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Income Taxes

12 Months Ended

Sep. 30, 2020

14. Income Taxes

Income before income taxes included income from domestic operations of $52.9 million, $133.0 million, and $100.9 million for fiscal years ended September 30, 2020, 2019 and 2018 and income from foreign operations of $179.7 million, $116.2 million, and $111.3 million for fiscal years ended September 30, 2020, 2019 and 2018.

Income tax (benefit) expense was comprised of:


	Fiscal Year Ended
	September 30,		September 30,		September 30,
	2020		2019		2018

	(in millions)
Current:
Federal	$	21.8	$	(17.3)	$	(159.7)
State		12.7		29.8		2.3
Foreign		55.7		41.7		51.1
Total current income tax expense (benefit)		90.2		54.2		(106.3)
Deferred:
Federal		(21.8)		(26.1)		119.6
State		12.8		(24.6)		4.1
Foreign		(35.4)		10.0		(20.9)
Total deferred income tax (benefit) expense		(44.4)		(40.7)		102.8
Total income tax (benefit) expense	$	45.8	$	13.5	$	(3.5)

The major elements contributing to the difference between the U.S. federal statutory rate of 21% for fiscal years ended September 30, 2020 and 2019 and 24.5% for fiscal year ended September 30, 2018, respectively, and the effective tax rate are as follows:


	Fiscal Year Ended
	September 30,				September 30,				September 30,
	2020				2019				2018
	Amount		%		Amount		%		Amount		%

	(in millions)
Tax at federal statutory rate	$	48.8	21.0	%	$	52.0	21.0	%	$	52.4	24.5	%
State income tax, net of federal benefit		8.4	3.6			7.0	2.8			(1.3)	(0.6)
Foreign residual income		39.5	17.0			35.8	14.5			9.9	4.6
Nondeductible costs		15.8	6.8			7.6	3.1			2.5	1.2
Return to provision		5.1	2.2			(0.2)	(0.1)			(21.2)	(9.9)
Foreign tax rate differential		3.2	1.4			(3.1)	(1.3)			(0.7)	(0.3)
Income tax credits and incentives		(47.8)	(20.6)			(44.7)	(18.1)			(28.6)	(13.4)
Valuation allowance		(15.9)	(6.9)			(26.5)	(10.7)			37.8	17.7
Change in uncertain tax positions		(8.3)	(3.6)			5.6	2.3			(26.0)	(12.2)
Exclusion of tax on non-controlling interests		(3.4)	(1.5)			(5.3)	(2.1)			(5.0)	(2.3)
Tax exempt income		(5.1)	(2.2)			(3.9)	(1.6)			(7.4)	(3.5)
Audit settlement		—	—			(4.6)	(1.9)			(27.7)	(13.0)
Impact of changes in tax law		—	—			(1.5)	(0.6)			12.5	5.9
Other items, net		5.5	2.5			(4.7)	(1.9)			(0.7)	(0.4)
Total income tax expense (benefit)	$	45.8	19.7	%	$	13.5	5.4	%	$	(3.5)	(1.7)	%

During fiscal 2020, the Company approved a tax planning strategy and restructured certain operations in Canada which resulted in a release of a valuation allowance related to net operating losses and other deferred tax assets of $31.7 million. The Company is now forecasting the utilization of the net operating losses within the foreseeable future. The new positive evidence was evaluated against any negative evidence to determine the valuation allowance was no longer needed.

During fiscal 2018, the Company recorded a valuation allowance of $38.1 million against foreign tax credits related to deferred tax assets in the U.S. In its determination of the realizability of its deferred tax assets, the Company evaluated positive evidence consisting of forecasts of foreign tax credit utilization against future foreign source income, earnings trends over a sustainable period, positive economic conditions in the industries the Company operates in, possible prudent and feasible tax planning strategies (net of costs to implement the tax planning strategies) and actual usage of foreign tax credit carryforwards. The Company also evaluated negative evidence consisting of significant foreign tax credits and U.S. tax law changes that restrict the usage of foreign tax credits. This evaluation was conducted on a tax jurisdictional basis or legal entity basis, as applicable, and based on the weighing of all positive and negative evidence, a determination was made as to the realizability of the deferred tax assets on that same basis.

