Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES:

U.S. federal and state and foreign income tax laws and regulations are voluminous and often ambiguous. As such, Quanta is required to make many subjective assumptions and judgments regarding its tax positions that could materially affect amounts recognized in its future consolidated balance sheets, statements of operations and statements of comprehensive income. For example, the Tax Act significantly revised the U.S. corporate tax regime, which, among other things, resulted in a reduction of Quanta’s future effective tax rate and a remeasurement of its deferred tax assets and liabilities. Quanta completed its analysis of the Tax Act within the prescribed one-year measurement period, and adjustments during the measurement period were included within “Net income” as an adjustment to “Provision for income taxes” on Quanta’s consolidated statement of operations. The measurement period adjustments are described in further detail below.

The Tax Act lowered the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries, limited and eliminated certain tax deductions and created new taxes on certain foreign-sourced earnings. Consequently, for the year ended December 31, 2017, Quanta recorded one-time net tax benefits of $70.1 million, including $85.3 million of tax benefits associated with the remeasurement of U.S. federal deferred tax assets and liabilities based on expected future rates (generally 21%), partially offset by an estimated $15.2 million transition tax on post-1986 earnings and profits of certain foreign subsidiaries. This net tax benefit was Quanta’s provisional estimate, utilizing the information that was available at the time. As permitted by and in accordance with the guidance issued by the SEC and codified by the FASB, during the year ended December 31, 2018, Quanta recorded $6.3 million of additional benefit related to the remeasurement of U.S. federal deferred tax assets and liabilities, as the estimate of such amount was revised in connection with the preparation and filing of Quanta’s 2017 income tax returns. Additionally, as a result of the tax reform regulations issued during 2018, Quanta recorded a valuation allowance of $43.5 million against foreign tax credits. As of December 31, 2018, Quanta completed its accounting for the tax effects of the enactment of the Tax Act; however, additional regulations could have a material impact on Quanta’s effective tax rate in future periods. Further, to the extent there are settlements of certain foreign unrecognized tax benefits in future periods, changes to the estimates associated with the transition tax may be required.

The Tax Act also imposed a tax on global intangible low-taxed income (GILTI). Quanta analyzed the impacts of GILTI and made an accounting policy election in the fourth quarter of 2018 whereby it determined that such income will be recognized in the period earned and deferred taxes for basis differences that may reverse as GILTI will not be recognized in future years.

For the year ended December 31, 2017, an additional one-time tax benefit of $26.7 million was recorded in connection with entity restructuring and recapitalization transactions completed by Quanta, which was partially offset by an $8.5 million decrease in the production activity-related tax benefit that resulted from acceleration of certain deductions into 2017. During the year ended December 31, 2018, the estimated benefit associated with entity restructuring and recapitalization transactions was decreased by $1.8 million based on actual 2017 earnings and profit balances.

The components of income before income taxes were as follows (in thousands):



	Year Ended December 31,
	2019		2018		2017
Income before income taxes:
Domestic	$	550,676	$	318,635	$	291,031
Foreign	21,611		139,031		62,726
Total	$	572,287	$	457,666	$	353,757

The components of the provision for income taxes were as follows (in thousands):



	Year Ended December 31,
	2019			2018			2017
Current:
Federal	$	121,214		$	50,306		$	44,695
State	35,329			26,170			301
Foreign	16,848			23,209			22,666
Total current tax provision	173,391			99,685			67,662

Deferred:
Federal	7,379			62,482			(36,915		)
State	(1,776		)	(4,152		)	14,951
Foreign	(13,522		)	3,644			(10,166		)
Total deferred tax provision (benefit)	(7,919		)	61,974			(32,130		)
Total provision for income taxes	$	165,472		$	161,659		$	35,532

The actual income tax provision differed from the income tax provision computed by applying the U.S. federal statutory corporate rate to income before provision for income taxes as follows (in thousands):



	Year Ended December 31,
	2019			2018			2017
Provision at the statutory rate	$	120,180		$	96,110		$	123,815
Increases (decreases) resulting from —
Valuation allowance on deferred tax assets	35,761			48,862			1,455
State taxes	23,399			18,504			17,920
Employee per diems, meals and entertainment	13,817			11,949			13,605
Foreign taxes	(21,565		)	(2,621		)	(18,413		)
Contingency reserves, net	(3,173		)	(2,619		)	3,651
Stock-based compensation	(1,863		)	(1,449		)	(5,095		)
Taxes on unincorporated joint ventures	(930		)	(578		)	(1,354		)
Tax Cuts and Jobs Act	—			(6,295		)	(70,129		)
Entity restructuring and recapitalization efforts	—			(4,424		)	(26,668		)
Production activity deduction	—			—			(1,504		)
Other	(154		)	4,220			(1,751		)
Total provision for income taxes	$	165,472		$	161,659		$	35,532

Deferred income taxes result from temporary differences in the recognition of income and expenses for financial reporting purposes and tax purposes. The tax effects of these temporary differences, representing deferred tax assets and liabilities, result principally from the following (in thousands):



