Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.19.3.a.u2
Income Taxes
12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes

The consolidated income tax expense consists of the following for the years ended December 31 ($ in millions):
 
2019
 
2018
 
2017
Current provision
 
 
 
 
 
Federal
$
381

 
$
498

 
$
421

State and local
41

 
107

 
14

Total current provision
422

 
605

 
435

Deferred provision
51

 
(131
)
 
(109
)
Total income tax expense
$
473

 
$
474

 
$
326



The reconciliation of the tax provision at the U.S. federal statutory rate to income tax expense for the years ended December 31 is as follows ($ in millions):
 
2019
 
2018
 
2017
Earnings from operations, before income tax expense
$
1,782


$
1,368


$
1,134

Loss (earnings) attributable to flow through noncontrolling interest
11

 
4

 
15

Earnings from operations, less noncontrolling interest, before income tax expense
1,793

 
1,372

 
1,149

 
 
 


 
 
Tax provision at the U.S. federal statutory rate
377

 
288

 
402

State income taxes, net of federal income tax benefit
49

 
52

 
11

Nondeductible compensation
42

 
33

 
58

ACA Health Insurer Fee

 
149

 

Income Tax Reform

 

 
(125
)
Valuation Allowance


(28
)

14

Nondeductible goodwill impairment
30





Other, net
(25
)
 
(20
)
 
(34
)
Income tax expense
$
473

 
$
474

 
$
326



The tax effects of temporary differences which give rise to deferred tax assets and liabilities are presented below for the years ended December 31 ($ in millions):
 
2019
 
2018
Deferred tax assets:
 
 
 
Medical claims liability
$
66

 
$
78

Nondeductible liabilities
97

 
128

Net operating loss and tax credit carryforwards
83

 
77

Compensation accruals
113

 
109

Premium and trade receivables
78

 
76

Operating lease liability
186

 

Other
46

 
61

Deferred tax assets
669

 
529

Valuation allowance
(66
)
 
(53
)
Net deferred tax assets
$
603

 
$
476

 
 
 
 
Deferred tax liabilities:
 
 
 
Intangible assets
$
346

 
$
343

Prepaid assets
26

 
31

Fixed assets
187

 
132

Investments in joint ventures
2

 
27

Deferred revenue
13

 
19

Right of use asset
171

 

Other
47

 
6

Deferred tax liabilities
792

 
558

Net deferred tax assets (liabilities)
$
(189
)
 
$
(82
)

The Company adopted an ASU that introduces a lessee model that requires the majority of leases to be recognized on the balance sheet, which resulted in a right of use asset and operating lease liability for GAAP purposes. With limited exceptions these items have no tax basis, therefore both deferred tax assets and deferred tax liabilities have been grossed up in 2019 to reflect the underlying GAAP change.

Valuation allowances are provided when it is considered more likely than not that deferred tax assets will not be realized. The valuation allowances primarily relate to future tax benefits on certain federal, state and foreign net operating loss and tax credit carryforwards. The $13 million increase in valuation allowance relates to tax losses in international jurisdictions.
 
Federal net operating loss carryforwards of $13 million expire beginning in 2021 through 2038; state net operating loss and tax credit carryforwards of $48 million expire beginning in 2020 through 2039. Substantially all of the non-U.S. tax loss carryforwards have indefinite carryforward periods.

The Company maintains a reserve for uncertain tax positions that may be challenged by a tax authority. A rollforward of the beginning and ending amount of uncertain tax positions, exclusive of related interest and penalties, is as follows:
 
Year Ended December 31,
 
2019
 
2018
Gross unrecognized tax benefits, beginning of period
$
277

 
$
257

Gross increases:
 
 
 
Current year tax positions
39

 
7

Prior year tax positions
14

 
14

Gross decreases:
 
 
 
Prior year tax positions
(8
)
 

Settlements
(16
)
 
 
Statute of limitation lapses
(1
)
 
(1
)
Gross unrecognized tax benefits, end of period
$
305

 
$
277


Uncertain tax positions increased $28 million due to various federal positions. As of December 31, 2019, $258 million of unrecognized tax benefits would impact the Company's effective tax rate in future periods, if recognized. The Company believes it is reasonably possible that its liability for unrecognized tax benefits will decrease in the next twelve months by $71 million as a result of the expiration of statutes of limitations and projected audit settlements in certain jurisdictions.

The table above excludes interest, net of related tax benefits, which is treated as income tax expense (benefit) under the Company's accounting policy. The Company recognized net interest expense related to uncertain positions of $2 million and $5 million for the years ended December 31, 2019 and 2018, respectively. The Company had $16 million and $14 million of accrued interest and penalties for uncertain tax positions as of December 31, 2019 and 2018, respectively.

The Company files tax returns for federal as well as numerous state and international tax jurisdictions. As of December 31, 2019, Health Net is under federal examination for tax years 2014 through its final return in 2016. Additionally, Centene's tax returns are under federal examination for tax years 2014 through 2017.