9. Income Taxes

Provision for Income Taxes

Our “Provision for income taxes” consisted of the following (in millions):


	Years Ended December 31,
	2014			2013			2012
Current:
Federal	$	414		$	389		$	268
State		61			79			72
Foreign		56			45			36

		531			513			376

Deferred:
Federal		(89	)		(82	)		48
State		(33	)		(14	)		17
Foreign		4			(53	)		2

		(118	)		(149	)		67

Provision for income taxes	$	413		$	364		$	443

The U.S. federal statutory income tax rate is reconciled to the effective income tax rate as follows:


	Years Ended December 31,
	2014			2013			2012
Income tax expense at U.S. federal statutory rate		35.00	%		35.00	%		35.00	%
Federal tax credits		(3.21	)		(11.74	)		(4.13	)
Taxing authority audit settlements and other tax adjustments		(1.59	)		(3.56	)		(0.02	)
Noncontrolling interests		(0.81	)		(2.28	)		(1.16	)
State and local income taxes, net of federal income tax benefit		1.77			9.81			3.85
Tax rate differential on foreign income		(0.46	)		1.63			(0.96	)
Tax impact of impairments		0.46			41.95			0.57
Tax impact of divestitures		(7.89	)		—			—
Other		0.34			2.94			0.80

Provision for income taxes		23.61	%		73.75	%		33.95	%

The comparability of our provision for income taxes for the reported periods has been primarily affected by (i) variations in our income before income taxes; (ii) the tax implications of divestitures; (iii) federal tax credits; (iv) adjustments to our accruals and related deferred taxes; (v) tax audit settlements; (vi) the realization of federal and state net operating loss and credit carry-forwards and (vii) the tax implications of impairments.

For financial reporting purposes, income (loss) before income taxes by source was as follows (in millions):


	Years Ended December 31,
	2014		2013			2012
Domestic	$	1,601	$	548		$	1,175
Foreign		150		(54	)		128

Income before income taxes	$	1,751	$	494		$	1,303

Tax Implications of Divestitures — During 2014, the Company recorded a net gain of $515 million primarily related to the divestiture of our Wheelabrator business, our Puerto Rico operations and certain landfill and collection operations in our Eastern Canada Area. Had this net gain been fully taxable, our provision for income taxes would have increased by $138 million. See Note 19 for more information related to divestitures.

Investment in Refined Coal Facility — In 2011, we acquired a noncontrolling interest in a limited liability company, which was established to invest in and manage a refined coal facility in North Dakota. The facility’s refinement processes qualify for federal tax credits that are expected to be realized through 2019 in accordance with Section 45 of the Internal Revenue Code.

We account for our investment in this entity using the equity method of accounting, recognizing our share of the entity’s results of operations and other reductions in the value of our investment in “Equity in net losses of unconsolidated entities,” within our Consolidated Statement of Operations. We recognized $7 million, $8 million and $7 million of net losses resulting from our share of the entity’s operating losses during the years ended December 31, 2014, 2013 and 2012, respectively. Our tax provision was reduced by $21 million, $20 million and $21 million for the years ended December 31, 2014, 2013 and 2012, respectively, primarily as a result of tax credits realized from this investment. See Note 20 for additional information related to this investment.

Investment in Low-Income Housing Properties — In 2010, we acquired a noncontrolling interest in a limited liability company established to invest in and manage low-income housing properties. The entity’s low-income housing investments qualify for federal tax credits that are expected to be realized through 2020 in accordance with Section 42 of the Internal Revenue Code.

We account for our investment in this entity using the equity method of accounting recognizing our share of the entity’s results of operations and other reductions in the value of our investment in “Equity in net losses of unconsolidated entities,” within our Consolidated Statement of Operations. The value of our investment decreases as the tax credits are generated and utilized. During the years ended December 31, 2014, 2013 and 2012, we recognized $25 million, $25 million and $24 million, respectively, of losses relating to our equity investment in this entity, $5 million, $6 million and $7 million, respectively, of interest expense, and a reduction in our tax provision of $37 million (including $25 million of tax credits), $38 million (including $26 million of tax credits) and $38 million (including $26 million of tax credits), respectively. See Note 20 for additional information related to this investment.

Adjustments to Accruals and Related Deferred Taxes — Adjustments to our accruals and related deferred taxes due to the filing of our income tax returns and changes in state law resulted in a reduction of $24 million and increases of $4 million and $7 million to our provision for income taxes for the years ended December 31, 2014, 2013 and 2012, respectively.

Tax Audit Settlements — We file income tax returns in the United States and Canada as well as various state and local jurisdictions. We are currently under audit by the IRS, Canada Revenue Agency and various state and local taxing authorities. Our audits are in various stages of completion.

During 2014, 2013 and 2012 we settled various tax audits. The settlement of these tax audits resulted in a reduction to our provision for income taxes of $12 million, $11 million and $10 million for the years ended December 31, 2014, 2013 and 2012, respectively.

We participate in the IRS’s Compliance Assurance Process, which means we work with the IRS throughout the year in order to resolve any material issues prior to the filing of our annual tax return. We are currently in the examination phase of IRS audits for the tax years 2013, 2014 and 2015 and expect these audits to be completed within the next three, 15 and 27 months, respectively. We are also currently undergoing audits by various state and local jurisdictions for tax years that date back to 2009, with the exception of affirmative claims in a limited number of jurisdictions that date back to 2000. We are also under audit in Canada for the tax years 2012 and 2013. In 2011, we acquired Oakleaf Global Holdings (“Oakleaf”), which is subject to potential IRS examination for the year 2011. Pursuant to the terms of our acquisition of Oakleaf, we are entitled to indemnification for Oakleaf’s pre-acquisition period tax liabilities.