	December 31,
	2019			2018
Deferred income tax liabilities:
Property and equipment	$	(208,751	)	$	(178,090	)
Leased assets	(73,861		)	—
Goodwill	(72,244		)	(60,305		)
Customer holdbacks	(11,882		)	(44,173		)
Other intangibles	(11,384		)	(21,034		)
Other book/tax accounting method differences	(1,801		)	(7,247		)
Total deferred income tax liabilities	(379,923		)	(310,849		)

Deferred income tax assets:
Net operating loss carryforwards	78,310			52,406
Lease liabilities	74,044			—
Tax credits	46,621			43,572
Accruals and reserves	36,372			28,594
Stock and incentive compensation	26,045			20,627
Deferred profit on investment in unconsolidated affiliates	—			16,021
Deferred tax benefits on unrecognized tax positions	16,542			13,278
Other	3,933			1,776
Subtotal	281,867			176,274
Valuation allowance	(104,178		)	(67,601		)
Total deferred income tax assets	177,689			108,673
Total net deferred income tax liabilities	$	(202,234	)	$	(202,176	)

The net deferred income tax assets and liabilities were comprised of the following in the accompanying consolidated balance sheets (in thousands):



	December 31,
	2019			2018
Deferred income taxes:
Assets	$	12,545		$	16,939
Liabilities	(214,779		)	(219,115		)
Total net deferred income tax liabilities	$	(202,234	)	$	(202,176	)

The valuation allowance for deferred income tax assets at December 31, 2019, 2018 and 2017 was $104.2 million, $67.6 million and $19.3 million. These valuation allowances relate to state and foreign net operating loss carryforwards and foreign tax credits. The net change in the total valuation allowance for each of the years ended December 31, 2019, 2018 and 2017 was an increase of $36.6 million, an increase of $48.3 million and an increase of $4.3 million. The valuation allowance was established primarily as a result of uncertainty in Quanta’s outlook as to the amount and character of future taxable income in particular tax jurisdictions. Quanta believes it is more likely than not that it will realize the benefit of its deferred tax assets net of existing valuation allowances.

At December 31, 2019, Quanta had state and foreign net operating loss carryforwards, the tax effect of which was $83.6 million. These carryforwards will expire as follows: 2020, $1.3 million; 2021, $0.5 million; 2022, $0.2 million; 2023, $27.0 million; 2024, $0.9 million; and $53.7 million thereafter. A valuation allowance of $52.0 million has been recorded against certain foreign and state net operating loss carryforwards.

Quanta generally does not provide for taxes related to undistributed earnings of its foreign subsidiaries because such earnings either would not be taxable when remitted or they are considered to be indefinitely reinvested. Quanta could also be subject to

additional foreign withholding taxes if it were to repatriate cash that is indefinitely reinvested outside the United States, but it does not expect such amount to be material.

A reconciliation of unrecognized tax benefit balances is as follows (in thousands):



	December 31,
	2019			2018			2017
Balance at beginning of year	$	41,110		$	36,229		$	35,240
Additions based on tax positions related to the current year	7,708			6,231			7,040
Additions for tax positions of prior years	1,200			9,377			3,372
Reductions for tax positions of prior years	—			(2,870		)	(1,171		)
Reductions for audit settlements	(3,205		)	—			—
Reductions resulting from a lapse of the applicable statute of limitations periods	(5,935		)	(7,857		)	(8,252		)
Balance at end of year	$	40,878		$	41,110		$	36,229

For the year ended December 31, 2019, the $9.1 million of aggregate reductions were primarily due to the favorable settlement of certain non-U.S. income tax obligations of an acquired business and the expiration of U.S. state income tax statute of limitations. For the year ended December 31, 2018, the $7.9 million reduction was primarily due to the expiration of certain federal and state statute of limitations periods for the 2014 tax year. For the year ended December 31, 2017, the $8.3 million reduction was primarily due to the expiration of certain federal and state statute of limitations periods for the 2010 through 2012 tax years.

The balances of unrecognized tax benefits, the amount of related interest and penalties and what Quanta believes to be the range of reasonably possible changes in the next 12 months are as follows (in thousands):



	December 31,
	2019		2018		2017
Unrecognized tax benefits	$	40,878	$	41,110	$	36,229
Portion that, if recognized, would reduce tax expense and effective tax rate	40,695		40,977		35,561
Accrued interest on unrecognized tax benefits	6,240		5,459		5,368
Accrued penalties on unrecognized tax benefits	14		631		631
Reasonably possible reduction to the balance of unrecognized tax benefits in succeeding 12 months	$0 to $6,268		$0 to $9,541		$0 to $13,655
Portion that, if recognized, would reduce tax expense and effective tax rate	$0 to $5,693		$0 to $8,224		$0 to $12,483

Quanta classifies interest and penalties within the provision for income taxes. Quanta recognized interest expense of $0.8 million, interest expense of $0.1 million and interest income of $0.2 million in the provision for income taxes for the years ended December 31, 2019, 2018 and 2017.

Quanta and certain subsidiaries remain under examination by various U.S. state and Canadian and other foreign tax authorities for multiple periods. Quanta does not consider any state in which it does business to be a major tax jurisdiction.