INCOME TAXES

12 Months Ended

Dec. 31, 2020

The provision for income taxes for continuing operations for the years ended December 31, 2020, 2019 and 2018 consists of the following:


	Years Ended December 31,
	2020		2019		2018
Current tax expense (benefit):
Federal	$	—	$	(6)	$	(6)
State	30		26		33
	30		20		27
Deferred tax expense (benefit):
Federal	(131)		140		156
State	4		—		(10)
	(127)		140		146
	$	(97)	$	160	$	173

A reconciliation between the amount of reported income tax expense (benefit) and the amount computed by multiplying income from continuing operations before income taxes by the statutory federal income tax rate is shown below. State income tax expense for the year ended December 31, 2020 includes $1 million of expense related to the write-off of expired or worthless unutilized state net operating loss carryforwards and other deferred tax assets for which a full valuation allowance had been provided in prior years. A corresponding tax benefit of $1 million is included for the year ended December 31, 2020 to reflect the reduction in the valuation allowance. Foreign pre-tax loss was $13 million for the year ended December 31, 2020, and $6 million for the years ended December 31, 2019 and 2018.


	Years Ended December 31,
	2020		2019		2018
Tax expense at statutory federal rate of 21%	$	141	$	67	$	132
State income taxes, net of federal income tax benefit	33		21		23
Expired state net operating losses, net of federal income tax benefit	1		2		9
Tax attributable to noncontrolling interests	(75)		(79)		(70)
Nondeductible goodwill	—		4		8
Nondeductible executive compensation	6		6		4
Nondeductible litigation costs	—		7		—
Expired charitable contribution carryforward	1		8		—
Impact of decrease in federal tax rate on deferred taxes	—		—		(1)
Reversal of permanent reinvestment assumption and other adjustments related to divestiture of foreign subsidiary	—		—		(6)
Stock-based compensation tax deficiencies (benefits)	(2)		4		5
Changes in valuation allowance (including impact of decrease in federal tax rate)	(226)		133		76
Change in tax contingency reserves, including interest	—		(14)		(1)
Prior-year provision to return adjustments and other changes in deferred taxes	14		(3)		(5)
Other items	10		4		(1)
Income tax expense (benefit)	$	(97)	$	160	$	173

The CARES Act includes a significant number of tax provisions applicable to individuals and businesses. For businesses, the CARES Act makes changes to the U.S. tax code relating to, among other things: (1) the business interest expense disallowance rules for 2019 and 2020; (2) net operating loss rules; (3) charitable contribution limitations; and (4) the realization of corporate alternative minimum tax credits. As a result of the change in the business interest expense disallowance rules, we recorded an income tax benefit of $88 million during the year ended December 31, 2020 to decrease the valuation allowance for interest expense carryforwards due to the additional deduction of interest expense.

In September 2020, we filed an application with the Internal Revenue Service (“IRS”) to change our method of accounting for certain capitalized costs on our 2019 tax return. This change in tax accounting method resulted in additional interest expense being allowed on the 2019 and 2020 tax returns. We reduced our valuation allowance by an additional $126 million in the year ended December 31, 2020 related to the change in accounting method.

Deferred income taxes reflect the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. The following table discloses those significant components of our deferred tax assets and liabilities, including any valuation allowance:


	December 31, 2020				December 31, 2019
	Assets		Liabilities		Assets		Liabilities
Depreciation and fixed-asset differences	$	—	$	621	$	—	$	282
Reserves related to discontinued operations and restructuring charges	8		—		14		—
Receivables (doubtful accounts and adjustments)	173		—		165		—

Accruals for retained insurance risks	223		—		209		—
Intangible assets	—		385		—		356
Other long-term liabilities	55		—		35		—
Benefit plans	265		—		274		—
Other accrued liabilities	74		—		45		—
Investments and other assets	—		73		—		95
Interest expense limitation	8		—		219		—
Net operating loss carryforwards	566		—		179		—
Stock-based compensation	11		—		19		—
Right-of-use lease assets and obligations	224		224		—		—
Other items	86		39		45		34
	1,693		1,342		1,204		767
Valuation allowance	(55)		—		(281)		—
	$	1,638	$	1,342	$	923	$	767

Below is a reconciliation of the deferred tax assets and liabilities and the corresponding amounts reported in the accompanying Consolidated Balance Sheets.