During fiscal 2019, the Company reevaluated the valuation allowance based on positive evidence and negative evidence including new positive evidence related to the issuance of regulations during the first quarter related to The Tax Cuts and Jobs Act (Tax Act) and forecasting the utilization of the foreign tax credits within the foreseeable future. Based on the weighing of all positive and negative evidence the Company determined that a valuation allowance was no longer needed and released the valuation allowance resulting in a tax benefit of $38.1 million.

During fiscal 2018, President Trump signed what is commonly referred to as the Tax Act into law. The Tax Act reduced the Company's U.S. federal corporate tax rate from 35% to a blended tax rate of 24.5% for its fiscal year ending September 30, 2018 and 21% for fiscal years thereafter, required companies to pay a one-time transition tax on accumulated earnings of foreign subsidiaries, created new taxes on foreign sourced earnings and eliminated or reduced deductions.

During fiscal 2018, the Company recorded tax expense of $38.9 million related to the remeasurement of its U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. In addition, the Company released the deferred tax liability and recorded a tax benefit related to foreign subsidiaries for which the undistributed earnings are not intended to be reinvested indefinitely for $79.8 million and accrued $53.4 million of tax expense related to the one-time transition tax. During fiscal 2019, the Company completed the calculation of the total foreign earnings and profits of foreign subsidiaries and recorded a tax benefit of $1.5 million.

During fiscal 2018, the Company had a favorable settlement for R&D credits and recorded a tax benefit of $19.9 million. In addition, the Company effectively settled the U.S. federal income tax examination for URS pre-acquisition tax years 2012, 2013 and 2014 and recorded an additional benefit of $27.7 million related to various adjustments.

The Company is currently under tax audit in several jurisdictions including the U.S and believe the outcomes which are reasonably possible within the next twelve months, including lapses in statutes of limitations, could result in adjustments, but will not result in a material change in the liability for uncertain tax positions.

Generally, the Company would reverse its valuation allowance in a particular tax jurisdiction if the positive evidence examined, such as projected and sustainable earnings or a tax-planning strategy that allows for the usage of the deferred tax asset, is sufficient to overcome significant negative evidence, such as large net operating loss carryforwards or a cumulative history of losses in recent years. In the United States, the valued deferred tax assets have a restricted life or use under relevant tax law and, therefore, it is unlikely that the valuation allowance related to these assets will reverse. In addition, the Company is continually investigating tax planning strategies that, if prudent and feasible, may be implemented to realize a deferred tax asset that would otherwise expire unutilized. The identification and internal/external approval (as relevant) of such a prudent and feasible tax planning strategy could cause a reduction in the valuation allowance.

The deferred tax assets (liabilities) are as follows:


	Fiscal Year Ended
	September 30,		September 30,
	2020		2019

	(in millions)
Deferred tax assets:
Compensation and benefit accruals not currently deductible	$	119.4	$	98.0
Net operating loss carryforwards		173.2		132.6
Self-insurance reserves		17.6		11.3
Research and experimentation and other tax credits		112.9		138.5
Pension liability		95.1		78.2
Accrued liabilities		303.2		97.2
Capital loss carryforward		104.8		—
Other		26.0		14.8
Total deferred tax assets		952.2		570.6
Deferred tax liabilities:
Unearned revenue		(40.3)		(53.4)
Depreciation and amortization		(106.7)		(76.3)
Acquired intangible assets		(24.5)		(25.1)
Investment in subsidiaries		(10.9)		(10.9)
Right of use assets		(164.9)		—
Contingent consideration		(33.6)		—
Total deferred tax liabilities		(380.9)		(165.7)
Valuation allowance		(217.5)		(120.6)
Net deferred tax assets	$	353.8	$	284.3

As of September 30, 2020 and 2019, the Company has available unused foreign and state net operating loss (NOL) carryforwards of $710.2 million and $505.3 million, respectively, which expire at various dates over the next several years and capital loss carryforwards of $355.7 million which expire in 2025; some foreign NOL carryforwards never expire. In addition, as of September 30, 2020, the Company has unused federal and state research and development credits of $71.2 million and $27.2 million, respectively, and other credits of $14.5 million which expire at various dates over the next several years.

