Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation (the “Tax Act”), which significantly revises the ongoing U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35.0% to 21.0%, implementing a territorial tax system, imposing one-time tax on foreign unremitted earnings and setting limitations on deductibility of certain costs (e.g., interest expense), among other things.

Loss before income taxes was comprised of the following:



	Year Ended December 31,
(In thousands)	2017			2016			2015
Domestic	$	(109,615	)	$	(110,347	)	$	(1,041,243	)
Foreign	(585		)	(2,927		)	(15,337		)
Loss before income taxes	$	(110,200	)	$	(113,274	)	$	(1,056,580	)

A reconciliation of the federal statutory rate of 35% to actual follows:



	Year Ended December 31,
	2017		2016		2015
Tax at statutory rate	35.0	%	35.0	%	35.0	%
Tax Cuts and Jobs Act of 2017	70.3	%	—	%	—	%
Goodwill impairment	—	%	(29.3	)%	(27.0	)%
State income taxes	(1.8	)%	3.3	%	2.8	%
Effect of foreign operations, net of foreign tax credits	3.5	%	(0.2	)%	—	%
Effect of current and prior year credits	1.7	%	2.9	%	0.5	%
Adjustments to deferred taxes	1.6	%	0.6	%	—	%
Valuation allowance	(1.6	)%	(6.6	)%	(1.0	)%
Other, net	(2.7	)%	1.4	%	(0.5	)%
Effective income tax rate	106.0	%	7.1	%	9.8	%

The components of income tax (benefit) expense are as follows:



	Year Ended December 31,
(In thousands)	2017			2016			2015
Current (benefit) expense
Federal	$	(34,445	)	$	23,752		$	29,668
State	1,216			779			(6,432		)
Foreign	(1,417		)	(582		)	2,575
Total current	(34,646		)	23,949			25,811
Deferred (benefit) expense
Federal	(89,820		)	(27,307		)	(100,139		)
State	9,266			(6,586		)	(28,143		)
Foreign	(1,653		)	1,865			(589		)
Total deferred	(82,207		)	(32,028		)	(128,871		)
Total income tax benefit	$	(116,853	)	$	(8,079	)	$	(103,060	)

Deferred tax assets (liabilities) consist of the following:



	December 31,
(In thousands)	2017			2016
Deferred tax assets
State net operating loss carryforwards	$	22,154		$	17,538
Foreign net operating loss carryforwards	16,760			17,234
Accrued liabilities	49,619			70,733
Intangible assets	26,029			43,662
Other assets including credits	11,967			7,497
Foreign tax credit carryforwards	6,601			13,576
Total deferred tax assets	133,130			170,240
Valuation allowance	(40,074		)	(35,410		)
Deferred tax assets, net	93,056			134,830
Deferred tax liabilities
Rental merchandise	(139,425		)	(234,211		)
Property assets	(40,712		)	(73,763		)
Total deferred tax liabilities	(180,137		)	(307,974		)
Net deferred taxes	$	(87,081	)	$	(173,144	)

At December 31, 2017, there are approximately $402.7 million of state Net Operating Loss (“NOL”) carryforwards expiring between 2018 and 2037, offset by a valuation allowance of $60.2 million. Of the total remaining state NOL carryforwards, approximately 12.0% represent acquired NOLs. Utilization of these NOLs is subject to applicable annual limitations for U.S. state tax purposes. At December 31, 2017, the Mexico NOL carryforwards were approximately $54.3 million, which expire between 2021 and 2027, and are offset with a full valuation allowance. The Puerto Rico NOL is $1.8 million and it will expire in 2024. In addition, at December 31, 2017, we also had approximately $6.6 million in foreign tax credit (“FTC”) carryforwards expiring between 2020 and 2025 and are offset with a full valuation allowance. We establish a valuation allowance to the extent we consider it more likely than not that the deferred tax assets attributable to our NOLs, FTCs or other deferred tax assets will not be recovered.

We are subject to federal, state, local and foreign income taxes. Along with our U.S. subsidiaries, we file a U.S. federal consolidated income tax return. With few exceptions, we are no longer subject to U.S. federal, state, foreign and local income tax examinations by tax authorities for years before 2012. We are currently under examination in the U.S., Puerto Rico, and various states. We do not anticipate that adjustments as a result of these audits, if any, will result in a material change to our consolidated statement of earnings, financial condition, statement of cash flows or earnings per share.

