INCOME TAXES

12 Months Ended

Dec. 31, 2019

The table below represents a geographical breakdown of book income before the provision for income taxes:



	Year ended December 31,
(Dollars in millions)	2019		2018		2017
Domestic	$	249.5	$	156.5	$	90.6
Foreign	113.0		113.6		31.1
Total	$	362.5	$	270.1	$	121.7

The U.S. and foreign components of provision for (benefit from) provision for income taxes consisted of the following components. However, it is not reflective of the cash tax results of the Company.



	Year ended December 31,
(Dollars in millions)	2019			2018			2017
Federal
Current	$	—		$	—		$	(0.3	)
Deferred	31.2			33.4			(17.9		)
	31.2			33.4			(18.2		)
State
Current	0.3			—			0.1
Deferred	(4.6		)	10.6			(3.1		)
	(4.3		)	10.6			(3.0		)
Foreign
Current	14.4			18.4			8.4
Deferred	0.1			(4.4		)	(3.5		)
	14.5			14.0			4.9

Total	$	41.4		$	58.0		$	(16.3	)

A reconciliation of the statutory federal income tax rate of 21% with Kennedy Wilson’s effective income tax rate is as follows:



	Year ended December 31,
(Dollars in millions)	2019			2018			2017
Tax computed at the statutory rate	$	76.1		$	56.7		$	42.6
TCJA federal rate change	—			—			(44.8		)
Tax deduction in excess of book compensation from restricted stock vesting	0.3			1.8			(3.7		)
Domestic permanent differences, primarily disallowed executive compensation	6.1			3.8			1.3
Foreign permanent differences, primarily non-deductible depreciation, amortization and interest expenses in the United Kingdom	1.3			1.4			6.1
Effect of foreign tax operations on U.S. taxes, net of foreign tax credits and valuation allowance	(16.8		)	1.1			1.6
Noncontrolling interests	(22.2		)	(15.1		)	(15.0		)
State income taxes, net of federal benefit	—			8.0			(3.8		)
Other	(3.4		)	0.3			(0.6		)
Provision for (benefit from) income taxes	$	41.4		$	58.0		$	(16.3	)

Cumulative tax effects of temporary differences are shown below at December 31, 2019 and 2018:



	Year ended December 31,
(Dollars in millions)	2019			2018
Deferred tax assets:
Foreign currency translation	$	4.9		$	9.1
Net operating loss carryforward and credits	138.6			102.3
Investment basis difference	96.2			121.6
Stock option expense	1.3			3.5
Hedging transactions	7.2			—
Marketable securities	—			0.1
Accrued reserves	—			0.1
Total deferred tax assets	248.2			236.7
Valuation allowance	(209.2		)	(131.1		)
Net deferred tax assets	39.0			105.6

Deferred tax liabilities:
Investment basis and reserve differences	145.7			121.3
Depreciation and amortization	2.8			65.0
Hedging transactions	—			5.4
Prepaid expenses and other	2.4			1.7
Capitalized interest	1.3			1.4
Total deferred tax liabilities	152.2			194.8

Deferred tax asset (liability), net	$	(113.2	)	$	(89.2	)

The United Kingdom enacted Finance Act 2019, which introduced a new capital gain tax for non-UK resident investors who dispose of UK real estate. The new capital gain tax law became effective April 6, 2019. Beginning on this date, non-UK resident investors are subject to UK tax on gains arising from the direct and indirect dispositions of UK real estate held for investment purposes. Transitional provisions allow rebasing of UK real estate values to fair market value as of April 5, 2019 ("UK Basis Step-Up"), because only gains arising from property value increases after such date is subject to tax. The step-up led to a higher tax basis relative to the carrying value of the UK real estate, thus resulting in a UK deferred tax asset of $107.0 million. The realizability of this deferred tax asset is dependent on future disposition of real estate at a fair market value in excess of appraised value as of April 5, 2019. Given uncertainties surrounding Brexit and its potential impact on future real estate values, the Company concluded that the U.K. deferred tax asset did not meet the more likely than not threshold of being realizable and therefore, a full valuation allowance is necessary.

