7. Income Taxes

Income Tax Expense

The components of income tax expense (benefit) for the following years ended December 31 were as follows (in thousands):


	2015		2016		2017
Income taxes currently payable:
Federal	$	64,227	$	59,343	$	49,944
State		5,181		5,675		6,120
		69,408		65,018		56,064
Deferred income taxes (benefits):
Federal		(26,573)		3,830		(31,941)
State		(426)		880		960
		(26,999)		4,710		(30,981)
Total income tax expense	$	42,409	$	69,728	$	25,083

Total income tax expense for the years ended December 31 was different from the amount computed using the statutory federal income tax rate of 35 percent for the following reasons (in thousands):


	2015		2016		2017
Income tax expense at federal statutory rate	$	24,891	$	50,931	$	47,328
State income taxes, net of federal income tax benefit		2,158		5,799		4,993
Tax contingencies reversed due to statute closings		(2,223)		(1,632)		(2,044)
Change in valuation allowances		5,174		2,130		(14,973)
Adjustments for Tax Act		—		—		(8,677)
Share-based compensation		165		(232)		(4,724)
Non-deductible HIF fees		9,953		10,204		—
Other-net		2,291		2,528		3,180
Total income tax expense	$	42,409	$	69,728	$	25,083

On December 22, 2017, the President of the United States signed into law the “Tax Cuts and Jobs Act” (the “Tax Act”). The legislation includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent, effective January 1, 2018. The legislation also provides for the acceleration of depreciation on certain assets placed in service after September 27, 2017, as well as prospective changes beginning in 2018, including additional limitations on the deduction of executive compensation.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. 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 Tax Act. SAB 118 allows registrants to determine a reasonable estimate to be included as provisional amounts and provides a measurement period by which the accounting must be completed. The measurement period ends when a registrant has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements under ASC Topic 740 but under no circumstances is the measurement period extend beyond one year from the enactment date (i.e. December 22, 2018).

Deferred Income Taxes

The significant components of deferred tax assets and liabilities at December 31 were as follows (in thousands):


	2016		2017
Deferred tax assets:
Net operating loss carryforwards	$	19,727	$	13,384
Share-based compensation		14,704		9,639
Other accrued compensation		9,313		6,195
Claims reserves		6,251		4,527
Deferred revenue		4,986		2,606
Other non-deductible accrued liabilities		3,460		5,362
Amortization of goodwill and intangible assets		444		—
Indirect tax benefits		4,396		2,847
Other deferred tax assets		3,858		2,051
Total deferred tax assets		67,139		46,611
Valuation allowances		(17,117)		(2,368)
Deferred tax assets after valuation allowances		50,022		44,243
Deferred tax liabilities:
Depreciation		(41,311)		(22,906)
Amortization of goodwill and intangible assets		—		(29,501)
Other deferred tax liabilities		(5,586)		(3,321)
Total deferred tax liabilities		(46,897)		(55,728)
Net deferred tax assets (liabilities)	$	3,125	$	(11,485)

The Company did not identify any items for which a reasonable estimate of the income tax effects of the Tax Act could not be determined as of December 31, 2017. However, as a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Act, the Company re-measured its ending net deferred tax liabilities at December 31, 2017 and recorded a provisional tax benefit of $8.2 million. The Company will continue to analyze the Tax Act and additional technical and interpretive guidance on the Tax Act from the government and will complete its accounting no later than December 22, 2018. Any changes to the tax basis for temporary differences between the estimates in these statements and the 2017 federal return filed by the Company will also result in a corresponding adjustment to the remeasurement of deferred taxes as of the enactment date of the Tax Act.

The Company has $38.8 million of federal net operating loss carryforwards (“NOLs”) available to reduce consolidated taxable income in 2018 and subsequent years. These NOLs (including $37.6 million incurred by AlphaCare prior to its membership in the Magellan consolidated group) will expire in 2018 through 2036 if not used and are subject to examination and adjustment by the IRS. In addition, the Company’s utilization of these NOLs is subject to limitations under the Internal Revenue Code as to the timing and use. At this time, the Company does not believe these limitations will restrict the Company’s ability to use any federal NOLs before they expire. The Company and its subsidiaries also have $93.7 million of NOLs available to reduce state and local taxable income at certain subsidiaries in 2018 and subsequent years. These NOLs will expire in 2018 through 2037 if not used and are subject to examination and adjustment by the respective tax authorities. In addition, the Company’s utilization of certain of these NOLs is subject to limitations as to the timing and use. At this time, the Company does not believe these limitations will restrict the Company’s ability to use any of these state and local NOLs before they expire.

The Company’s valuation allowances against deferred tax assets were $17.1 million and $2.4 million as of December 31, 2016 and 2017, respectively. The allowances at December 31, 2016 mostly related to uncertainties regarding the eventual realization of the AlphaCare federal NOLs and certain state NOLs. The significant decrease in 2017 was due to the reversal of AlphaCare federal NOL allowances as a result of planned restructuring of the Company’s New York operations as a result of the acquisition of SWH. The combined results are projected to provide sufficient taxable income to utilize AlphaCare’s NOL unrestricted carryforwards. At December 31, 2017, the Company’s remaining valuation allowances primarily related to uncertainties regarding the eventual realization of certain state NOLs.

