9. Income Taxes

Provision for Income Taxes

Our provision for income taxes consisted of the following for the years ended December 31 (in millions):


	2016			2015			2014
Current:
Federal	$	443		$	192		$	414
State		88			50			61
Foreign		38			36			56

		569			278			531

Deferred:
Federal		57			43			(89	)
State		17			(17	)		(33	)
Foreign		(1	)		4			4

		73			30			(118	)

Provision for income taxes	$	642		$	308		$	413

The U.S. federal statutory income tax rate is reconciled to the effective income tax rate for the years ended December 31 as follows:


	2016			2015			2014
Income tax expense at U.S. federal statutory rate		35.00	%		35.00	%		35.00	%
Federal tax credits		(3.08	)		(5.49	)		(3.21	)
Taxing authority audit settlements and other tax adjustments		(0.53	)		(2.67	)		(1.59	)
State and local income taxes, net of federal income tax benefit		3.31			3.20			1.77
Tax impact of impairments		0.80			0.23			0.46
Tax impact of divestitures		0.26			(0.34	)		(7.89	)
Tax rate differential on foreign income		(0.63	)		(0.99	)		(0.46	)
Other		0.10			0.17			(0.47	)

Provision for income taxes		35.23	%		29.11	%		23.61	%

The comparability of our provision for income taxes for the reported periods has been primarily affected by (i) variations in our income before income taxes; (ii) federal tax credits; (iii) tax audit settlements; (iv) the realization of state net operating losses and credits; (v) adjustments to our accruals and related deferred taxes and (vi) the tax implications of impairments and divestitures.

For financial reporting purposes, income before income taxes by source for the years ended December 31 was as follows (in millions):


	2016		2015		2014
Domestic	$	1,681	$	922	$	1,601
Foreign		141		138		150

Income before income taxes	$	1,822	$	1,060	$	1,751

Investments Qualifying for Federal Tax Credits — We have significant financial interests in entities established to invest in and manage low-income housing properties and a refined coal facility. We support the operations of these entities in exchange for a pro-rata share of the tax credits they generate. The low-income housing investments and the coal facility’s refinement processes qualify for federal tax credits that we expect to realize through 2020 under Section 42 and through 2019 under Section 45, respectively, of the Internal Revenue Code.

We account for our investments in these entities using the equity method of accounting, recognizing our share of each entity’s results of operations and other reductions in the value of our investments in “Equity in net losses of unconsolidated entities,” within our Consolidated Statements of Operations. During the years ended December 31, 2016, 2015 and 2014, we recognized $31 million, $30 million and $32 million of net losses and a reduction in our tax provision of $55 million, $57 million and $58 million, respectively, primarily as a result of tax credits realized from these investments. In addition, during the years ended December 31, 2016, 2015 and 2014, we recognized interest expense of $3 million, $4 million and $5 million, respectively, associated with our investment in low-income housing properties.

See Note 20 for additional information related to these unconsolidated variable interest entities.

Other Federal Tax Credits — During 2016, 2015 and 2014, we recognized federal tax credits in addition to the tax credits realized from our investments in low-income housing properties and the refined coal facility, resulting in a reduction to our provision for income taxes of $14 million, $15 million and $13 million, respectively.

Tax Audit Settlements — We file income tax returns in the United States and Canada, as well as various state and local jurisdictions. We are currently under audit by the IRS, Canada Revenue Agency and various state and local taxing authorities. Our audits are in various stages of completion.

During 2016, 2015 and 2014, we settled various tax audits. The settlement of these tax audits resulted in a reduction to our provision for income taxes of $11 million, $10 million and $12 million for the years ended December 31, 2016, 2015 and 2014, respectively.

We participate in the IRS’s Compliance Assurance Process, which means we work with the IRS throughout the year in order to resolve any material issues prior to the filing of our annual tax return. We are currently in the examination phase of IRS audits for the tax years 2014, 2015, 2016 and 2017 and expect these audits to be completed within the next nine, 12, 18 and 30 months, respectively. We are also currently undergoing audits by various state and local jurisdictions for tax years that date back to 2009, with the exception of affirmative claims in a limited number of jurisdictions that date back to 2000.

State Net Operating Losses and Credits — During 2016, 2015 and 2014, we recognized state net operating losses and credits resulting in a reduction to our provision for income taxes of $10 million, $17 million and $16 million, respectively.

Adjustments to Accruals and Related Deferred Taxes — Adjustments to our accruals and related deferred taxes due to the filing of our income tax returns and changes in state laws resulted in a reduction of $10 million, $18 million and $24 million to our provision for income taxes for the years ended December 31, 2016, 2015 and 2014, respectively.

