INCOME TAXES

12 Months Ended

Dec. 31, 2019

Prior the date of the Spin-Off, the Company's operations were included in Ensign’s U.S. federal and state income tax returns and all income taxes were paid by Ensign. Additionally, prior to the date of the Spin-Off, income tax expense and other income tax related information contained in these Consolidated and Combined Financial Statements were presented on a separate tax return approach. Under this approach, the provision for income taxes represents income tax paid or payable for the current year plus the change in deferred taxes during the year calculated as if the Company were a stand-alone taxpayer filing hypothetical income tax returns. Management believes that the assumptions and estimates used to determine these tax amounts were reasonable. However, the Company's Consolidated and Combined Financial Statements may not necessarily reflect the Company’s income tax expense or tax payments in the future, or what its tax amounts would have been if the Company had been a stand-alone company during the periods presented.

The Company recorded a prepaid expense for income taxes in connection with the income tax returns the Company will file for the three month period from October 1, 2019 through December 31, 2019.

Effective January 1, 2018, the Tax Act reduced the corporate rate from 35.0% to 21.0%. The Company has adopted ASU 2018-05, Taxes (Topic 740): Amendments to SEC Paragraph Pursuant to SEC Staff Accounting Bulletin No. 118, which allows the Company to record provisional amounts during the period of enactment. Any changes to the provisional amounts are recorded as adjustments to the provision for income taxes in the period the amounts are determined. During the year ended December 31, 2017, the Company recognized a provisional reduction to income tax expense of $315 to reflect the revaluation of the Company’s net deferred tax liabilities based on the U.S. federal tax rate of 21%. In accordance with SAB 118, the Tax Act related income tax effects that were initially reported as provisional estimates were refined as additional analysis was performed. As of December 31, 2018, the Company had completed its accounting for the tax effects of the enactment of the Tax Act.

The provision for income taxes for the years ended December 31, 2019, 2018 and 2017 is summarized as follows:


	Year Ended December 31,
	2019		2018		2017
Current:
Federal	$	562	$	3,223	$	3,550
State	278		915		649
	840		4,138		4,199
Deferred:
Federal	1,070		226		1,305
State	175		(12)		186
	1,245		214		1,491
Adjustment to deferred taxes for tax rate change	—		—		(315)
Total income tax expense	$	2,085	$	4,352	$	5,375

A reconciliation of the federal statutory rate to the effective tax rate for income from continuing operations for the years ended December 31, 2019, 2018 and 2017, respectively, is comprised as follows:


	Year Ended December 31,
	2019		2018		2017
Income tax expense at statutory rate	21.0	%	21.0	%	35.0	%
State income taxes - net of federal benefit	6.8		3.5		3.5
Non-deductible expenses	2.6		0.4		0.3
Transaction costs	41.2		—		—
Tax credits	(1.6)		—		—
Equity compensation	(30.0)		(2.9)		(1.4)
Revaluation of deferred	—		(0.2)		(2.0)
Other adjustments	(0.4)		(0.7)		(0.5)
Total income tax provision	39.6	%	21.1	%	34.9	%

The Company's completion of the Spin-Off resulted in the Company not being able to deduct approximately $10,300 of the related transaction costs, which increased the effective tax rate significantly and affected all items that were impacted by this exclusion. This increase was partially offset by a favorable impact of tax benefits related to equity compensation.

The Company’s deferred tax assets and liabilities as of December 31, 2019 and 2018 are summarized below.


	Year Ended December 31,
	2019		2018
Deferred tax assets (liabilities):
Accrued expenses	$	2,670	$	2,964
Allowance for doubtful accounts	869		857
State taxes	27		178
Lease liabilities	83,076		—
Insurance	137		—
Total deferred tax assets	86,779		3,999
Depreciation and amortization	(6,107)		(4,357)
Prepaid expenses	(594)		(240)
Right of use asset	(82,181)		—
Other liabilities	—		(14)
Total deferred tax liabilities	(88,882)		(4,611)
Net deferred tax liabilities, included in other long-term liabilities	$	(2,103)	$	(612)

As of December 31, 2019, the Company has $830 of net operating loss carryforwards for federal income tax purposes which are available to reduce future federal taxable income, if any, over an indefinite period. The utilization of those net operating loss carryforwards is limited to 80% of taxable income in any given year.

The federal statutes of limitations on the Company’s 2015, 2014, and 2013 income tax years lapsed during the third quarter of 2019, 2018, and 2017, respectively. During the fourth quarter of each year, various state statutes of limitations also lapsed. The lapses for the years ended December 31, 2019 and 2018 had no impact on the Company’s unrecognized tax benefits.

As of December 31, 2019 and 2018, the Company did not have any unrecognized tax benefits, net of their state benefits that would affect the Company’s effective tax rate. The Company classifies interest and/or penalties on income tax liabilities or refunds as additional income tax expense or income. Such amounts are not material.