As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. In 2017, we increased the valuation allowance against Net Operating Losses and Credits in multiple state jurisdictions as well as foreign deferred tax assets that management believes will not be realized. In addition, the valuation allowance related to foreign tax credits was decreased due to the realization of foreign tax credits through deduction.

A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:



	Year Ended December 31,
(In thousands)	2017			2016			2015
Beginning unrecognized tax benefit balance	$	33,723		$	27,164		$	13,376
(Reductions) additions based on tax positions related to current year	(2,280		)	773			1,508
Additions for tax positions of prior years	6,688			8,396			20,684
Reductions for tax positions of prior years	(368		)	(2,246		)	(8,354		)
Settlements	(444		)	(364		)	(50		)
Ending unrecognized tax benefit balance	$	37,319		$	33,723		$	27,164

Included in the balance of unrecognized tax benefits at December 31, 2017, is $6.2 million, net of federal benefit, which, if ultimately recognized, will affect our annual effective tax rate.

During the next twelve months, we anticipate that it is reasonably possible that the amount of unrecognized tax benefits could be reduced by approximately $2.4 million either because our tax position will be sustained upon audit or as a result of the expiration of the statute of limitations for specific jurisdictions.

As of December 31, 2017, we have accrued approximately $3.3 million for the payment of interest for uncertain tax positions and recorded interest expense of approximately $1.0 million for the year then ended, which are excluded from the reconciliation of unrecognized tax benefits presented above.

The SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

Our accounting for the following elements of the Tax Act is incomplete. However, we were able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments as follows:

•

The Tax Act reduced the corporate tax rate to 21 percent, effective January 1, 2018. For our net federal deferred tax liabilities ("DTL"), we have recorded a provisional decrease of $76.5 million, with a corresponding net adjustment to deferred income tax benefit of $76.5 million for the year ended December 31, 2017. This adjustment is based on a reasonable estimate of the impact of the reduction in the corporate tax rate on our DTL's as of December 22, 2017. While we are able to make a reasonable estimate of the impact of the reduction in the corporate tax rate, our DTL's may be affected by other analyses related to the Tax Act, including our calculation of deemed repatriation of deferred foreign income, our calculation of the 100% bonus depreciation for assets placed in service in 2017 impacted by the Tax Act, and the state tax effect of adjustments made to federal temporary differences.

•

A provision in the Tax Act allows for 100% bonus depreciation on certain assets acquired and placed in service after September 27, 2017. This immediate expensing will continue for assets acquired before December 31, 2022, at which point it will begin phasing out. While we have not yet completed all of the computations necessary or completed an inventory of our 2017 expenditures that qualify for immediate expensing, we have recorded a federal provisional benefit of $9.7 million based on our current intent to fully expense all qualifying expenditures. This resulted in a decrease of approximately $24.2 million to our current income tax payable and a corresponding increase in our DTLs of approximately $14.5 million (after considering the effects of the reduction in income tax rates). This provisional estimate is including the rate change provision above.

•

The Deemed Repatriation Transition Tax (Transition Tax) is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of our foreign subsidiaries. To assess the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We are able to make a reasonable estimate of the Transition Tax and currently estimate an obligation of $0.7 million. However, we are continuing to review additional information regarding our accumulated E&P and non-U.S. income taxes paid to more precisely compute the amount of the Transition Tax, if any. In addition, based on current state tax law, we estimate the state impact of the Transition Tax to be insignificant. This estimate will be revised based on a calculation of our final Transition Tax as well as any updated guidance on state treatment of the deemed repatriation.

The effect of the tax rate change for items originally recognized in other comprehensive income was properly recorded in tax expense from continuing operations. This results in stranded tax effects in accumulated other comprehensive income at December 31, 2017. Companies can make a policy election to reclassify from accumulated other comprehensive income to retained earnings the stranded tax effects directly arising from the change in the federal corporate tax rate. We do not intend to exercise the option to reclassify stranded tax effects within accumulated other comprehensive income in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act (or portion thereof) is recorded.