Income Taxes

12 Months Ended

Dec. 31, 2019

Provision for Income Taxes

We are subject to tax in U.S. federal and various state and local jurisdictions, as well as Canada. We are not subject to any material income tax examinations in federal or state jurisdictions for tax years prior to January 1, 2015. The provision for income taxes consists of the following:



	Year Ended December 31,
(in millions)	2019			2018			2017
Current:
Federal	$	53		$	41		$	46
State	12			7			1
Total Current	65			48			47
Deferred:
Federal	(2		)	(3		)	12
State	(5		)	4			3
Revaluation due to legislative changes	—			—			(40		)
Total Deferred	(7		)	1			(25		)
Total	$	58		$	49		$	22

Certain prior year amounts have been reclassified to conform to current period presentation. The U.S. federal statutory income tax rate reconciled to our effective tax rate is as follows:



	Year Ended December 31,
	2019							2018							2017
(in millions, except percent)	Pre-Tax Income		Tax Expense/(Benefit)			Percent of Pre-Tax Income (Loss)		Pre-Tax Income		Tax Expense/(Benefit)			Percent of Pre-Tax Income (Loss)		Pre-Tax Income		Tax Expense/(Benefit)			Percent of Pre-Tax Income (Loss)
	$	270						$	241						$	200
U.S. federal statutory tax rate			$	57		21	%			$	51		21	%			$	70		35	%
State income taxes, net of federal benefit			20			7				18			8				10			5
Tax rate change			—			—				—			—				(40		)	(20	)
Nondeductible meals, entertainment and penalties			1			—				1			—				1			—
Stock based compensation			(1		)	—				(9		)	(4	)			(15		)	(7	)
Uncertain tax positions			—			—				1			—				4			2
Tax credits			(7		)	(3	)			(5		)	(2	)			(4		)	(2	)
State and tax return to provision adjustments			(8		)	(3	)			(7		)	(3	)			(5		)	(3	)
Sec 199 benefits			(1		)	—				—			—				(3		)	(1	)
Other			(3		)	(1	)			(1		)	—				4			2
Total			$	58		21	%			$	49		20	%			$	22		11	%

Our effective income tax rate increased by 1% to 21% in 2019 from 20% in 2018. The increase was primarily attributable to one-time expenses associated with stock based compensation and a reduction from excess tax benefits related to stock-based compensation. These increases were partially offset by a one-time benefit associated with prior year tax expense and changes in valuation allowance.

The revaluation of deferred taxes from changes in the statutory tax rates resulted in a discrete tax benefit representing an immaterial amount in 2019 and 2018, and 20% for the year ended December 31, 2017.

Deferred Income Taxes

Significant components of our deferred tax assets and liabilities are as follows:



	Year Ended December 31,
(in millions)	2019			2018
Deferred tax assets:
Net operating losses (federal and state)	$	3		$	3
Accrued expenses	10			8
Accrued workers' compensation costs	9			9
Stock based compensation	3			8
Tax benefits relating to uncertain positions	1			—
Tax credits (federal and state)	7			7
Total	33			35
Valuation allowance	(5		)	(7		)
Total deferred tax assets	28			28
Deferred tax liabilities:
Depreciation and amortization	(27		)	(24		)
Deferred service revenues	(41		)	(62		)
Prepaid health plan expenses	(1		)	—
Prepaid commission expenses	(19		)	(9		)
Total deferred tax liabilities	(88		)	(95		)
Net deferred tax liabilities	$	(60	)	$	(67	)

As of December 31, 2019 and 2018, we have various state net operating loss carryforwards of $53 million and $61 million, respectively, which, if unused, will expire in years 2020 through 2039 with the exception of an immaterial amount that will be carried forward indefinitely. As of December 31, 2019 and 2018, we have state tax credit carryforwards (net of federal benefit) of $6 million and $7 million, respectively available that will begin expiring in 2021, which are offset by a valuation allowance of $4 million and $6 million as of December 31, 2019 and 2018, respectively.

The provision for income taxes for the year ended December 31, 2019 included $8 million of excess tax benefits resulting from equity incentive plan activities.

We previously paid Notices of Proposed Assessments disallowing employment tax credits totaling $11 million, plus interest of $4 million in connection with the IRS examination of Gevity HR, Inc. and its subsidiaries, which was acquired by TriNet in June 2009. TriNet filed suit in June 2016 to recover the disallowed credits, and the issue is being resolved through the litigation process. TriNet and the U.S. filed cross motions for summary judgment in federal district court. On September 17, 2018, the district court granted our motion for summary judgment and denied the U.S.'s motion. On January 18, 2019, the district court entered judgment in favor of TriNet in the amount of $15 million, plus interest. The U.S. filed a notice of appeal of the federal district court's decision on March 18, 2019. The U.S. filed its opening brief in the court of appeals on June 10, 2019 and we filed our answering brief on July 24, 2019 to which the government filed its reply brief on September 6, 2019. We will continue to vigorously defend our position through the litigation process. Given the uncertainty of the outcome of any appeal, it remains possible that our recovery of the refund will be less than the total amount in dispute.

Valuation Allowance

We have recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized. A reconciliation of the beginning and ending amount of the valuation allowance is presented in the table below:



	Year Ended December 31,
(in millions)	2019			2018		2017
Valuation allowance at January 1	$	7		$	7	$	6
Credited/ charged to net income	(2		)	—		1
Valuation allowance at December 31	5			7		7

Uncertain Tax Positions

As of December 31, 2019 and 2018, the total unrecognized tax benefits related to uncertain income tax positions, which would affect the effective tax rate if recognized, were $7 million and $6 million, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) is presented in the table below:



	Year Ended December 31,
(in millions)	2019			2018			2017
Unrecognized tax benefits at January 1	$	6		$	6		$	1
Additions for tax positions of prior periods	1			1			4
Additions for tax positions of current period	1			—			1
Reductions for tax positions of prior period:
Lapse of applicable statute of limitations	(1		)	(1		)	—
Unrecognized tax benefits at December 31	$	7		$	6		$	6

As of December 31, 2019 and 2018, the total amount of gross interest and penalties accrued were immaterial. The unrecognized tax benefit, including accrued interest and penalties, is included in other liabilities on the consolidated balance sheet.

It is reasonably possible the amount of the unrecognized benefit could increase or decrease within the next twelve months, which would have an impact on net income.