11. Income Taxes

The Company has adjusted certain prior period amounts relating to income taxes for the immaterial correction of errors. See Note 1 — Summary of Significant Accounting Policies — Revisions for Correction of Immaterial Errors

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


	2018		2017		2016
Current:
Federal	$	13,828	$	19,496	$	845
State		5,598		4,448		1,297
Deferred:
Federal		11,970		97,792		3,571
State		(606)		33,174		87
Income tax expense	$	30,790	$	154,910	$	5,800

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


	2018		2017		2016
Income taxes computed at federal statutory rate(1)	$	20,238	$	134,961	$	72,259
State income taxes – net of federal benefit(1)		4,313		13,570		7,253
Other differences:
Federal alternative minimum tax and state and local taxes on pass-through entities		1,076		1,072		1,013
Income taxes computed at the effective federal and state statutory rate for pass-through entities not subject to tax for the Company (2)		(41,367)		(84,747)		(75,774)
Increase in valuation allowance		43,175		11,194		1,049
Impact of 2017 Tax Act (3)		—		78,222		—
Impact of other state tax rate changes		(2,020)		—		—
Goodwill impairment		6,158		—		—
Other		(783)		638		—
Income tax expense	$	30,790	$	154,910	$	5,800

⁽¹⁾

Federal and state tax for 2018 and 2017 include the tax effect of $0.3 million of income tax expense and $38.8 million of income tax benefit, respectively, 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 $0.3 million of income tax expense and $38.8 million of income tax benefit for 2018 and 2017, respectively, 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):


	2018		2017
Deferred tax liabilities
Accelerated depreciation	$	(6,468)	$	(5,147)
Prepaid expenses		(1,238)		(302)
Intangible assets		(3,474)		(3,501)
Other		—		(305)
		(11,180)		(9,255)
Deferred tax assets
Investment impairment		21,974		21,647
Inventory related		6,479		170
Gift cards		1,478		744
Deferred revenues		322		304
Accrual for employee benefits and severance		1,401		1,221
Stock option expense		440		218
Investment in partnership		208,749		208,559
Tax Receivable Agreement liability		34,184		35,319
AMT credit		—		609
Net operating loss carryforward		51,654		17,518
Claims reserves		126		440
Intangible assets		547		113
Goodwill		3,836		996
Deferred book gain		770		851
Other reserves		6,146		5,697
		338,106		294,406
Valuation allowance		(180,983)		(132,468)
Net deferred tax assets	$	145,943	$	152,683

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, 2018, CWH owned 41.9% 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, 2018, the Subchapter C corporations had federal and state net operating loss carryforwards of approximately $188.6 million and $96.5 million, respectively, which will be able to offset future taxable income. If not used, $57.9 million of federal and $96.5 million of state net operating losses will expire between 2029 and 2037, and $128.7 million will be carried forward indefinitely.

On December 22, 2017, the U.S. enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“2017 Tax Act”). The 2017 Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21% and eliminating certain deductions.

Shortly after the 2017 Tax Act was enacted, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of 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 had determined that the $117.0 million of the deferred tax expense recorded in connection with the remeasurement of certain deferred tax assets and liabilities during the three months ended December 31, 2017 was a provisional amount and a reasonable estimate at December 31, 2017. The Company's measurement period for implementing the accounting changes required by the 2017 Tax Act closed on December 22, 2018, and the Company completed the accounting under ASC Topic 740, Income Taxes, within the measurement period provided under SAB 118. We have determined that there were no additional material adjustments to record during the measurement period for the year ended December 31, 2018.

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, 2018, the Company determined that all of its deferred tax assets (except those of Camping World Inc. (“CW”) and the Outside Basis Deferred Tax Asset discussed below) are more likely than not to be realized. The valuation allowance for CW increased by $43.2 million in the year ended December 31, 2018, compared to a decrease of $4.6 million in the year ended December 31, 2017 primarily the result of remeasurement under the 2017 Tax Act. Since it was determined that 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 Outside Basis Deferred Tax Asset pertaining to the portion 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 increased $5.4 million in the year ended December 31, 2018, compared to a decrease of $9.2 million in the year ended December 31, 2017. The decrease in the year ended December 31, 2017 was primarily the result of the remeasurement under the 2017 Tax Act of $43.0 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, which is still pending. 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 2015.

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 related to 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, 2018, the Company recorded an immaterial amount related to uncertain tax positions and none at December 31, 2017.

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. The above payments are predicated on CWGS, LLC making an election under 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 twelve months ended December 31, 2018 and 2017, 215,486 and 12,945,419 common units in CWGS, LLC, respectively, were exchanged for Class A common stock subject to the provisions of the Tax Receivable Agreement. The Company recognized a liability for the Tax Receivable Agreement payments due to those parties that redeemed common units, 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, 2018, and December 31, 2017, the amount of Tax Receivable Agreement payments due under the Tax Receivable Agreement was $134.2 million and $139.7 million, respectively, of which $9.4 million and $8.9 million, respectively, were 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, 2018, there was no incremental impact on estimated values of the Tax Receivable Agreement liability and the Company’s deferred tax assets as a result of the 2017 Tax Act. 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 $117.0 million, and decreased basic and diluted earnings per share by $0.62.

The Company consolidated CWGS, LLC, which, as a limited liability company, is not subject to U.S. federal income taxes. Rather, the LLC’s taxable income flows through to the owners, who are responsible for paying the applicable income taxes on the income allocated to them. For tax years beginning on or after January 1, 2018, CWGS, LLC is subject to partnership audit rules enacted as part of the Bipartisan Budget Act of 2015 (the “Centralized Partnership Audit Regime”). Under the Centralized Partnership Audit Regime, any IRS audit of CWGS, LLC would be conducted at the CWGS, LLC level, and if the IRS determines an adjustment, the default rule is that CWGS, LLC would pay an “imputed underpayment” including interest and penalties, if applicable. CWGS, LLC may instead elect to make a “push-out” election, in which case the partners for the year that is under audit would be required to take into account the adjustments on their own personal income tax returns. If CWGS, LLC does not elect to make a “push-out” election, CWGS, LLC has agreements in place requiring former partners to indemnify CWGS, LLC for their share of the imputed underpayment. The partnership agreement does not stipulate how CWGS, LLC will address imputed underpayments. If CWGS, LLC receives an imputed underpayment, a determination will be made based on the relevant facts and circumstances that exist at that time. Any payments that CWGS, LLC ultimately makes on behalf of its current partners will be reflected as a distribution, rather than tax expense, at the time such distribution is declared.