Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes [Abstract]

Income Taxes

(15) Income Taxes:

The following is a reconciliation of the provision for income taxes computed at the federal statutory rate to income taxes computed at the effective rates for the years ended December 31, 2020, 2019 and 2018:

	2020		2019		2018
Consolidated tax provision at federal statutory rate	21.0	%	21.0	%	21.0	%
State income tax provisions, net of federal income
tax benefit	21.7		2.6		1.6
Tax reserve adjustment	(0.7)		-		0.1
Changes in certain deferred tax balances	(35.8)		(2.3)		(3.5)
Interest expense deduction	30.7		-		-
Restructuring cost	(10.0)		-		-
Goodwill impairment	-		(11.8)		(10.4)
Loss on disposal of Northwest Operations	(9.1)		-		-
Share-based payments	(0.2)		(0.1)		(0.5)
Federal research and development credit	(0.5)		-		0.1
Deferred Tax Remeasurement - 2017 Tax Reform	-		-		0.6
All other, net	0.1		-		(0.2)
Effective tax rate	17.2	%	9.4	%	8.8	%

CARES Act

On March 27, 2020, the CARES Act were each enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses arising in taxable years beginning after December 31, 2017.

The CARES Act has a number of beneficial tax provisions (e.g., deferral of the employer portion of social security taxes for the remainder of 2020, the ability to claim additional interest deductions, net operating loss carrybacks, and removal of the 80% usage limitation for post-2017 NOLs for tax years 2018, 2019 and 2020).

Employers can defer payment of the employer’s share of the Social Security tax that they otherwise are responsible for paying on wages. The deferral applies to affected taxes normally required to be paid from March 27, 2020, through December 31, 2020. The deferred tax must be paid over the following two years, with half to be paid by December 31, 2021, and the other half to be paid by December 31, 2022. As of December 31, 2020, Frontier has entered the program and has deferred approximately the payment of $60 million.

The business interest deduction limit under Code Sec. 163(j) is increased to 50 percent of the taxpayer’s adjusted taxable income (ATI) for the 2019 and 2020 tax years. A taxpayer may also elect for the 2020 year only to use 2019 ATI in calculating the limitation. A taxpayer may elect not to have the increased limitation apply in 2019 or 2020.

Net operating losses (NOLs) arising in tax years beginning in 2018, 2019, and 2020 now have a five-year carryback period and an unlimited carryforward period. The provision limiting an NOL deduction attributable to NOLs arising in tax years beginning after 2017 to 80 percent of taxable income does not apply during these years.

The Tax Cut and Jobs Act

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly known as the Tax Cut and Jobs Act (the TCJA). The TCJA, makes broad and complex changes to the U.S. tax code. The TCJA reduces the corporate tax rate to 21%, effective January 1, 2018. Under ASC 740, the effects of new legislation are recognized upon enactment. Accordingly, recognition of the tax effects of the TCJA were required in the interim and annual periods that include December 22, 2017.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allowed the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As a result, the Company previously provided provisional estimates of the effect of the TCJA in the financial statements. In the fourth quarter of 2018, the Company completed our analysis to determine the effects of the TCJA and recorded immaterial adjustments as of December 31, 2018.

Shareholders’ Rights Agreement

On July 1, 2019, the Board of Directors of Frontier Communications adopted a shareholder’s right plan (Rights Agreement) designed to protect the availability of the net operating loss carryforwards under the Internal Revenue Code (IRC). The Rights Agreement is intended to reduce the likelihood of an ownership change under Section 382 of the IRC by deterring any person or group of affiliated or associated persons from acquiring beneficial ownership of 4.9% or more of the outstanding common shares.

Other Tax Items

Income taxes includes the tax impact of $524 million and $72 million, related to the goodwill impairment for the years ended December 31, 2019 and 2018, respectively.

As of December 31, 2020, $13 million of expected income tax refunds are included in “Income taxes and other current assets” in the consolidated balance sheet.

In 2020, 2019 and 2018, we paid net federal and state income tax totaling $8 million, $4 million, and $4 million, respectively.

