VSE Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2018

We are subject to U.S. federal income tax as well as income tax in multiple state and local jurisdictions. We have concluded all U.S. federal income tax matters as well as material state and local tax matters for years through 2014.

The Tax Cuts and Jobs Act (the "Tax Act") was enacted on December 22, 2017. The Tax Act significantly affects the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%. In connection with the permanent reduction in the U.S. statutory corporate tax rate, we recalculated our net deferred tax liabilities as of December 31, 2017 and recorded a provisional tax benefit of approximately $10.6 million in 2017.

We applied the guidance in Staff Accounting Bulletin 118 when accounting for the enactment-date effects of the Tax Act in 2017 and throughout 2018. At December 31, 2017, we had substantially completed our provisional analysis of the income tax effects of the Tax Act and recorded a reasonable estimate in 2017 of such effects. During 2018, we refined our calculations, evaluated changes in interpretations and assumptions that we had made, applied additional guidance issued by the U.S. Government, and evaluated actions and related accounting policy decisions we have made. As of December 22, 2018, we completed our accounting for all of the enactment-date income tax effects of the Tax Act and identified an additional tax benefit of approximately $795 thousand to the provisional one-time charge for the year ended December 31, 2017, related to the Tax Act.

We file consolidated federal income tax returns that include all of our subsidiaries. The components of the provision for income taxes from continuing operations for the years ended December 31, 2018, 2017 and 2016 are as follows (in thousands):



	2018			2017			2016
Current
Federal	$	9,667		$	14,149		$	13,648
State	1,758			2,511			2,379
Foreign	140			—			—
	11,565			16,660			16,027
Deferred
Federal	(1,114		)	(10,645		)	(983		)
State	(347		)	110			(163		)
Foreign	64			(136		)	—
	(1,397		)	(10,671		)	(1,146		)
Provision for income taxes	$	10,168		$	5,989		$	14,881

The differences between the amount of tax computed at the federal statutory rate of 21% in 2018 and 35% in 2017 and 2016, and the provision for income taxes from continuing operations for the years ended December 31, 2018, 2017 and 2016 are as follows (in thousands):



	2018			2017			2016
Tax at statutory federal income tax rate	$	9,502		$	15,780		$	14,586
Increases (decreases) in tax resulting from:
State taxes, net of federal tax benefit	1,861			1,732			1,599
Permanent differences, net	367			(275		)	(545		)
Impact of Tax Act	(795		)	(10,556		)	—
Other provision adjustments	(767		)	(692		)	(759		)
Provision for income taxes	$	10,168		$	5,989		$	14,881

Certain amounts from the prior years have been reclassified to conform to the current year presentation.

The tax effect of temporary differences representing deferred tax assets and liabilities as of December 31, 2018 and 2017 are as follows (in thousands):



	2018			2017
Gross deferred tax assets
Deferred compensation and accrued paid leave	$	5,794		$	5,594
Accrued expenses	1,310			1,013
Stock-based compensation	819			772
Reserve for contract disallowances	120			84
Acquisition-related expenses	151			—
Capitalized inventory	742			916
State operating loss carryforward	24			263
Tax credit carryforward	47			178
Foreign country operating loss carryforward	157			136
Foreign country valuation allowance	(107		)	—
Total gross deferred tax assets	9,057			8,956

Gross deferred tax liabilities
Interest rate swaps	(49		)	(74		)
Depreciation	(1,739		)	(2,439		)
Deferred revenues	(2,164		)	(1,875		)
Goodwill and intangible assets	(23,395		)	(23,854		)
Prepaid expenses	(120		)	—
Total gross deferred tax liabilities	(27,467		)	(28,242		)

Net deferred tax liabilities	$	(18,410	)	$	(19,286	)