During March 2018, Kennedy Wilson elected to treat KWE as a partnership for U.S. tax purposes retroactive to December 29, 2017. Due to unrealized foreign exchange losses not yet deductible for tax purposes and the consideration paid to acquire the non-controlling interests in KWE exceeding the book carrying value of the non-controlling interests in KWE, the Company’s tax basis in KWE exceeded its book carrying value at December 29, 2017 and December 31, 2018. Prior to the election to treat KWE as a partnership, KWE was taxed as a controlled foreign corporation. As a controlled foreign corporation, the Company was precluded from recognizing a deferred tax asset for its tax basis in excess of book carrying value for its investment in KWE as the excess tax basis from the investment was not expected to reverse in the foreseeable future. However, as a result of the conversion of KWE to a partnership for U.S. tax purposes, the Company was required to record a deferred tax asset for its investment in KWE. As of December 31, 2018, the Company recorded a $98.3 million deferred tax asset related to its excess tax basis over book carrying value for its investment in KWE. As a significant portion of the excess tax basis would only reverse upon a strengthening of foreign currencies or upon a disposition of KWE, the Company determined that a valuation allowance of $98.3 million was required for the tax basis that was in excess of the Company’s carrying value for its investment in KWE as it did not meet the more likely than not threshold of being realizable and therefore, a full valuation allowance was necessary. During 2019 and 2018, a portion of the excess tax basis over book basis in KWE reversed as a result of lower tax gains on sales of real estate. As of December 31, 2019, Kennedy Wilson’s excess tax basis in KWE and the related valuation allowance is $77.1 million and $72.6 million, respectively.

The U.S. federal tax legislation commonly known as the Tax Cuts and Jobs Act (the “TCJA”), was signed into law on December 22, 2017. The TCJA amends a range of U.S. federal tax rules applicable to businesses and international taxation with most provisions having taken effect beginning January 1, 2018. These changes include lowering the federal corporate income tax rate from a top marginal rate of 35% to a flat rate of 21% and imposing additional limitations on deductibility of executive compensation. During the fourth quarter of 2017, we adjusted our net U.S. deferred tax liability down to the new federal tax rate and recorded a $44.8 million tax benefit. During 2018, we completed our analysis of TCJA impacts and recorded an insignificant adjustment in the 2018 financial statements with respect to the federal rate change. As the IRS, Treasury Regulations or state taxing authorities issue further guidance or interpretation of relevant aspects of the new tax law, our federal and state taxable income computations may be adjusted accordingly.

As of December 31, 2019, Kennedy Wilson had federal, California and other state net operating losses of $122.2 million, $94.9 million and $18.3 million, which begin to expire in 2034 and 2031, respectively. Approximately $34.9 million of the federal net operating losses relate to tax years after December 31, 2017. The post-2017 federal net operating losses do not expire but are only eligible to offset 80% of taxable income. As of December 31, 2019, Kennedy Wilson had $226.5 million of foreign net operating loss carryforwards, which have no expiration date. The Company has foreign tax credit carryforwards of $52.6 million, which begin to expire in 2023.

The Company's valuation allowance on deferred tax assets increased by $78.1 million in 2019 and increased by $98.4 million in 2018. The increase in 2019 principally relates to the valuation allowance recorded against the deferred tax asset established for the U.K. Basis Step-Up, offset by a decrease in the valuation allowance related to the partnership investment in KWE. The Company’s excess tax basis over book basis in KWE and the related valuation allowance decreased as a result of KWE’s disposition of real estate during 2019. The increase in the 2018 valuation allowance principally relates to the partnership investment in KWE.

During July 2019, the IRS initiated an income tax examination of the Company’s federal consolidated tax return for the period ended December 31, 2017. Items requested by the IRS thus far are standard schedules utilized and produced during the normal course of tax return preparation. As of December 31, 2019, the Company is not aware of specific tax position under the scrutiny of the IRS. There were no gross unrecognized tax benefits at December 31, 2019 and 2018. Management has considered the likelihood and significance of possible penalties associated with Kennedy Wilson's current and intended filing positions and has determined, based on its assessment, that such penalties, if any, would not be significant.

Kennedy Wilson’s federal and state income tax returns remain open to examination for the years 2016 through 2018 and 2015 through 2018, respectively. However, due to the existence of prior year loss carryovers, the IRS may examine any tax years for which the carryovers are used to offset future taxable income. Our foreign subsidiaries’ tax returns remain open to examination for the years 2015 through 2018. The Spanish loss carryovers may be subject to tax examination for a period of 10 years from the period in which such losses were generated.