INCOME TAXES

12 Months Ended

Dec. 31, 2019

The following is a summary of the components of the (benefit) provision for income taxes for Verso:



	Year Ended December 31,
(Dollars in millions)	2017			2018			2019
Current tax (benefit) provision:
U.S. federal	$	(6	)	$	—		$	—
U.S. state and local	—			—			1
Total current tax (benefit) provision	(6		)	—			1
Deferred tax (benefit) provision:
U.S. federal	64			35			(4		)
U.S. state and local	(1		)	(31		)	2
Total deferred tax (benefit) provision	63			4			(2		)
Less: valuation allowance	(63		)	(4		)	(115		)
Allocation to Other comprehensive (income) loss	(2		)	—			(1		)
Total income tax (benefit) provision	$	(8	)	$	—		$	(117	)

A reconciliation of income tax expense using the statutory federal income tax rate compared with actual income tax expense follows:



	Year Ended December 31,
(Dollars in millions)	2017			2018			2019
Tax at Statutory U.S. Rate of 21% in 2019 and 2018 and 35% in 2017	$	(13	)	$	36		$	(4	)
Increase resulting from:
Federal tax rate change	71			—			—
Allocation to Other comprehensive (income) loss related to pension benefits.	(2		)	—			(1		)
Other expenses	—			(1		)	—
Net permanent differences	69			(1		)	(1		)
Valuation allowance	(63		)	(4		)	(115		)
State income taxes (benefit)	—			(31		)	3
Other	(1		)	—			—
Total income tax (benefit) provision	$	(8	)	$	—		$	(117	)

The following is a summary of the significant components of the net deferred tax asset (liability):



	December 31,
(Dollars in millions)	2018			2019
Deferred tax assets:
Net operating loss	$	46		$	54
Credit carryforwards	40			44
Pension	140			123
Compensation obligations	18			15
Inventory reserves/capitalization	23			24
Capitalized expenses	4			4
Other	8			12
Gross deferred tax assets	279			276
Less: valuation allowance	(126		)	(11		)
Deferred tax assets, net of allowance	$	153		$	265
Deferred tax liabilities:
Property, plant and equipment	$	(149	)	$	(137	)
Intangible assets	(3		)	(5		)
Other	(1		)	(5		)
Total deferred tax liabilities	(153		)	(147		)
Net deferred tax assets	$	—		$	118

We regularly evaluate the need for an income tax valuation allowance for deferred tax assets by assessing whether it is more likely than not that we will realize the deferred tax assets. At December 31, 2019, we considered the existence of recent cumulative income from continuing operations as a source of positive evidence and concluded to reverse a portion of the income tax valuation allowance. To determine the appropriate income tax valuation allowance, we considered the timing of future reversal of our taxable temporary differences that supports realizing a portion of our deferred tax assets.

The income tax valuation allowance for deferred tax assets as of December 31, 2018 and 2019 was $126 million and $11 million, respectively. The decrease in the income tax valuation allowance in 2019 of $115 million is primarily attributable to a release of the income tax valuation allowances on all federal deferred tax assets and certain state tax credits. It is less than more likely than not that Verso will realize the carryforward benefits of all of these state tax credits in the future.

ASC Topic 740 requires that a Company allocate tax expense to other comprehensive income, or “OCI,” and a corresponding tax benefit to income from continuing operations when there is a pretax loss from continuing operations and pretax income in OCI. In 2018, Verso allocated zero of tax expense to OCI and recognized a zero tax benefit in continuing operations. In 2019, Verso allocated $1 million tax expense to OCI and recognized a $1 million tax benefit in continuing operations.

Income tax benefits of $123 million related to pension benefit obligations are recorded, of which $32 million is attributable to other comprehensive income as of December 31, 2019.

Verso has federal net operating loss carryforwards totaling $347 million as of December 31, 2019, which begin to expire at the end of 2034. Verso estimates that these net operating losses have been reduced by attribute reduction and IRC Section 382 limits to $238 million available to be utilized in the future. $198 million of the federal net operating loss carryforwards begin to expire at the end of 2034 and $40 million of the federal net operating loss carryforwards never expire under the provisions of the Tax Act (defined below).

Verso has state net operating loss carryforwards, after apportionment, totaling $71 million available to be utilized in the future as of December 31, 2019. A state income tax credit of $40 million, that was denied in prior years was reinstated in 2018, has a 15-year carryforward period and begins to expire in 2024. Verso has research and development credit carryforwards of $4 million which begin to expire in 2036.

On December 22, 2017, the federal government enacted new tax reform legislation. The provisions of the U.S. Tax Cuts and Jobs Act of 2017, or the “Tax Act,” included a reduction in the corporate income tax rate from 35% to 21%. The reduction in the federal tax rate resulted in a reduction of deferred tax assets of $71 million offset with a corresponding decrease in the income tax valuation allowance. Also included in the Tax Act was a repeal of the alternative minimum tax and provisions allowing for the refund of any minimum tax credit carryovers. Verso recognized a tax benefit of $6 million, which is included in Income tax expense (benefit) on the Consolidated Statement of Operations for the year ended December 31, 2017, related to the recognition of a minimum tax credit carryover receivable. Verso believes that all of the significant impacts of the Tax Act are reflected in the financial statements.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



(Dollars in millions)
Balance at December 31, 2017	$	2
Additions	—
Reductions	—
Balance at December 31, 2018	2
Additions	—
Reductions	—
Balance at December 31, 2019	$	2

Verso’s policy is to record interest paid or received with respect to income taxes as interest expense or interest income, respectively, in the Consolidated Statements of Operations. The total amount of tax-related interest and penalties in the Consolidated Balance Sheets was zero at December 31, 2018 and 2019. The amount of expense (benefit) for interest and penalties included in the Consolidated Statements of Operations was zero for all periods presented.

None of the unrecognized tax benefits are expected to significantly increase or decrease in the next twelve months. None of the unrecognized tax benefits would, if recognized, affect the effective tax rate.

Verso files income tax returns in the United States for federal and various state jurisdictions. As of December 31, 2019, periods beginning in 2016 are still open for examination by various taxing authorities; however, taxing authorities have the ability to adjust net operating loss carryforwards from years prior to 2016. As of December 31, 2019, there are no ongoing federal or state income tax audits.