Income Taxes

3 Months Ended

Mar. 31, 2020

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE R— INCOME TAXES

For interim period reporting, we record income taxes using an estimated annual effective tax rate based upon projected annual income, forecasted permanent tax differences, discrete items and statutory rates in states in which we operate. At the end of each interim period, we update the estimated annual effective tax rate, and if the estimated tax rate changes based on new information, we make a cumulative adjustment in the period. We record the tax effect of an unusual or infrequently occurring item in the interim period in which it occurs as a discrete item of tax.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act) was enacted and signed into law in response to the COVID-19 pandemic. Certain provisions of the CARES Act impact our 2019 income tax provision computations and are reflected in the first quarter of 2020, or the period of enactment. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning after 2017 and before 2021. In addition, the CARES Act allows NOLs generated after 2017 and before 2021 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. We intend to carry the NOL generated in 2019 back to offset a portion of the taxable income in the 2014 tax year. The deferred tax asset related to the NOL generated in 2019 was recorded at the statutory income tax rate for 2019 of 21%. As a result of the carry back of this NOL to 2014, the NOL will be utilized at the statutory income tax rate for 2014 of 35%. This increase in the tax rate at which the 2019 NOL will be utilized results in a deferred tax benefit. Accordingly, during the three months ended March 31, 2020, we recorded an estimated deferred tax benefit of $11.2 million. Pursuant to ASC 740, this has been recorded as a discrete component of the tax benefit.

The CARES Act also accelerates the ability of companies to receive refunds of alternative minimum tax (“AMT”) credits related to tax years beginning in 2018 and 2019. AMT credits have been presented as a receivable or a deferred tax asset in the prior period balance sheets. The presentation of refundable AMT credits in the current balance sheet have been reclassified from deferred tax asset to accounts receivable to reflect the timing of when the credits are expected to be monetized.

Additionally, the CARES Act provides temporary relief for payment of certain payroll taxes. Prior to the CARES Act, payroll taxes generally would have been deductible for income tax purposes in the same period that they were expensed for book purposes under the “recurring item exception” of the Internal Revenue Code. However, if a company defers payment of its payroll taxes as a result of the CARES Act such that the recurring item exception no longer applies, accrued payroll taxes would not be deductible until the tax year in which they are actually paid. If the book expense and tax deduction are expected to occur in different periods, a deferred tax asset would need to be recorded for the deductible temporary difference related to

the payroll tax accrual. The temporary relief for payment of certain payroll taxes will not have an impact to the first quarter of 2020.

We are currently still evaluating all provisions of the CARES Act and its impact on income tax and in our Consolidated Statements of Operation.

For the three months ended March 31, 2020 and 2019, we had tax benefits of $36.1 million and $2.0 million, respectively. The effective tax rate was 33% and 9% for the three months ended March 31, 2020 and 2019, respectively. Without discrete items, which primarily consist of tax expense related to equity compensation and a tax benefit related to the carryback of the 2019 NOL to 2014, the effective tax rate for the three months ended March 31, 2020 and 2019 would have been 24% and 29%, respectively.

During the three months ended March 31, 2020 and 2019, we recorded tax expense related to equity compensation of $0.5 million and $3.9 million, respectively.