10. Income Taxes

The components of the Company’s income tax expense from operations for the year ended December 31, consisted of (in thousands):


	2017		2016		2015
Current:
Federal	$	26,730	$	468	$	139
State		5,632		1,259		1,398
Deferred:
Federal		92,441		4,045		(162)
State		32,179		135		(19)
Income tax expense	$	156,982	$	5,907	$	1,356

A reconciliation of income tax expense from operations to the federal statutory rate for the year ended December 31, is as follows (in thousands):


	2017		2016		2015
Income taxes computed at federal statutory rate(1)	$	136,485	$	73,200	$	61,161
State income taxes – net of federal benefit(1)		13,723		7,347		7,196
Other differences:
Federal alternative minimum tax and state and local taxes on pass-through entities		1,072		1,013		1,179
Income taxes computed at the effective federal and state statutory rate for pass-through entities not subject to tax for the Company (2)		(86,200)		(76,702)		(68,940)
Increase in valuation allowance		11,194		1,049		735
Impact of 2017 Tax Act (3)		79,987		—		—
Other		721		—		25
Income tax expense	$	156,982	$	5,907	$	1,356

⁽¹⁾

Federal and state tax for 2017 include the tax effect of $38,399 relating to the reduction in the Tax Receivable Agreement liability.

⁽²⁾

The related income is taxable to the noncontrolling interest for periods after the Company’s IPO and taxable to the holders of membership units prior to the Company’s IPO.

⁽³⁾

Excludes the tax effect of $38,399 for 2017 relating to the reduction in the Tax Receivable Agreement liability, which is included in federal and state tax.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss and tax credit carryforwards. Significant items comprising the net deferred tax assets at December 31, were (in thousands):


	2017		2016
			Restated
Deferred tax liabilities
Accelerated depreciation	$	(8,227)	$	(4,655)
Prepaid expenses		(289)		(358)
Other		(293)		(57)
		(8,809)		(5,070)
Deferred tax assets
Investment impairment		20,674		30,680
Gift cards		710		969
Deferred revenues		304		355
Accrual for employee benefits and severance		1,166		1,246
Stock option expense		209		55
Investment in partnership		208,167		116,318
Tax Receivable Agreement liability		34,802		7,387
AMT credit		584		1,049
Net operating loss carryforward		16,733		8,512
Claims reserves		420		547
Intangible assets		108		70
Goodwill		996		1,898
Deferred book gain		813		1,337
Other reserves		5,380		5,339
		291,066		175,762
Valuation allowance		(126,706)		(146,259)
Net deferred tax assets	$	155,551	$	24,433

CWH is organized as a Subchapter C corporation and, on October 6, 2016, as part of the Company’s IPO, became a 22.6% owner of CWGS, LLC (see Note 18 — Stockholders’ Equity). At December 31, 2017, CWH owned 41.5% of CWGS, LLC. CWGS, LLC is organized as a limited liability company and treated as a partnership for federal tax purposes, with the exception of Americas Road and Travel Club, Inc., CW, and FreedomRoads RV, Inc. and their wholly-owned subsidiaries, which are Subchapter C corporations. At December 31, 2017, the Subchapter C corporations had federal net operating loss carryforwards of approximately $60.7 million, which will be able to offset future taxable income. If not used, the net operating loss carryforwards will expire between 2029 through 2037.

The Company is subject to federal and state income taxes. Tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating the Company’s provision and accruals for these taxes. In addition, a number of jurisdictions in which the Company is subject to tax are actively pursuing changes to their tax laws applicable to corporate taxpayers, such as the recently enacted U.S. tax reform legislation commonly referred to as the U.S. Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). The 2017 Tax Act was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21% and eliminating certain deductions. The 2017 Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. As of December 31, 2017, the Company had not completed its accounting for the tax effects of the enactment of the 2017 Tax Act on its tax accruals. However, the Company has reasonably estimated the effects of the 2017 Tax Act and recorded provisional amounts in its financial statements as of December 31, 2017. The final impact of the 2017 Tax Act may differ from these estimates, due to, among other things, changes in interpretations, analysis and assumptions made by management, additional guidance that may be issued by the U.S. Department of the Treasury and the Internal Revenue Service, and any updates or changes to estimates the Company has utilized to calculate the transition impact. Therefore, the Company’s accounting for the elements of the 2017 Tax Act is incomplete. However, the Company was able to make reasonable estimates of the effects of the 2017 Tax Act. Pursuant to the SEC Staff Accounting Bulletin No. 118 (“SAB 118”), the Company's measurement period for implementing the accounting changes required by the 2017 Tax Act will close before December 22, 2018 and the Company anticipates completing the accounting under ASC Topic 740, Income Taxes, in a subsequent reporting period within the measurement period.

On December 22, 2017, SAB 118 was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. In accordance with SAB 118, the Company has determined that the $118.4 million of the deferred tax expense recorded in connection with the remeasurement of certain deferred tax assets and liabilities was a provisional amount and a reasonable estimate at December 31, 2017. As the Company completes its analysis of the 2017 Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company may make adjustments to the provisional amounts. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.

The increase in the amount of income tax expense in 2017 compared to 2016 is primarily due the impact of the 2017 Tax Act described above, the increased profitability of the Company, and its increased ownership in CWGS, LLC.

