Construction Partners, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Provision for Income Taxes

Provision for Income Taxes

12 Months Ended

Sep. 30, 2018

The Company files a consolidated United States income tax return and income tax returns in various states. Management evaluated the Company’s tax positions based on appropriate provisions of applicable enacted tax laws and regulations and believes that they are supportable based on their specific technical merits and the facts and circumstances of the transactions.

The provision for income taxes for the fiscal years ended September 30, 2018 and September 30, 2017 consists of the following (in thousands):



	For the Fiscal Year Ended September 30,
	2018			2017
Current
U.S. Federal	$	9,380		$	11,977
State	1,626			1,900
Total current	11,006			13,877
Deferred
U.S. Federal	(1,003		)	711
State	522			154
Total deferred	(481		)	865
Provision for income taxes	$	10,525		$	14,742

Differences exist between income and expenses reported on the consolidated financial statements and those deducted for U.S. Federal and state income tax reporting. The Company’s deferred tax assets and liabilities consisted of the following temporary difference tax effects at September 30, 2018 and September 30, 2017 (in thousands):



	September 30,
	2018			2017
Deferred tax assets
Allowance for bad debt	$	444		$	936
Amortization of finite-lived intangible assets	499			751
State net operating loss	1,695			1,928
Employee benefits	—			243
Accrued insurance claims	1,202			1,417
Other	—			506
Total deferred tax assets, net	3,840			5,781
Deferred tax liabilities
Amortization of goodwill	(3,925		)	(5,022		)
Property, plant and equipment	(7,162		)	(8,550		)
Other	(63		)	—
Total deferred tax liabilities, net	(11,150		)	(13,572		)
Net deferred tax assets (liabilities)	$	(7,310	)	$	(7,791	)

The Consolidated Balance Sheets at September 30, 2018 and September 30, 2017 include gross deferred tax assets of $3.8 million and $5.8 million, respectively. In assessing the realization of 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. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected taxable income, and tax-planning strategies in making this assessment. Based on the weight of all evidence known and available as of the balance sheet date, management believes that these tax benefits are more likely than not to be realized in the future. To the extent that management does not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established.

Income taxes payable have been reduced by fuel tax credits of $0.3 million for each of the fiscal years ended September 30, 2018 and September 30, 2017. The remaining amount of goodwill expected to be deductible for tax purposes was $14.9 million and $15.3 million at September 30, 2018 and September 30, 2017, respectively.

The following is a reconciliation of net deferred tax assets (liabilities) to amounts reflected on the Company’s Consolidated Balance Sheets at September 30, 2018 and September 30, 2017 (in thousands):



	September 30,
	2018			2017
Asset: Deferred income taxes, net	$	1,580		$	1,876
Liability: Deferred income taxes, net	(8,890		)	(9,667		)
Net deferred tax assets (liabilities)	$	(7,310	)	$	(7,791	)

At September 30, 2018 and September 30, 2017, the Company had a state net operating loss carryforward of $38.3 million and $52.5 million, respectively. The state net operating loss credit carryforwards expire in varying amounts between the fiscal years ended September 30, 2020 and September 30, 2030.

The U.S. statutory income tax rate applicable to the Company was 35.0% during the fiscal year ended September 30, 2017. On December 22, 2017, the U.S. government enacted comprehensive tax legislation known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act included broad and complex changes to the U.S. tax code, including a reduction in the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. The Company completed its accounting for the income tax effects of the Tax Act during fiscal 2018 and recorded a discrete tax benefit of $4.6 million related to the Tax Act, primarily due to adjusting its U.S. deferred tax liabilities by the same amount, reflecting the reduction in the U.S. federal corporate tax rate. This net reduction in deferred tax liabilities also included the estimated impact on the Company’s net state deferred tax assets. Accordingly, the Company recorded its income tax provision for the fiscal year ended September 30, 2018 based on a blended U.S. statutory tax rate of 24.5%, which was based on a proration of the applicable tax rates before and after the effective date of the Tax Act, and the effect of applicable state income taxes. The federal statutory rate of 21% applies for fiscal years beginning after September 30, 2018. During the fiscal year ended September 30, 2018, the Company also realized a $2.3 million permanent tax benefit, including $1.4 million resulting from the deduction of the excess fair market value of options exercised under the 2010 Non-Plan Stock Option Agreement over the exercise price.

The following table reconciles income taxes based on the U.S. statutory tax rate to the Company’s income before provision for income taxes for the fiscal years ended September 30, 2018 and September 30, 2017 (in thousands):



	For the Fiscal Year Ended September 30,
	2018			2017
Provision for income tax at federal statutory rate	$	15,023		$	14,260
State income taxes	1,622			1,268
Change in deferred federal income taxes due to Tax Act	(4,552		)	—
Permanent differences	(2,282		)	(686		)
Other	714			(100		)
Provision for income taxes	$	10,525		$	14,742

Uncertain Tax Positions

ASC Topic 740, Income Taxes prescribes a recognition threshold and measurement model for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return and provides guidance on derecognition classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company is subject to tax audits in various jurisdictions in the United States. Tax audits by their nature are often complex. In the normal course of business, the Company is subject to challenges from the Internal Revenue Service ("IRS") and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. As part of the calculation of the provision for income taxes on earnings, management determines whether the benefits of the Company’s tax positions are at least more likely than not to be sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not to be sustained upon audit, management accrues the largest amount of the benefit that is more likely than not to be sustained. Such accruals require management to make estimates and judgments with respect to the ultimate outcome of a tax audit. Actual results could vary materially from these estimates. The Company performed an analysis of its tax positions and determined that no uncertain tax positions existed at September 30, 2018 or 2017. Accordingly, there was no liability for uncertain tax positions at September 30, 2018 or September 30, 2017. Based on the provisions of ASC 740, the Company had no material unrecognized tax benefits at September 30, 2018 or September 30, 2017. Due to the utilization of net operating loss carryforwards, the Company’s federal income tax returns for fiscal years ended September 30, 2012 through September 30, 2018 are subject to examination. Various state income tax returns for fiscal years ended September 30, 2011 through September 30, 2018 are also subject to examination.