State Net Operating Loss and Credit Carry-Forwards — During 2014, 2013 and 2012, we recognized state net operating loss and credit carry-forwards resulting in a reduction to our provision for income taxes of $16 million, $16 million and $5 million, respectively.

Federal Net Operating Loss Carry-Forwards — During 2012, we recognized additional federal net operating loss (“NOL”) carry-forwards resulting in a reduction to our provision for income taxes of $8 million. As a result of the acquisition of Oakleaf in 2011, we received income tax attributes (primarily federal and state net operating loss carry-forwards) and allocated a portion of the purchase price to these acquired assets. At the time of the acquisition, we fully recognized all of the income tax attributes identified by the seller and concluded the realization of these attributes did not affect our overall provision for income taxes. In 2012, as a result of new information, we recognized the tax benefit related to additional federal net operating loss carry-forwards received in the Oakleaf acquisition.

Tax Implications of Impairments — A portion of the impairment charges recognized are not deductible for tax purposes. Had the charges been fully deductible, our provision for income taxes would have been reduced by $8 million, $235 million and $7 million for the years ended December 31, 2014, 2013, and 2012 respectively. See Notes 6 and 13 for more information related to asset impairments and unusual items.

Unremitted Earnings in Foreign Subsidiaries — At December 31, 2014, remaining unremitted earnings in foreign operations were approximately $750 million, which are considered permanently invested and, therefore, no provision for U.S. income taxes were accrued for these unremitted earnings. Determination of the unrecognized deferred U.S. income tax liability is not practicable due to uncertainties related to the timing and source of any potential distribution of such funds, along with other important factors such as the amount of associated foreign tax credits.

Deferred Tax Assets (Liabilities)

The components of net deferred tax assets (liabilities) are as follows (in millions):


	December 31,
	2014			2013
Deferred tax assets:
Net operating loss, capital loss and tax credit carry-forwards	$	297		$	164
Miscellaneous and other reserves, net		380			356

Subtotal		677			520
Valuation allowance		(300	)		(149	)
Deferred tax liabilities:
Landfill and environmental remediation liabilities		(22	)		(30	)
Property and equipment		(598	)		(966	)
Goodwill and other intangibles		(1,095	)		(1,104	)

Net deferred tax liabilities	$	(1,338	)	$	(1,729	)

The valuation allowance increased by $151 million in 2014 due to changes in our capital loss carry-forwards and in our state NOL and tax credit carry-forwards, as well as the tax impacts of impairments.

At December 31, 2014, we had $28 million of federal NOL carry-forwards and $1.6 billion of state NOL carry-forwards. The federal and state NOL carry-forwards have expiration dates through the year 2034. We also have $519 million of federal capital loss carry-forwards which expire in 2019. In addition, we have $33 million of state tax credit carry-forwards at December 31, 2014.

We have established valuation allowances for uncertainties in realizing the benefit of certain tax loss and credit carry-forwards and other deferred tax assets. While we expect to realize the deferred tax assets, net of the valuation allowances, changes in estimates of future taxable income or in tax laws may alter this expectation.

Liabilities for Uncertain Tax Positions

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, including accrued interest for 2014, 2013 and 2012 is as follows (in millions):


	2014			2013			2012
Balance at January 1	$	49		$	54		$	49
Additions based on tax positions related to the current year		9			6			15
Additions based on tax positions of prior years		2			—			—
Additions due to acquisitions		—			—			—
Accrued interest		1			2			2
Reductions based on tax positions related to the current year		—			—			—
Reductions for tax positions of prior years		—			(7	)		(1	)
Settlements		(11	)		(1	)		(4	)
Lapse of statute of limitations		(8	)		(5	)		(7	)

Balance at December 31	$	42		$	49		$	54

These liabilities are included as a component of long-term “Other liabilities” in our Consolidated Balance Sheets because the Company does not anticipate that settlement of the liabilities will require payment of cash within the next 12 months. As of December 31, 2014, $28 million of net unrecognized tax benefits, if recognized in future periods, would impact our effective tax rate.

We recognize interest expense related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2014, 2013 and 2012, we recognized $1 million, $2 million and $2 million, respectively, of such interest expense as a component of our provisions for income taxes. We had $3 million and $7 million of accrued interest expense in our Consolidated Balance Sheets as of December 31, 2014 and 2013, respectively. We do not have any accrued liabilities or expense for penalties related to unrecognized tax benefits for the years ended December 31, 2014, 2013 and 2012.

We are not able to reasonably estimate when we might make any cash payments required to settle these liabilities, but we do not believe that the ultimate settlement of our obligations will materially affect our liquidity. As of December 31, 2014 we anticipate that approximately $12 million of liabilities for unrecognized tax benefits, including accrued interest, and $3 million of related tax assets may be reversed within the next 12 months. The anticipated reversals primarily relate to state tax items, none of which are material, and are expected to result from audit settlements or the expiration of the applicable statute of limitations period.

Bonus Depreciation

The Tax Increase Prevention Act of 2014 was signed into law on December 19, 2014 and included an extension for one year of the bonus depreciation allowance. As a result, 50% of qualifying capital expenditures on property placed in service before January 1, 2015 were depreciated immediately. The acceleration of deductions on 2014 qualifying capital expenditures resulting from the bonus depreciation provisions had no impact on our effective income tax rate for 2014 although it will reduce our cash taxes. This reduction will be offset by increased cash taxes in subsequent periods when the deductions related to the capital expenditures would have otherwise been taken.