The increase in the net deferred tax assets in 2017 is primarily due to an increase in the Company’s Outside Basis Deferred Tax Asset from the redemption of common units in CWGS, LLC for shares of Class A common stock, an increase in the liability for payments due under the tax receivable agreement discussed below, and an increase in net operating losses from its Subchapter C corporations. The Company evaluates its deferred tax assets on a quarterly basis to determine if they can be realized and establishes valuation allowances when it is more likely than not that all or a portion of the deferred tax assets may not be realized. At December 31, 2017, the Company determined that all of its deferred tax assets (except those of CW and the Outside Basis Deferred Tax Asset discussed below) are more likely than not to be realized. The valuation allowance for CW and its subsidiaries after remeasurement under the 2017 Tax Act decreased by $6.4 million in the year ended December 31, 2017, compared to an increase of $1.0 million in the year ended December 31, 2016. CW’s net deferred tax assets increased during those years, but since it was determined CW would not have sufficient taxable income in the current or carryforward periods under the tax laws to realize the future tax benefits of its deferred tax assets, it continues to maintain a full valuation allowance. The Company maintains a partial valuation allowance against the portion of the Outside Basis Deferred Tax Asset that is not amortizable for tax purposes, since the Company would likely only realize the non-amortizable portion of the Outside Basis Deferred Tax Asset if the investment in CWGS, LLC was divested. The partial valuation allowance for the Outside Basis Deferred Tax Asset decreased $13.2 million in the year ended December 31, 2017 primarily as a result of the remeasurement under the 2017 Tax Act of $47.0 million, which was partially offset by an increase in the valuation allowance for additional outside basis in CWGS, LLC for the public offering in May 2017 (see Note 18 — Stockholders’ Equity) that was not amortizable for tax purposes.

During the year ended December 31, 2017, CW was notified by the Internal Revenue Service of their intention to audit the 2014 income tax returns. The 2014 audit concluded with no adjustments. Also during the year ended December 31, 2017, CWGS, LLC was notified by a state revenue department of their intention to audit the 2014 and 2015 state income tax returns. The Company does not expect to receive any material tax adjustments as a result of this pending audit. The Company and its subsidiaries file U.S. federal income tax returns and tax returns in various states. With few exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years before 2014.

The provision for income tax for the entities subject to federal income tax has been included in the consolidated financial statements. The income tax is based on the amount of taxes due on their tax returns plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities, using expected tax rates.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements on a particular tax position are measured based on the largest benefit that has a greater than a 50% likelihood of being realized upon settlement. The amount of unrecognized tax benefits is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax law, new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. As of December 31, 2017 and 2016, the Company had no uncertain tax positions. The Company did not recognize any interest or penalties relating to income taxes for the years ended December 31, 2017, 2016, and 2015.

On October 6, 2016, the Company entered into a tax receivable agreement (the “Tax Receivable Agreement”) that provides for the payment by the Company to the Continuing Equity Owners and Crestview Partners II GP, L.P. of 85% of the amount of tax benefits, if any, the Company actually realizes, or in some circumstances is deemed to realize, as a result of (i) increases in the tax basis from the purchase of common units from Crestview Partners II GP, L.P. in exchange for Class A common stock in connection with the consummation of the IPO and the related transactions and any future redemptions that are funded by the Company and any future redemptions or exchanges of common units by Continuing Equity Owners as described above and (ii) certain other tax benefits attributable to payments made under the Tax Receivable Agreement. CWGS intends to make Section 754 of the Internal Revenue Code effective for each tax year in which a redemption or exchange (including a deemed exchange) of common units for cash or stock occur. These tax benefit payments are not conditioned upon one or more of the Continuing Equity Owners or Crestview Partners II GP, L.P. maintaining a continued ownership interest in CWGS, LLC. In general, the Continuing Equity Owners’ or Crestview Partners II GP, L.P.’s rights under the Tax Receivable Agreement are assignable, including to transferees of its common units in CWGS, LLC (other than the Company as transferee pursuant to a redemption or exchange of common units in CWGS, LLC). The Company expects to benefit from the remaining 15% of the tax benefits, if any, which may be realized.

During the year ended December 31, 2016 and as part of the initial IPO, 1,698,763 common units in CWGS, LLC were exchanged for Class A common stock of the Company by Crestview Partners II GP, L.P. subject to the provisions of the Tax Receivable Agreement. Further, during the year ended December 31, 2017, 12,945,419 common units in CWGS, LLC were exchanged for Class A common stock of the Company by certain of the Continuing Equity Owners, subject to the provisions of the Tax Receivable Agreement. During 2017 and 2016, the Company recognized a liability for the Tax Receivable Agreement payments due to the Continuing Equity Owners and Crestview Partners II GP, L.P., representing 85% of the aggregate tax benefits the Company expects to realize from the tax basis increases related to the exchange, after concluding it was probable that the Tax Receivable Agreement payments would be paid based on estimates of future taxable income. As of December 31, 2017, the amount of Tax Receivable payments due Crestview Partners II GP, L.P. and certain Continuing Equity Owners under the Tax Receivable Agreement increased to $137.7 million, of which $8.1 million was included in current portion of the tax receivable agreement liability in the Consolidated Balance Sheets.

The 2017 Tax Act had a significant impact on the future tax rates incorporated in the estimated values of the Tax Receivable Agreement liability and the Company’s deferred tax assets. For the year ended December 31, 2017, these changes in estimate had no impact on income from operations, decreased net income to a net loss by $18.6 million, and decreased basic and diluted earnings per share by $0.69.