	December 31,
	2020		2019
Deferred income tax assets	$	325	$	183
Deferred tax liabilities	(29)		(27)
Net deferred tax asset	$	296	$	156

During the year ended December 31, 2020, the valuation allowance decreased by $226 million, including a decrease of $211 million due to limitations on the tax deductibility of interest expense, a decrease of $1 million due to the expiration or worthlessness of unutilized state net operating loss carryovers, and a decrease of $14 million due to changes in expected realizability of deferred tax assets. The balance in the valuation allowance as of December 31, 2020 was $55 million. During the year ended December 31, 2019, the valuation allowance increased by $133 million, including an increase of $130 million due to limitations on the tax deductibility of interest expense, a decrease of $2 million due to the expiration or worthlessness of unutilized state net operating loss carryovers, and an increase of $5 million due to changes in expected realizability of deferred tax assets. The remaining balance in the valuation allowance at December 31, 2019 was $281 million. During the year ended December 31, 2018, the valuation allowance decreased by $76 million, including an increase of $89 million due to limitations on deductions of interest expense, a decrease of $9 million due to the expiration or worthlessness of unutilized state net operating loss carryovers, and a decrease of $4 million due to changes in expected realizability of deferred tax assets. The remaining balance in the valuation allowance as of December 31, 2018 was $148 million. Deferred tax assets relating to interest expense limitations under Internal Revenue Code Section 163(j) have a full valuation allowance because the interest expense carryovers are not expected to be utilized in the foreseeable future.

We account for uncertain tax positions in accordance with FASB ASC 740-10-25, which prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The following table summarizes the total changes in unrecognized tax benefits in continuing operations during the years ended December 31, 2020, 2019 and 2018. There were no such changes in discontinued operations. The additions and reductions for tax positions include the impact of items for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductions. Such amounts include unrecognized tax benefits that have impacted deferred tax assets and liabilities at December 31, 2020, 2019 and 2018.


	Continuing Operations
Balance At December 31, 2017	$	46
Reductions due to a lapse of statute of limitations	(1)
Balance At December 31, 2018	$	45
Reductions due to a lapse of statute of limitations	(14)
Balance At December 31, 2019	$	31
Reductions due to a lapse of statute of limitations	—
Balance At December 31, 2020	$	31

The total amount of unrecognized tax benefits as of December 31, 2020 was $31 million, of which $29 million, if recognized, would affect our effective tax rate and income tax benefit from continuing operations. In the year ended December 31, 2020, there was no change in our estimated liabilities for uncertain tax positions. The total amount of unrecognized tax benefits as of December 31, 2019 was $31 million, of which $29 million, if recognized, would affect our effective tax rate and income tax expense from continuing operations. Income tax expense in the year ended December 31, 2019 includes a benefit of $11 million in continuing operations attributable to a decrease in our estimated liabilities for uncertain tax positions, net of related deferred tax effects. The total amount of unrecognized tax benefits as of December 31, 2018 was $45 million, of which $43 million, if recognized, would affect our effective tax rate and income tax expense from continuing operations. Income tax expense in the year ended December 31, 2018 includes a benefit of $1 million in continuing operations attributable to a decrease in our estimated liabilities for uncertain tax positions, net of related deferred tax effects.

Our practice is to recognize interest and penalties related to income tax matters in income tax expense in our consolidated statements of operations. We did not have any interest or penalties on unrecognized tax benefits accrued at December 31, 2020.

The IRS has completed audits of our tax returns for all tax years ended on or before December 31, 2007. All disputed issues with respect to these audits have been resolved and all related tax assessments (including interest) have been paid. Our tax returns for years ended after December 31, 2007 and USPI’s tax returns for years ended after December 31, 2016 remain subject to audit by the IRS.

As of December 31, 2020, no significant changes in unrecognized federal and state tax benefits are expected in the next 12 months as a result of the settlement of audits, the filing of amended tax returns or the expiration of statutes of limitations.

At December 31, 2020, our carryforwards available to offset future taxable income consisted of (1) federal net operating loss (“NOL”) carryforwards of approximately $2.367 billion pre-tax, $1.126 billion of which expires in 2021 to 2034 and $1.241 billion of which has no expiration date, (2) general business credit carryforwards of approximately $25 million expiring in 2023 through 2039, (3) charitable contribution carryforwards of approximately $195 million expiring in 2021 through 2025 and (4) state NOL carryforwards of approximately $3.728 billion expiring in 2021 through 2040 for which the associated deferred tax benefit, net of valuation allowance and federal tax impact, is $61 million. Our ability to utilize NOL carryforwards to reduce future taxable income may be limited under Section 382 of the Internal Revenue Code if certain ownership changes in our company occur during a rolling three-year period. These ownership changes include purchases of common stock under share repurchase programs, the offering of stock by us, the purchase or sale of our stock by 5% shareholders, as defined in the Treasury regulations, or the issuance or exercise of rights to acquire our stock. If such ownership changes by 5% shareholders result in aggregate increases that exceed 50 percentage points during the three-year period, then Section 382 imposes an annual limitation on the amount of our taxable income that may be offset by the NOL carryforwards or tax credit carryforwards at the time of ownership change.

- 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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