes in the year ended December 31, 2017. The $99.6 million change in valuation allowance is comprised of a deferred tax benefit of $22.1 million as a result of re-measuring to the new corporate rate while the remaining deferred tax benefit is related to 2017 pretax book income activity. In total the re-measurement related to Corporate Tax Reform is $125.5 million, which was recorded in the year ended December 31, 2017.  

Deferred Tax Liabilities

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 are as follows.

	December 31,
	2019		2018
	(in millions)
Non-current deferred income tax (assets) liabilities:
Allowances and other reserves	$	(6.8)	$	(7.1)
Net operating loss carryforwards		(203.7)		(172.8)
Depreciation and amortization		183.9		140.5
Franchise operating rights		202.0		204.7
Interest hedging		(4.8)		—
Debt issuance costs		2.5		3.2
State income tax		(0.9)		(1.9)
Other		(6.4)		(4.1)
Valuation allowance		26.7		30.4
Total net deferred tax liabilities	$	192.5	$	192.9

Valuation Allowance

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. In evaluating the need for a valuation allowance, management takes into account various factors, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations. On the basis of this evaluation, a valuation allowance of $26.7 million and $30.4 million, as of December 31, 2019 and 2018, respectively, has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized.

Net Operating Loss Carryforwards

As of December 31, 2019, the Company had approximately $850.0 million of federal tax net operating loss carryforwards. Of the federal tax net operating loss carryforwards, $197.4 million are indefinite lived and $652.6 million expire between the years 2025 through 2036. In addition, as of December 31, 2019, the Company had state tax net operating loss carryforwards of $931.0 million, of which $158.4 million are indefinite lived and $772.6 million expire between 2020 and 2038.

As a result of the IPO (effective May 25, 2017), the Company experienced an “ownership change” as defined in Section 382 of the Internal Revenue Code; resulting in limitations on the Company’s use of its existing federal and state net operating losses and capital losses. After December 31, 2019, $652.6 million of the Company’s federal tax loss carryforwards are subject to Section 382 and other restrictions. Pursuant to these restrictions, the Company estimates the entire balance of federal tax loss carryforwards should become unrestricted and available for use since the limitation amounts accumulate for future use to the extent they are not utilized in any given year. The Company believes its loss carryforwards should become fully available to offset future taxable income resulting in no significant impact on future operating cash flows. $646.0 million of the Company’s state loss carryforwards are subject to similar limitations on their future use. If the Company was to experience another “ownership change” in the future, its ability to use its loss carryforwards could be subject to further limitations.

Uncertain Tax Positions

These uncertain tax positions, if ever recognized in the financial statements, would be recorded in the consolidated statements of operations as part of the income tax provision. A reconciliation of the beginning and ending amount of unrecognized tax benefits, exclusive of interest and penalties, included in other non-current liabilities on the accompanying consolidated balance sheets of the Company is as follows:

	Year ended December 31,
	2019		2018		2017
	(in millions)
Unrecognized tax benefits—January 1st	$	28.0	$	30.9	$	31.5
Gross increases—tax positions in prior period		—		—		3.8
Gross decreases—tax positions in prior period		(12.8)		(2.9)		(2.6)
Gross increases—tax positions in current period		—		—		14.2
Settlements		(3.8)		—		(1.2)
Gross change related to Tax Reform		—		—		(14.8)
Unrecognized tax benefits—December 31st	$	11.4	$	28.0	$	30.9

As of December 31, 2019 the Company recorded gross unrecognized tax benefits of $11.4 million, all of which, if recognized, would affect the Company’s effective tax rate. The Company recognizes interest and penalties accrued on uncertain income tax positions as part of the income tax provision. Interest and penalties included in other long-term liabilities on the accompanying consolidated balance sheets of the Company were $1.0 million, $1.9 million, and $1.4 million for years ended December 31, 2019, 2018 and 2017, respectively. The Company does not expect any amount of the $11.4 million unrecognized tax benefits to reverse in the next 12 months.

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. No tax years for the Company are currently under examination by the IRS or state and local tax authorities for income tax purposes. Generally the Company’s 2016 through 2019 tax years remain open for examination and assessment. The Company’s short period return dated April 1, 2016 remains subject to examination and assessment. Years prior to 2016 remain open solely for purposes of examination of the Company’s loss and credit carryforwards. The Company is not currently under examination, but does have open tax controversy matters with state taxing authorities. Activity related to state and local controversy matters did not have a material impact on our consolidated financial position or results of operations during the year ended December 31, 2019, nor do we anticipate a material impact in the future.