Tax Implications of Impairments — A portion of the impairment charges recognized in 2016, 2015 and 2014 are not deductible for tax purposes. Had the charges been fully deductible, our provision for income taxes would have been reduced by $15 million, $2 million and $8 million for the years ended December 31, 2016, 2015 and 2014, respectively. See Note 13 for more information related to our impairment charges.

Tax Implications of Divestitures — During 2014, the Company recorded a net gain of $515 million primarily related to the divestiture of our Wheelabrator business, our Puerto Rico operations and certain landfill and collection operations in our Eastern Canada Area. Had this net gain been fully taxable, our provision for income taxes would have increased by $138 million. During 2015, the Company recorded an additional $10 million net gain primarily related to post-closing adjustments on the Wheelabrator divestiture and had this gain been fully taxable, our provision for income taxes would have increased by $4 million. During 2016, the Company recorded a loss of $9 million related to the divestiture of certain asset and had the associated tax loss been fully deductible, our provision for income taxes would have decreased by $5 million. See Note 19 for more information related to our divestitures.

Unremitted Earnings in Foreign Subsidiaries — At December 31, 2016, remaining unremitted earnings in foreign operations were approximately $950 million, which are considered permanently invested and, therefore, no provision for U.S. income taxes were accrued for these unremitted earnings. Determination of the unrecognized deferred U.S. income tax liability is not practicable due to uncertainties related to the timing and source of any potential distribution of such funds, along with other important factors such as the amount of associated foreign tax credits.

Deferred Tax Assets (Liabilities)

The components of net deferred tax assets (liabilities) at December 31 are as follows (in millions):


	2016			2015
Deferred tax assets:
Net operating loss, capital loss and tax credit carry-forwards	$	285		$	280
Landfill and environmental remediation liabilities		116			120
Miscellaneous and other reserves, net		355			373

Subtotal		756			773
Valuation allowance		(292	)		(273	)
Deferred tax liabilities:
Property and equipment		(728	)		(709	)
Goodwill and other intangibles		(1,218	)		(1,182	)

Net deferred tax liabilities	$	(1,482	)	$	(1,391	)

The valuation allowance increased by $19 million in 2016 primarily due to changes in our capital loss and state net operating loss carry-forwards, as well as the tax impacts of impairments.

At December 31, 2016, we had $25 million of federal net operating loss carry-forwards and $2.0 billion of state net operating loss carry-forwards. The federal and state net operating loss carry-forwards have expiration dates through the year 2036. We also had $453 million of federal capital loss carry-forwards which expire in 2019 and 2021 and $24 million of state tax credit carry-forwards.

We have established valuation allowances for uncertainties in realizing the benefit of certain tax loss and credit carry-forwards and other deferred tax assets. While we expect to realize the deferred tax assets, net of the valuation allowances, changes in estimates of future taxable income or in tax laws may alter this expectation.

Liabilities for Uncertain Tax Positions

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, including accrued interest is as follows (in millions):


	2016			2015			2014
Balance at January 1	$	71		$	42		$	49
Additions based on tax positions related to the current year		19			18			9
Additions based on tax positions of prior years		4			21			2
Accrued interest		2			2			1
Reductions for tax positions of prior years		(7	)		(1	)		—
Settlements		—			(3	)		(11	)
Lapse of statute of limitations		(7	)		(8	)		(8	)

Balance at December 31	$	82		$	71		$	42

These liabilities are included as a component of long-term “Other liabilities” in our Consolidated Balance Sheets because the Company does not anticipate that settlement of the liabilities will require payment of cash within the next 12 months. As of December 31, 2016, $69 million of net unrecognized tax benefits, if recognized in future periods, would impact our effective tax rate.

We recognize interest expense related to unrecognized tax benefits in our provision for income taxes. During the years ended December 31, 2016, 2015 and 2014, we recognized $2 million, $2 million and $1 million, respectively, of such interest expense as a component of our provisions for income taxes. We had $5 million and $3 million of accrued interest expense in our Consolidated Balance Sheets as of December 31, 2016 and 2015, respectively. We did not have any accrued liabilities or expense for penalties related to unrecognized tax benefits for the years ended December 31, 2016, 2015 and 2014.

We are not able to reasonably estimate when we might make any cash payments required to settle these liabilities, but we do not believe that the ultimate settlement of our obligations will materially affect our liquidity. As of December 31, 2016, we anticipate that approximately $7 million of liabilities for unrecognized tax benefits, including accrued interest, and $3 million of related tax assets may be reversed within the next 12 months. The anticipated reversals primarily relate to miscellaneous state tax items, each of which is individually insignificant. The recognition of the unrecognized tax benefits is expected to result from tax audit settlements or the expiration of the applicable statute of limitations period.