Income Taxes

9 Months Ended

Sep. 30, 2021

Income Taxes

Income Taxes

4.    Income Taxes

Our effective income tax rate was 23.7% and 23.2% for the three and nine months ended September 30, 2021, respectively, compared with 24.5% and 21.4% for the three and nine months ended September 30, 2020, respectively.

The decrease in our effective income tax rate when comparing the three months ended September 30, 2021 with the prior year period was due to the detrimental impact of non-deductible transaction costs incurred during the prior year period related to our acquisition of Advanced Disposal which did not reoccur in the current period. The decrease was partially offset by a net nominal increase in our effective income tax rate during the current year period resulting from a pre-tax gain from the recognition of cumulative translation adjustments on the divestiture of certain non-strategic Canadian

operations in 2021 which was not taxable and unfavorable adjustments to accruals and related deferred taxes primarily due to a change from our initial expectations of the tax effects of the Advanced Disposal acquisition and related divestitures.

The increase in our effective income tax rate for the nine-month period ended September 30, 2021 as compared with the prior year period was due to (i) lower federal tax credits in 2021; (ii) unfavorable adjustments to accruals and related deferred taxes discussed above and (iii) a decrease in excess tax benefits associated with equity-based compensation in the current year period, partially offset by a pre-tax gain from the recognition of cumulative translation adjustments on the divestiture of certain non-strategic Canadian operations in 2021 which was not taxable. In addition, our effective income tax rate in 2020 included the detrimental impact of non-deductible transaction costs related to closing the acquisition of Advanced Disposal in 2020.

These items are discussed further below. We evaluate our effective income tax rate at each interim period and adjust it as facts and circumstances warrant.

Investments Qualifying for Federal Tax Credits — We have significant financial interests in entities established to invest in and manage low-income housing properties. We support the operations of these entities in exchange for a pro-rata share of the tax credits they generate. The low-income housing investments qualify for federal tax credits that we expect to realize through 2030 under Section 42 or Section 45D of the Internal Revenue Code. We also held a residual financial interest in an entity that owned a refined coal facility that qualified for federal tax credits under Section 45 of the Internal Revenue Code through 2019. The entity sold the majority of its assets in the first quarter of 2020, which resulted in a $7 million non-cash impairment of our investment at that time. We account for our investments in these entities using the equity method of accounting, recognizing our share of each entity’s results of operations and other reductions in the value of our investments in equity in net losses of unconsolidated entities, within our Condensed Consolidated Statements of Operations.

During the three and nine months ended September 30, 2021, we recognized $15 million and $36 million, respectively, of net losses for these investments. We also recognized a reduction in our income tax expense for the three and nine months ended September 30, 2021 of $21 million and $53 million, respectively, due to federal tax credits realized from these investments as well as the tax benefits from the pre-tax losses realized. In addition, during the three and nine months ended September 30, 2021, we recognized interest expense of $2 million and $7 million, respectively, associated with our investments in low-income housing properties.

During the three and nine months ended September 30, 2020, we recognized $16 million and $59 million, respectively, (including the $7 million impairment of the refined coal facility noted above for the nine-month period) of net losses for these investments. We also recognized a reduction in our income tax expense for the three and nine months ended September 30, 2020 of $24 million and $65 million, respectively, due to federal tax credits realized from these investments as well as the tax benefits from the pre-tax losses realized. In addition, during the three and nine months ended September 30, 2020, we recognized interest expense of $3 million and $9 million, respectively, associated with our investments in low-income housing properties.

See Note 13 for additional information related to these unconsolidated variable interest entities.

Adjustments to Accruals and Related Deferred Taxes — Adjustments to accruals and related deferred taxes increased our income tax expense by $10 million for the three and nine months ended September 30, 2021. The unfavorable adjustments to accruals and related deferred taxes are primarily due to a change from our initial expectations of the tax effects of the Advanced Disposal acquisition and related divestitures. During the three and nine months ended September 30, 2020, adjustments to accruals and related deferred taxes impacted our income tax expense with a nominal increase and a $6 million decrease, respectively.

Equity-Based Compensation — During the three and nine months ended September 30, 2021, we recognized a reduction in income tax expense of $5 million and $16 million, respectively, for excess tax benefits related to the vesting or exercise of equity-based compensation awards compared with $2 million and $25 million, respectively, for the comparable prior year periods.

Tax Implications of Divestitures – During the third quarter of 2021, we recognized a pre-tax gain from the recognition of cumulative translation adjustments on the divestiture of certain non-strategic Canadian operations. This gain was not taxable, which caused a beneficial impact to our effective income tax rate for the three and nine months ended September 30, 2021.

Non-Deductible Transaction Costs — During the three months ended September 30, 2020, we recognized the detrimental tax impact of $19 million of non-deductible transaction costs related to our acquisition of Advanced Disposal. The tax rules require the capitalization of certain facilitative costs on the acquisition of stock of a company resulting in the applicable costs not being deductible for tax purposes.