Centene Corporation 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, 2019

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.