Ameresco, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2017

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

The components of income before income taxes are as follows:



	Year Ended December 31,
	2017			2016			2015
Domestic	$	29,792		$	19,874		$	17,860
Foreign	(1,075		)	(3,507		)	(17,568		)
Income before (benefit) provision for income taxes	$	28,717		$	16,367		$	292

The components of the (benefit) provision for income taxes are as follows:



	Year Ended December 31,
	2017			2016			2015
Current:
Federal	$	(1,055	)	$	1,304		$	224
State	671			303			603
Foreign	161			(106		)	443
	(223		)	1,501			1,270
Deferred:
Federal	(6,683		)	2,341			3,861
State	1,853			106			134
Foreign	262			422			(289		)
	(4,568		)	2,869			3,706
	$	(4,791	)	$	4,370		$	4,976

The Company’s deferred tax assets and liabilities result primarily from temporary differences between financial reporting and tax recognition of depreciation, reserves, and certain accrued liabilities.

Deferred tax assets and liabilities consist of the following:



	December 31,
	2017			2016
Deferred tax assets:
Compensation accruals	$	3,042		$	4,259
Reserves	2,149			4,597
Other accruals	(193		)	732
Net operating losses	10,099			8,044
Interest rate swaps	866			1,500
Energy efficiency	22,716			14,449
Deferred revenue	815			1,351
Gross deferred income tax assets	39,494			34,932
Valuation allowance	(7,534		)	(7,344		)
Total deferred income tax assets	$	31,960		$	27,588
Deferred tax liabilities:
Depreciation	$	(24,178	)	$	(30,974	)
Contract refinancing	—			(217		)
Canada	(3,156		)	(1,901		)
United Kingdom	(802		)	(697		)
Outside basis difference	(4,408		)	(2,756		)
Acquisition accounting	—			(80		)
Total deferred income tax liabilities	(32,544		)	(36,625		)
Deferred income tax liabilities, net	$	(584	)	$	(9,037	)

The Company recorded a valuation allowance in the amount of $7,534 and $7,344 as of December 31, 2017 and 2016, respectively, related to the following items: 1) The Company recorded a valuation allowance on a deferred tax asset relating to interest rate swaps in the amount of $401 and $859 as of December 31, 2017 and 2016, respectively. The deferred tax asset represents a future capital loss which can only be recognized for income tax purposes to the extent of capital gain income. Although the Company anticipates sufficient future taxable income, it is more likely than not that it will not be of the appropriate character to allow for the recognition of the future capital loss. 2) As of December 31, 2017 and 2016, the Company recorded a valuation allowance on a deferred tax asset relating to a foreign net operating loss in the amount of $6,871 and $6,269, respectively. It is more likely than not that the Company will not generate sufficient taxable income at the foreign subsidiary level to utilize the net operating loss. 3) The Company recorded a valuation allowance on a deferred tax asset relating to a state net operating loss of $262 and $216 at one of its subsidiaries as of December 31, 2017 and 2016, respectively. It is more likely than not that the Company will not generate sufficient taxable income at the subsidiary level to utilize the net operating loss.

The provision for income taxes is based on the various rates set by federal and local authorities and is affected by permanent and temporary differences between financial accounting and tax reporting requirements.

The following is a reconciliation of the effective tax rates:



