Income Taxes

12 Months Ended

Dec. 31, 2018

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.

On December 22, 2017, the U.S. government enacted the Tax Reform Act, which makes broad and complex changes to the U.S. tax code, including a permanent reduction in the U.S. federal corporate tax rate from 35% to 21% (“Rate Reduction”). The Tax Reform Act also puts into place new tax laws that will apply prospectively, which include, but are not limited to, modifying the rules governing the deductibility of certain executive compensation; extending and modifying the additional first-year depreciation deduction to accelerate expensing of certain qualified property; creating a limitation on deductible interest expense; and changing rules related to uses and limitations of net operating loss carryforwards.

We applied the guidance in Staff Accounting Bulletin 118 (“SAB 118”), when accounting for the effects of the Tax Reform Act. At December 31, 2017, we made a reasonable estimate of the effects on our existing deferred tax balances, and recognized a provisional benefit amount of $166.9 million, which was included as a component of income tax expense from continuing operations. We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21% for federal purposes. For the year ended December 31, 2018, we completed the analysis of the accounting for the tax effects of the Tax Reform Act, resulting in our recording of an additional tax benefit of $0.6 million during 2018. These adjustments to the previously recorded provisional amounts include the tax effects on the remeasurement of the existing net deferred tax liabilities. We also had a reclassification of $1.6 million from accumulated other comprehensive income to retained earnings for stranded tax effects as of December 31, 2018 resulting from the Tax Reform Act. See Note 2 for further information.

On January 1, 2018, we adopted ASU 2016-16 as discussed in Note 1. As a result of the adoption, we decreased prepaid income taxes by $59.4 million, increased income taxes payable by $3.0 million, increased deferred tax assets by $18.0 million (net of a valuation allowance of $17.2 million), and decreased retained earnings by $44.4 million for the cumulative effect related to new guidance that requires recognizing the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs - see Note 2 for further information.

Significant components of Delek's deferred tax assets (liabilities) reported in the accompanying consolidated financial statements as of December 31, 2018 and 2017 were as follows (in millions):



	December 31,
	2018			2017
Non-Current Deferred Taxes:
Property, plant and equipment, and intangibles	$	(275.6	)	$	(180.9	)
Partnership and equity investments	22.2			(83.7		)
Deferred revenues	(5.5		)	(6.5		)
Derivatives and hedging	(12.5		)	4.8
Compensation and employee benefits	15.5			15.9
Net operating loss carryforwards	39.9			26.5
Reserves and accruals	63.0			40.8
Inventories	1.3			4.4
Valuation allowance	(58.5		)	(21.2		)
Total net deferred tax liabilities	$	(210.2	)	$	(199.9	)

The difference between the actual income tax expense and the tax expense computed by applying the statutory federal income tax rate to income from continuing operations was attributable to the following (in millions):



	Year Ended December 31,
	2018			2017			2016
Provision (benefit) for federal income taxes at statutory rate	$	102.0		$	104.7		$	(137.0	)
State income tax expense (benefit), net of federal tax provision	5.5			4.9			(10.2		)
Income tax (benefit) expense attributable to non-controlling interest	(7.3		)	(12.0		)	(7.1		)
Tax credits and incentives	(8.3		)	(1.6		)	(9.7		)
Partnership basis differences not expected to be realized	5.5			—			—
Dividends received deduction	—			(2.8		)	(5.7		)
Executive compensation limitation	1.7			1.5			0.3
Stock compensation	(2.2		)	—			—
Amortization - prepaid taxes	—			(2.4		)	(3.5		)
Reversal of deferred taxes related to equity method investment in Alon	—			45.3			—
Impact of Tax Reform Act	(0.6		)	(166.9		)	—
Goodwill write-down	5.3			—			—
Other items	0.3			0.1			1.4
Income tax expense (benefit)	$	101.9		$	(29.2	)	$	(171.5	)

Tax credits and incentives include work opportunity, research and development, E-85 and blocked pump tax credits, as well as incentives for the Company’s biodiesel blending operations.

Income tax expense (benefit) from continuing operations was as follows (in millions):



	Year Ended December 31,
	2018			2017			2016
Current	$	128.7		$	18.8		$	(18.3	)
Deferred	(26.8		)	(48.0		)	(153.2		)
	$	101.9		$	(29.2	)	$	(171.5	)

We carry valuation allowances against certain state deferred tax assets and net operating losses that may not be recoverable with future taxable income. We also carry valuation allowances related to basis differences that may not be recoverable. During the years ended December 31, 2018 and 2017, we recorded increases to the valuation allowance related to continuing operations of $37.3 million ($17.2 million of which was charged to retained earnings as a result of the cumulative effect of the adoption of accounting guidance, discussed above) and $13.9 million, respectively.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods for which the deferred tax assets are deductible, management believes it is more likely than not Delek will realize the benefits of these deductible differences, net of the existing valuation allowance. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Subsequently recognized tax benefit or expense relating to the valuation allowance for deferred tax assets will be reported as an income tax benefit or expense in the consolidated statement of income.

State net operating loss and credit carryforwards at December 31, 2018 totaled $668.4 million and $3.5 million, respectively, a portion of which are subject to a valuation allowance. State net operating losses will begin expiring in 2019 through 2038. State tax credit carryforwards will begin expiring in 2020.

Delek files a consolidated U.S. federal income tax return, as well as income tax returns in various state jurisdictions. Delek is no longer subject to U.S. federal income tax examinations by tax authorities for years through 2013. The Internal Revenue Service has examined Delek's income tax returns through the tax year ended 2013. However, pre-acquisition tax returns for Alon USA Energy & Subsidiaries are open to U.S. federal income tax examinations beginning with the year ended December 31, 2013. Alon's federal income tax returns for tax years 2014 through 2016 are currently under examination. The Company is under audit in the state of Texas for the years ended December 31, 2013 through December 31, 2014. No material adjustments have been identified at this time.

ASC 740 provides a recognition threshold and guidance for measurement of income tax positions taken or expected to be taken on a tax return. ASC 740 requires the elimination of the income tax benefits associated with any income tax position where it is not "more likely than not" that the position would be sustained upon examination by the taxing authorities.

Increases and decreases to the beginning balance of unrecognized tax benefits during the years ended December 31, 2018, 2017, and 2016 were as follows:



	2018			2017			2016
Balance at the beginning of the year	$	6.1		$	1.7		$	0.2
Additions based on tax positions related to current year	11.2			0.4			1.5
Additions for tax positions related to prior years and acquisitions	3.4			4.2			—
Reductions for tax positions related to prior years	(0.9		)	(0.2		)	—
Settlements with taxing authorities	(0.6		)	—			—
Balance at the end of the year	$	19.2		$	6.1		$	1.7

The amount of the unrecognized benefit above, that if recognized would change the effective tax rate, is $7.4 million and $4.6 million as of December 31, 2018 and 2017, respectively.

Delek recognizes accrued interest and penalties related to unrecognized tax benefits as an adjustment to the current provision for income taxes. $2.9 million and $0.5 million of interest was recognized related to unrecognized tax benefits during the years ended December 31, 2018 and 2017, respectively and a nominal amount of interest was recognized during the year ended December 31, 2016.

Uncertain tax positions have been examined by Delek for any material changes in the next 12 months, and none are expected.