Forward Air Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes (Notes)

Income Taxes (Notes)

12 Months Ended

Dec. 31, 2018

Tax Reform

On December 22, 2017, President Trump signed into law H.R. 1, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (this legislation is referred to herein as the “U.S. Tax Act”). The U.S. Tax Act provided for significant changes in the U.S. Internal Revenue Code of 1986, as amended. The U.S. Tax Act contains provisions with separate effective dates but is generally effective for taxable years beginning after December 31, 2017.

Beginning on January 1, 2018, the U.S. Tax Act lowered the U.S. corporate income tax rate from 35% to 21% on our U.S. earnings from that date and beyond. The revaluation of our U.S. deferred tax assets and liabilities to the 21% corporate tax rate reduced our net U.S. deferred income tax liability by approximately $15,901 which is reflected as a reduction in our income tax expense in our results for the quarter and year ended December 31, 2017.

On December 22, 2017, the SEC staff issued SAB 118 that allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As of December 22, 2018, the Company has completed its accounting for all of the enactment-date income tax effects of the U.S. Tax Act. The Company made no adjustments to the provisional amounts recorded at December 31, 2017.

Income Taxes

The provision for income taxes consists of the following:



	2018		2017			2016
			(As Adjusted)			(As Adjusted)
Current:
Federal	$	16,572	$	28,556		$	24,139
State	3,559		4,043			3,052
	20,131		32,599			27,191
Deferred:
Federal	7,194		(11,860		)	3,145
State	870		(457		)	269
	8,064		(12,317		)	3,414
	$	28,195	$	20,282		$	30,605

The tax benefit associated with the exercise of stock options and the vesting of non-vested shares recorded to additional paid in capital during the year ended December 31, 2016 was $1,732 and is reflected as an increase in additional paid-in capital in the accompanying consolidated statements of shareholders’ equity. For 2018 and 2017, FASB guidance required the recognition of the income tax effects of awards in the income statement when the awards vest or are settled thus eliminating additional paid in capital ("APIC") pools.

The historical income tax expense differs from the amounts computed by applying the federal statutory rate of 21.0% for 2018 and 35.0% for 2017 and 2016 to income before income taxes as follows:



	2018			2017			2016
				(As Adjusted)			(As Adjusted)
Tax expense at the statutory rate	$	25,252		$	37,637		$	20,399
State income taxes, net of federal benefit	3,685			2,339			2,229
Share-based compensation	(50		)	(366		)	—
Qualified stock options	12			32			(88		)
Other permanent differences	163			252			474
TQI goodwill impairment	—			—			8,990
Deferred tax asset valuation allowance	35			78			(2		)
Federal qualified property deductions	—			(2,075		)	(1,311		)
Federal income tax credits	(207		)	(58		)	—
Non-taxable acquisitions	—			(568		)	—
Rate impact on deferred tax liabilities	—			(15,901		)	—
Other	(695		)	(1,088		)	(86		)
	$	28,195		$	20,282		$	30,605

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets are as follows:



	December 31, 2018			December 31, 2017
				(As Adjusted)
Deferred tax assets:
Accrued expenses	$	10,362		$	8,228
Allowance for doubtful accounts	535			777
Share-based compensation	3,526			3,002
Accruals for income tax contingencies	217			251
Net operating loss carryforwards	2,906			4,733
Total deferred tax assets	17,546			16,991
Valuation allowance	(395		)	(360		)
Total deferred tax assets, net of valuation allowance	17,151			16,631
Deferred tax liabilities:
Tax over book depreciation	25,606			19,402
Intangible assets	10,904			11,108
Prepaid expenses deductible when paid	3,902			3,460
Goodwill	13,913			11,741
Total deferred tax liabilities	54,325			45,711
Net deferred tax liabilities	$	(37,174	)	$	(29,080	)

Total cash income tax payments, net of refunds, during fiscal years 2018, 2017 and 2016 were $21,064, $36,110 and $10,628, respectively.

The Company has considered the weight of all available evidence in determining the need for a valuation allowance against each of the Company’s various deferred tax assets and believes the Company’s history of income is a significant weight of evidence supporting the realization of all of the Company’s federal and most state deferred tax assets. In addition, the Company believes all existing deferred tax liabilities will reverse in a manner that generates enough taxable income to realize an offsetting amount of deferred tax assets. Given the historical positive performance of the Company for having more than ten consecutive years of profitability, the Company expects to fully utilize the vast majority of its deferred tax assets and has concluded that the only valuation allowance needed relates to state net operating loss carryforwards, as noted below.

As a result of the Towne acquisition the Company has approximately $10,258, $18,586 and $27,050 of federal net operating losses as of December 31, 2018, 2017 and 2016 respectively, that will expire between 2020 and 2030. The Company expects to be able to fully utilize these federal net operating losses before they expire.

At December 31, 2018 and 2017, the Company had state net operating loss carryforwards of $18,148 and $18,126, respectively, that will expire between 2018 and 2030. Also, the use of these state net operating losses is limited to the future taxable income of separate legal entities. Based on expectations of future taxable income, management believes that it is more likely than not that the results of operations for certain separate legal entities will not generate sufficient taxable income to realize portions of these net operating loss benefits for state loss carryforwards. As a result, a valuation allowance has been provided for the state loss carryforwards for these specific legal entities. The valuation allowance on these state loss carryforwards increased $35 during 2018 and $78 during 2017.

Income Tax Contingencies

The Company, or one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction, various states and Canada. With a few exceptions, the Company is no longer subject to U.S. federal, state and local, or Canadian examinations by tax authorities for years before 2012.

A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:



	Liability for
	Unrecognized Tax
	Benefits
Balance at December 31, 2015	$	773
Reductions for settlement with state taxing authorities	(247		)
Additions for tax positions of current year	56
Balance at December 31, 2016	582
Reductions for settlement with state taxing authorities	(14		)
Additions for tax positions of prior years	400
Additions for tax positions of current year	366
Balance at December 31, 2017	1,334
Reductions for settlement with state taxing authorities	(271		)
Reductions for tax positions of prior years	(40		)
Additions for tax positions of current year	35
Balance at December 31, 2018	$	1,058

Included in the liability for unrecognized tax benefits at December 31, 2018 and December 31, 2017 are tax positions of $1,058 and $1,334, respectively, which represents tax positions where the realization of the ultimate benefit is uncertain and the disallowance of which would affect the Company’s annual effective income tax rate.

In addition, at December 31, 2018 and December 31, 2017, the Company had accrued penalties associated with unrecognized tax benefits of $61 and $105, respectively. At December 31, 2018 and December 31, 2017, the Company also had accrued interest associated with unrecognized tax benefits of $143 and $201, respectively.