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, 2017

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 2013.

The Tax Cuts and Jobs Act (the "Tax Act") was signed into law 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%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and changing how foreign earnings are subject to U.S. tax. The Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. We have not completed our determination of the accounting implications of the Tax Act on our tax accruals. However, we have reasonably estimated the effects of the Tax Act and recorded provisional amounts in our financial statements as of December 31, 2017. We recorded a provisional tax benefit for the impact of the Tax Act of approximately $10.6 million. This amount is primarily comprised of the re-measurement of our federal net deferred tax liabilities resulting from the permanent reduction in the U.S. corporate tax rate from 35% to 21%. As we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments, if any, are not expected to have a material impact on our consolidated financial statements.

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, 2017, 2016 and 2015 are as follows (in thousands):



	2017			2016			2015
Current
Federal	$	14,149		$	13,648		$	13,641
State	2,511			2,379			2,352
	16,660			16,027			15,993
Deferred
Federal	(10,645		)	(983		)	73
State	110			(163		)	11
Foreign	(136		)	—			—
	(10,671		)	(1,146		)	84
Provision for income taxes	$	5,989		$	14,881		$	16,077

The differences between the amount of tax computed at the federal statutory rate of 35% and the provision for income taxes from continuing operations for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):



	2017			2016			2015
Tax at statutory federal income tax rate	$	15,780		$	14,586		$	14,348
Increases (decreases) in tax resulting from:
State taxes, net of federal tax benefit	1,732			1,599			1,683
Permanent differences, net	(643		)	(974		)	88
Impact of Tax Act	(10,556		)	—			—
Other, net	(324		)	(330		)	(42		)
Provision for income taxes	$	5,989		$	14,881		$	16,077

The tax effect of temporary differences representing deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows (in thousands):



	2017			2016
Gross deferred tax assets
Deferred compensation and accrued paid leave	$	5,594		$	7,602
Accrued expenses	1,013			1,933
Stock-based compensation	772			803
Reserve for contract disallowances	84			90
Capitalized inventory	916			1,104
State operating loss carryforward	263			283
Tax credit carryforward	178			155
Foreign country operating loss carryforward	136			—
Legal settlements	—			614
Other	—			65
Total gross deferred tax assets	8,956			12,649

Gross deferred tax liabilities
Interest rate swaps	(74		)	(28		)
Depreciation	(2,439		)	(3,522		)
Deferred revenues	(1,875		)	(2,291		)
Goodwill and intangible assets	(23,854		)	(36,680		)
Total gross deferred tax liabilities	(28,242		)	(42,521		)

Net deferred tax liabilities	$	(19,286	)	$	(29,872	)

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