Reversals of valuation allowances are recorded in the period they occur, typically as reductions to income tax expense. Determination of the amount of deferred tax assets considered realizable requires significant judgment and estimation regarding the forecasts of future taxable income which are consistent with the plans and estimates the Company uses to manage the underlying businesses. Although consideration is also given to potential tax planning strategies which might be available to improve the realization of deferred tax assets, none were identified which were both prudent and reasonable. The Company believes taxable income expected to be generated in the future will be sufficient to support realization of the Company’s deferred tax assets, as reduced by valuation allowances. This determination is based upon earnings history and future earnings expectations.

Other than deferred tax benefits attributable to operating loss carryforwards, there are no time constraints within which the Company’s deferred tax assets must be realized. Future changes in the estimated realizability of deferred tax assets could materially affect the Company’s financial condition and results of operations.

Uncertain Tax Positions

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):


	2015		2016		2017
Balance as of beginning of period	$	13,528	$	12,597	$	13,604
Additions for current year tax positions		3,371		3,274		3,243
Additions for tax positions of prior years		949		141		342
Reductions for tax positions of prior years		(1,807)		(173)		(114)
Reductions due to lapses of applicable statutes of limitations		(3,071)		(2,235)		(2,693)
Reductions due to Tax Act		—		—		(509)
Reductions due to settlements with taxing authorities		(373)		—		(293)
Balance as of end of period	$	12,597	$	13,604	$	13,580

If these unrecognized tax benefits had been realized as of December 31, 2016 and 2017, $9.1 million and $10.7 million, respectively, would have reduced income tax expense.

The Company continually performs a comprehensive review of its tax positions and accrues amounts for tax contingencies related to uncertain tax positions. Based upon these reviews, the status of ongoing tax audits and the expiration of applicable statutes of limitations, accruals are adjusted as necessary. The tax benefit from an uncertain tax position is recognized when it is more likely than not that, based on the technical merits, the position will be sustained upon examination, including resolution of any related appeals or litigation processes.

The Company also adjusts these liabilities for unrecognized tax benefits when its judgment changes as a result of the evaluation of new information not previously available. However, the ultimate resolution of a disputed tax position following an examination by a taxing authority could result in a payment that is materially different from that accrued by the Company. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined. However, reversals of unrecognized tax benefits related to deductions for stock compensation in excess of the related book expense are recorded as reductions to deferred tax assets, although prior to the adoption of ASU 2016-09 in 2016 these were recorded as increases in additional paid‑in capital.

The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2013 expired during 2017. As a result, $3.0 million of tax contingency reserves recorded as of December 31, 2016 were reversed in the current year, of which $2.0 million was reflected as a reduction to income tax expense and $1.0 million as a decrease to deferred tax assets. Additionally, $0.2 million of accrued interest was reversed in 2017 and reflected as a reduction to income tax expense due to the closing of statutes of limitations on tax assessments.

The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2012 expired during 2016. As a result, $2.2 million of tax contingency reserves recorded as of December 31, 2015 were reversed in 2016, of which $1.5 million was reflected as a reduction to income tax expense and $0.7 million as a decrease to deferred tax assets. Additionally, $0.1 million of accrued interest was reversed in 2016 and reflected as reductions to income tax expense due to the closing of statutes of limitations on tax assessments.

The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2011 expired during 2015. As a result, $3.1 million of tax contingency reserves recorded as of December 31, 2014 were reversed in 2015, of which $2.0 million was reflected as a reduction to income tax expense, $1.0 million as a decrease to deferred tax assets, and the remainder as an increase to additional paid-in capital. Additionally, $0.4 million of accrued interest and $0.7 million of unrecognized state tax benefits were reversed in 2015 and reflected as reductions to income tax expense due to the closing of statutes of limitations on tax assessments and the favorable settlement of state income tax examinations.

With few exceptions, the Company is no longer subject to income tax assessments by tax authorities for years ended prior to 2014. Further, it is reasonably possible the statutes of limitations regarding the assessment of federal and most state and local income taxes for 2014 could expire during 2018. Up to $2.9 million of unrecognized tax benefits recorded as of December 31, 2017 could be reversed during 2018 as a result of statute expirations, of which $2.3 million would be reflected as a reduction to income tax expense and $0.6 million as a decrease to deferred tax assets. All reversals from statute expirations would be reflected as discrete adjustments during the quarter in which the respective event occurs. As of December 31, 2016 and 2017, the Company had accrued approximately $0.3 million and $0.5 million, respectively, for the potential payment of interest and penalties. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. During the years ended December 31, 2015, 2016 and 2017, the Company recorded approximately $(0.4) million, $0.1 million and $0.2 million, respectively, in interest and penalties.