As of September 30, 2020 and 2019, gross deferred tax assets were $952.2 million and $570.6 million, respectively. The Company has recorded a valuation allowance of $217.5 million and $120.6 million at September 30, 2020 and 2019, respectively, primarily related to foreign and state net operating loss carryforwards, capital loss carryforwards, tax credits and other deferred tax assets. The Company has performed an assessment of positive and negative evidence, including the nature, frequency, and severity of cumulative financial reporting losses in recent years, the future reversal of existing temporary differences, predictability of future taxable income exclusive of reversing temporary differences of the character necessary to realize the asset, relevant carryforward periods, taxable income in carry-back years if carry-back is permitted under tax law, and prudent and feasible tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax asset that would otherwise expire. Although realization is not assured, based on the Company’s assessment, the Company has concluded that it is more likely than not that the remaining gross deferred tax asset (exclusive of deferred tax liabilities) of $734.7 million will be realized and, as such, no additional valuation allowance has been provided. The net increase in the valuation allowance of $96.9 million is primarily attributable to an increase in valuation allowances of $71.2 million related to capital losses, partially offset by the release of a valuation allowance of $31.7 million related to net operating losses and other deferred tax assets in Canada, the utilization of $1.5 million of foreign net operating loss carryforwards in the current year and increases in valuation allowances for unbenefitable losses.

Generally, the Company does not provide for U.S. taxes or foreign withholding taxes on gross book-tax differences in its non-U.S. subsidiaries because such basis differences of approximately $1.5 billion are able to and intended to be reinvested indefinitely. If these basis differences were distributed, foreign tax credits could become available under current law to partially or fully reduce the resulting U.S. income tax liability. There may also be additional U.S. or foreign income tax liability upon repatriation, although the calculation of such additional taxes is not practicable.

As of September 30, 2020 and 2019, the Company had a liability for unrecognized tax benefits, including potential interest and penalties, net of related tax benefit, totaling $65.8 million and $70.1 million, respectively. The gross unrecognized tax benefits as of September 30, 2020 and 2019 were $47.1 million and $55.7 million, respectively, excluding interest, penalties, and related tax benefit. Of the $47.1 million, approximately $29.5 million would be included in the effective tax rate if recognized. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:


	Fiscal Year Ended
	September 30,		September 30,
	2020		2019

	(in millions)
Balance at the beginning of the year	$	55.7	$	53.8
Gross increase in current period’s tax positions		2.8		2.9
Gross increase in prior years’ tax positions		—		0.8
Gross decrease in prior years’ tax positions		(7.9)		(1.0)
Decrease due to settlement with tax authorities		(0.5)		—
Decrease due to lapse of statute of limitations		(3.5)		—
Gross change due to foreign exchange fluctuations		0.5		(0.8)
Balance at the end of the year	$	47.1	$	55.7

The Company classifies interest and penalties related to uncertain tax positions within the income tax expense line in the accompanying consolidated statements of operations. As of September 30, 2020, the accrued interest and penalties were $18.9 million and $2.7 million, respectively, excluding any related income tax benefits. At September 30, 2019, the accrued interest and penalties were $20.3 million and $4.3 million, respectively, excluding any related income tax benefits.

The Company files income tax returns in numerous tax jurisdictions, including the U.S., and numerous U.S. states and non-U.S. jurisdictions around the world. The statute of limitations varies by jurisdiction in which the Company operates. Because of the number of jurisdictions in which the Company files tax returns, in any given year the statute of limitations in certain jurisdictions may expire without examination within the 12-month period from the balance sheet date.

While it is reasonably possible that the total amounts of unrecognized tax benefits could significantly increase or decrease within the next twelve months, an estimate of the range of possible change cannot be made.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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