	Year Ended December 31,
	2017			2016			2015
Income before (benefit) provision for income taxes	$	28,717		$	16,367		$	292
Federal statutory tax expense	$	10,048		$	5,728		$	102
State income taxes, net of Federal benefit	1,584			678			604
Net state impact of deferred rate change	327			(110		)	55
Non deductible expenses	1,473			670			933
Impact of reserve for uncertain tax positions	42			(411		)	(1,772		)
Stock-based compensation expense	116			306			402
Energy efficiency preferences	(6,416		)	(4,130		)	(3,280		)
Foreign items and rate differential	139			516			1,556
Tax rate change	(13,948		)	—			—
Valuation allowance	424			213			4,255
Energy partnership basis adjustments	—			—			2,133
Miscellaneous	1,420			910			(12		)
	$	(4,791	)	$	4,370		$	4,976
Effective tax rate:
Federal statutory rate expense	35.0		%	35.0		%	35.0		%
State income taxes, net of Federal benefit	5.5		%	4.1		%	206.8		%
Net state impact of deferred rate change	1.1		%	(0.7		)%	18.8		%
Non deductible expenses	5.1		%	4.1		%	319.5		%
Impact of reserve for uncertain tax positions	0.1		%	(2.5		)%	(606.8		)%
Stock-based compensation expense	0.4		%	1.9		%	137.7		%
Energy efficiency preferences	(22.3		)%	(25.2		)%	(1,123.3		)%
Foreign items and rate differential	0.5		%	3.2		%	532.9		%
Tax rate change	(48.6		)%	—		%	—		%
Valuation allowance	1.5		%	1.3		%	1,457.2		%
Energy partnership basis adjustments	—		%	—		%	730.5		%
Miscellaneous	4.9		%	5.5		%	(4.1		)%
	(16.7		)%	26.7		%	1,704.2		%

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:



	Year Ended December 31,
	2017		2016
Balance, beginning of year	$	600	$	2,200
Additions for prior year tax positions	—		—
Settlements paid to tax authorities	—		(1,310		)
Reductions of prior year tax positions	—		(290		)
Balance, end of year	$	600	$	600

At December 31, 2017 and 2016, the Company had approximately $600 and $600, respectively, of total gross unrecognized tax benefits.

Of the total gross unrecognized tax benefits as of December 31, 2017 and 2016, $80 and $20, respectively, (both net of the federal benefit on state amounts) represent the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods.

At December 31, 2017 the Company had state net operating loss carryforwards of approximately $15,700, which will expire from 2017 through 2034. Any tax benefit resulting from excess stock option deductions is recorded as an adjustment to additional paid in capital when realized. At December 31, 2017 the Company had Canadian net operating loss carryforwards of approximately $27,200, which will expire for tax years 2016 through 2026.

The Company does not accrue U.S. tax for foreign earnings that it considers to be permanently reinvested outside the United States. Consequently, the Company has not provided any U.S. tax on the unremitted earnings of its foreign subsidiaries. As of December 31, 2017, the amount of earnings for which no repatriation tax has been provided was estimated to be $0.

At December 31, 2017 the company had a federal tax credit carryforward of approximately $21,200 which will expire at various times through 2036.

The tax years 2014 through 2017 remain open to examination by major taxing jurisdictions. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes. The (decrease) increase included in tax expense for the years end December 31, 2017, 2016 and 2015 were $(60), $(20) and $(200), respectively.

The 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”) was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries as of 2017, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The 2017 Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. The Company recorded a tax benefit for the impact of the 2017 Tax Act of approximately $13,900, in its consolidated financial statements as of December 31, 2017. This amount is primarily comprised of the remeasurement of federal net deferred tax liabilities resulting from the permanent reduction in the U.S. statutory corporate tax rate from 35% to 21%, after taking into account the mandatory one-time tax on the accumulated earnings of the Company’s foreign subsidiaries.

The Tax Legislation provided for a one-time deemed mandatory repatriation for post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Company’s initial estimate shows a deficit in foreign E&P and significant foreign taxes paid, which may be creditable against any tax resulting from the deemed mandatory repatriation. The Company will continue to refine its calculations of foreign E&P, however the Company does not expect the deemed mandatory repatriation to result in material tax assessment.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 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 Legislation. The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. As of December 31, 2017, the Company has substantially completed its accounting for the tax effects of the 2017 Tax Act. If revisions are needed as new information becomes available, the final determination of the deemed re-measurement of the Company’s deferred assets and liabilities, the deemed mandatory repatriation or other applicable provisions of the Tax Legislation will be completed as additional information becomes available, but no later than one year from the enactment of the 2017 Tax Act.

In February 2018, as part of the Bipartisan Budget Act, Code Section 179D Commercial Buildings Energy Efficiency Tax Deduction was retroactively extended through December 31, 2017. The impact is not reflected in the Company’s effective tax rate for 2017 but will be included as a tax benefit in the Company’s 2018 first quarter tax provision.