Income Taxes

12 Months Ended

Dec. 31, 2019

Reconciliations of the statutory U.S. federal income tax rates to our effective tax rate for continuing operations follow:



	Years Ended December 31,
	2019		2018		2017
Statutory rate	21.0	%	21.0	%	35.0	%
Tax reform	—		(0.3	)	3.1
State tax, net of federal benefit	3.9		3.8		2.6
Business tax credits	(3.5	)	(0.5	)	(0.1	)
Reverse federal impact of indemnification adjustments	0.3		3.5		2.5
Unrecognized tax benefits, U.S. federal and state, net of federal benefit	(0.1	)	(15.9	)	(2.0	)
Excess tax benefits/deficiencies for employee stock-based compensation, federal and state, net of federal benefit	(0.3	)	(0.6	)	(1.7	)
Impact of state rate change on net deferred tax liabilities, net of federal benefit	—		(0.4	)	0.6
State, valuation allowance adjustments on net operating losses	0.1		0.4		0.2
Other, net	0.9		1.9		1.0
Effective tax rate	22.3	%	12.9	%	41.2	%

The effective tax rate varies from the statutory U.S. federal rate of 21 percent primarily due to business tax credits and the impact of state taxes, net of federal benefit, for the year ended December 31, 2019; the reduction in uncertain tax positions related to statute of limitation expirations and the impact of state taxes, net of federal benefit, for the year ended December 31, 2018; and the impact of tax reform and state taxes, net of federal benefit, for the year ended December 31, 2017.

Income tax expense consists of:



	December 31,
	2019			2018			2017
Current provision:
Federal	$	150,800		$	102,516		$	248,191
State	24,378			32,638			13,092
Total current provision	175,178			135,154			261,283
Deferred benefit:
Federal	(8,240		)	(57,076		)	(58,124		)
State	(1,474		)	(6,225		)	(628		)
Total deferred benefit	(9,714		)	(63,301		)	(58,752		)
Provision for income tax expense	$	165,464		$	71,853		$	202,531

The tax effect of temporary differences that give rise to deferred tax assets and liabilities is summarized below.



	December 31,
	2019		2018
Deferred tax assets:
Loan reserves	$	109,369	$	85,100
Stock-based compensation plans	10,022		9,312
Deferred revenue	1,017		1,081
Operating loss carryovers	—		—
Accrued expenses not currently deductible	12,599		12,896
Net unrealized losses	2,124		—
Unrecorded tax benefits	6,049		5,106
Market value adjustments on student loans, investments and derivatives	—		1,460
Other	874		953
Total deferred tax assets	142,054		115,908
Deferred tax liabilities:
Fixed assets	10,475		7,150
Acquired intangible assets	5,453		5,179
Market value adjustments on student loans, investments and derivatives	3,175		—
Net unrealized gains	—		3,436
Federal deferred for state receivable	5,368		2,083
Student loan premiums and discounts, net	3,398		1,971
Other	285		285
Total deferred tax liabilities	28,154		20,104
Net deferred tax assets	$	113,900	$	95,804

Included in operating loss carryovers are state net operating losses of $6 million and $19 million as of December 31, 2019 and 2018, respectively. The Company has recorded a full valuation allowance against these net operating losses. The valuation allowance is primarily attributable to deferred tax assets for state net operating losses that management believes is more likely than not to expire prior to being realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income of the appropriate character (i.e., capital or ordinary) during the period in which the temporary differences become deductible. Management considers, among other things, the scheduled reversals of deferred tax liabilities and the history of positive taxable income in evaluating the realizability of the deferred tax assets. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize our deferred tax assets (other than state net operating loss carryovers as outlined above).

As of December 31, 2019, the state net operating loss carryforwards will begin to expire in 2029.

Accounting for Uncertainty in Income Taxes

The following table summarizes changes in unrecognized tax benefits:



	December 31,
	2019			2018			2017
Unrecognized tax benefits at beginning of year	$	52,159		$	131,608		$	152,581
Increases resulting from tax positions taken during a prior period	12,333			4,121			7,482
Decreases resulting from tax positions taken during a prior period	(851		)	—			(7,025		)
Increases resulting from tax positions taken during the current period	4,572			3,169			1,656
Decreases related to settlements with taxing authorities	(8,670		)	(601		)	(3,594		)
Reductions related to the lapse of statute of limitations	(6,034		)	(86,138		)	(19,492		)
Unrecognized tax benefits at end of year	$	53,509		$	52,159		$	131,608

As of December 31, 2019, the gross unrecognized tax benefits are $54 million. Included in the $54 million are $48 million of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate. As a part of the Spin-Off, the Company recorded a liability related to uncertain tax positions for which it is indemnified by Navient. See Note 2, “Significant Accounting Policies — Income Taxes,” for additional details.

Tax related interest and penalty expense is reported as a component of income tax expense. As of December 31, 2019, 2018 and 2017, the total amount of income tax-related accrued interest and penalties, net of related benefit, recognized in the consolidated balance sheets was $12 million, $14 million and $21 million, respectively.

For the years ended December 31, 2019, 2018 and 2017, the total amount of income tax-related accrued interest, net of related tax benefit, recognized in the consolidated statements of income was $(1) million, $(7) million and $3 million, respectively.

The Company or one of its subsidiaries files income tax returns at the U.S. federal level and in most U.S. states. U.S. federal income tax returns filed for years 2014 and prior are no longer subject to examination. Various combinations of subsidiaries, tax years, and jurisdictions remain open for review, subject to statute of limitations periods (typically 3 to 4 prior years). We do not expect the resolution of open audits to have a material impact on our unrecognized tax benefits.

It is reasonably possible that the uncertain tax position reserve may decrease by as much as $10 million during the next 12 months due to the expiration of statutes of limitations primarily related to indemnified tax liabilities. The reduction in the uncertain tax position reserve would be reflected as a tax benefit. We recorded a tax indemnification receivable from Navient for the indemnified tax liabilities which are included in the uncertain tax position reserve. A portion of the tax benefit will be offset by an expense related to the write-down of the indemnification receivable.