The components of the net deferred income tax liability (asset) at December 31 are as follows:

($ in millions)	2020		2019
Deferred income tax liabilities:
Property, plant and equipment basis differences	$	1,873	$	2,184
Deferred revenue/expense		44		65
Other, net		56		56
	$	1,973	$	2,305
Deferred income tax assets:
Pension liability	$	308	$	256
Intangibles		681		665
Tax operating loss carryforward		923		898
Employee benefits		207		184
Interest expense deduction
limitation carryforward		44		238
Accrued expenses		75		37
Lease obligations		83		92
Tax credit		40		39
Allowance for doubtful accounts		35		32
Other, net		17		7
		2,413		2,448
Less: Valuation allowance		(783)		(605)
Net deferred income tax asset		1,630		1,843
Net deferred income tax liability	$	343	$	462

Our federal net operating loss carryforward as of December 31, 2020 is estimated at $1.8 billion. The majority of the federal loss carryforward will begin to expire after 2036, with $121 million carrying forward indefinitely, unless otherwise used. In connection with the sale of the Northwest Operations, Frontier utilized NOL’s of approximately $857 million during the year ended December 31, 2020.

Our state tax operating loss carryforward as of December 31, 2020 is estimated at $9.4 billion. A portion of our state loss carryforward will continue to expire annually through 2039, unless otherwise used.

Our federal research and development credit as of December 31, 2020 is estimated at $12 million. The federal research and development credit will expire between 2034 and 2039, unless otherwise used.

Our various state credits as of December 31, 2020 are estimated at $34 million. The state credits will expire between 2020 and 2023, unless otherwise used.

As of December 31, 2020, Frontier has a valuation allowance of $783 million to reduce deferred tax assets to an amount more likely than not to be realized. This valuation allowance is related to state net operating losses, state tax credits, and the state impact from the federal limitation on interest expense deduction. In evaluating Frontier’s ability to realize its deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. Management also considered the projected reversal of deferred tax liabilities and projected future taxable income in making this assessment. Based upon this assessment, management believes it is more likely than not Frontier will realize the benefits of these deductible differences, net of valuation allowance.

The provision (benefit) for federal and state income taxes, as well as the taxes charged or credited to equity of Frontier, includes amounts both payable currently and deferred for payment in future periods as indicated below:

($ in millions)	2020		2019		2018
Income tax expense (benefit):
Current:
Federal	$	(12)	$	1	$	(1)
State		19		7		6
Total Current		7		8		5
Deferred:
Federal		(84)		(606)		(77)
State		(7)		(13)		10
Total Deferred		(91)		(619)		(67)
Total income tax benefit		(84)		(611)		(62)
Income taxes charged (credited) to equity of Frontier:
Deferred income taxes (benefits) arising from the recognition
of additional pension/OPEB liability		35		32		(31)
Total income taxes charged (credited) to equity of Frontier		35		32		(31)
Total income tax benefit	$	(49)	$	(579)	$	(93)

U.S. GAAP requires applying a “more likely than not” threshold to the recognition and derecognition of uncertain tax positions either taken or expected to be taken in Frontier’s income tax returns. The total amount of our gross tax liability for tax positions that may not be sustained under a “more likely than not” threshold amounts to $16 million as of December 31, 2020, including immaterial interest. The amount of our uncertain tax positions, for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease during the next twelve months, and which would affect our effective tax rate, is $2 million as of December 31, 2020.

Frontier’s policy regarding the classification of interest and penalties is to include these amounts as a component of income tax expense. This treatment of interest and penalties is consistent with prior periods. We are subject to income tax examinations generally for the years 2017 forward for federal and 2016 forward for state filing jurisdictions. We also maintain uncertain tax positions in various state jurisdictions.

The following table sets forth the changes in Frontier’s balance of unrecognized tax benefits for the years ended December 31, 2019 and 2018:

($ in millions)	2020		2019
Unrecognized tax benefits - beginning of year	$	12	$	11
Gross increases - prior year tax positions		4		-
Gross increases - current year tax positions		-		1
Gross decreases - FIN 48 liability release		-		-
Gross decreases - expired statute of limitations		-		-
Unrecognized tax benefits - end of year	$	16	$	12