INCOME TAXES

Benefit

The benefit from income taxes from continuing operations is as follows (in millions):



	Year Ended December 31,
	2017			2016
Current:
Federal	$	—		$	—
State and local	(0.1		)	(0.6		)
Foreign	—			—
	(0.1		)	(0.6		)
Deferred:
Federal	—			—
State and local	—			—
Foreign	—			—
	—			—
	$	(0.1	)	$	(0.6	)

Deferred Taxes

Future tax consequences of temporary differences between the carrying amounts for financial reporting purposes and the Company’s estimate of the tax bases of its assets and liabilities result in deferred tax assets and liabilities, as follows (in millions):



	December 31,
	2017			2016
Deferred tax assets:
Employee benefits costs	$	79.9		$	142.3
Inventory	2.4			—
Property, plant and equipment	187.0			318.8
Net operating loss and credit carryforwards	166.9			254.9
Accrued expenses	0.9			7.9
Long-term debt and financing costs	17.3			8.0
Other	5.5			8.6
	459.9			740.5
Valuation allowance	(440.7		)	(702.2		)
Deferred tax assets, net of valuation allowance	$	19.2		$	38.3

Deferred tax liabilities:
Inventory	$	—		$	2.6
Intangible assets	17.7			33.0
Prepaid expenses	1.5			2.7
Deferred tax liabilities	$	19.2		$	38.3
	$	—		$	—

The valuation allowance reduces the net deferred tax assets to their net realizable value. There is a full valuation allowance against net deferred taxes due to annual operating losses since 2011 and substantial uncertainty to generate future taxable income that would lead to realization of the net deferred tax assets. When a change in the tax rate or tax law has an impact on deferred taxes, we apply the change based on the years in which the deferred taxes are expected to reverse. We record the impact of the change in our consolidated financial statements in the period of enactment. The decrease in net deferred tax assets before valuation allowance results primarily from the provisional remeasurement at 21% in accordance with the Tax Cut and Jobs Act of 2017 (the “Tax Act”). The ultimate realization of the net deferred tax assets is dependent upon generating sufficient taxable income in future years when deferred tax assets are recoverable or are expected to reverse.

Centrus has federal net operating losses of $789.7 million that currently expire through 2037. The federal net operating losses as well as other tax attributes consisting primarily of tax basis in property of approximately $15.3 million have been reduced as a result of Centrus’ cancellation of debt income in 2014 of approximately $340 million as prescribed by Internal Revenue Code Section 108. Centrus also has state net operating losses of $18.1 million that currently expire through 2037. The deferred tax assets for state net operating losses and state unrealized built-in loss deductions have been reduced as a result of Centrus’ tax ownership change and cancellation of debt income in 2014.

Centrus experienced an ownership change as defined under Internal Revenue Code Section 382 on September 30, 2014 when it emerged from bankruptcy. Generally, after an ownership change, the use of federal and state net operating loss carryforwards and tax credits generated prior to the ownership change are subject to an annual limitation. However, there is an exception available to qualifying corporations that eliminates the annual limitation. Centrus can utilize this exception for federal purposes, but not for state purposes. The pre-apportioned annual state limitation is $2.9 million. Centrus also had an unrealized built-in loss as of the ownership change date. To the extent this built-in loss is recognized during the five-year post-ownership change period through certain depreciation and loss deductions, the same annual limitation for loss and tax credit carryforwards also applies generally to a built-in loss when it is recognized, unless the exception applies. Centrus can utilize the same exception for federal purposes when the built-in loss is recognized, but not for state purposes. To the extent the built-in loss is recognized during the five-year post-ownership change period, the same pre-apportioned state limitation will apply so that the combination of loss carryforwards and recognized built-in losses cannot exceed $2.9 million annually.

Effective Tax Rate

A reconciliation of income taxes calculated based on the federal statutory income tax rate of 35% and the effective tax rate follows:



	Year Ended December 31,
	2017		2016
Federal statutory tax rate	35	%	35	%
Gain on early extinguishment of debt	(268	)	6
Tax Cuts and Jobs Act of 2017	2,382		—
Interest expense	4		(3	)
Other non-deductible expenses	1		—
Valuation allowance against net deferred tax assets	(2,156	)	(36	)
State income tax expense, net of federal benefit	1		(1	)
Effective tax rate	(1	)%	1	%

The Tax Act enacted on December 22, 2017 reduced the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. The SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification 740, Income Taxes (“ASC 740”). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, but it can determine a reasonable estimate, it must record a provisional estimate in the financial statements.

As a result of the reduction of the federal corporate income tax rate, the net deferred tax assets have been remeasured as of December 31, 2017. Primarily as a result of the provisional remeasurement, the effective tax rate for the year ended December 31, 2017 includes a decrease to the net deferred tax assets of $288.9 million, or an increase to the effective tax rate of 2,382%. The effective tax rate also includes a decrease to the valuation allowance against net deferred tax assets of $261.5 million, or a decrease to the effective tax rate of (2,156)% and an adjustment to the gain on early extinguishment of debt of $32.5 million or a decrease to the effective tax rate of (268)%. The Tax Act did not affect the income tax provision for the year ended December 31, 2017. The adjustments to net deferred tax assets are provisional amounts based on information available as of December 31, 2017. We will recognize any changes to the provisional amounts as we refine our estimates of net deferred assets and the application of the Tax Act. We expect to complete our analysis of the provisional items during the second half of 2018.

The effective tax rate for the year ended December 31, 2016, includes an adjustment to the valuation allowance against net deferred tax assets of $24.4 million, or a decrease to the effective tax rate of 36% and an adjustment to the gain on early extinguishment of debt of $4.1 million or an increase to the effective tax rate of 6%.

Uncertain Tax Positions

Accounting standards require that a tax position meet a minimum recognition threshold in order for the related tax benefit to be recognized in the financial statements. The liability for unrecognized tax benefits, included in Other Long-Term Liabilities, was $0.3 million as of December 31, 2017, and $0.4 million as of December 31, 2016. If recognized, these tax benefits would impact the effective tax rate. As a result of changes to unrecognized tax benefits, the income tax provision (state tax, net of federal benefit) decreased $0.1 million during the year ended December 31, 2017, and $0.4 million during the year ended December 31, 2016. The liability for unrecognized tax benefits in the table below relates to unrecognized state income tax benefits. Centrus believes that the liability for unrecognized tax benefits will not change significantly in the next 12 months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits follows (in millions):



	Year Ended December 31,
	2017			2016
Balance at beginning of the period	$	0.4		$	1.0
Additions to tax positions of current period	0.1			—
Reductions to tax positions of prior years	(0.2		)	(0.6		)
Balance at end of the period	$	0.3		$	0.4

Centrus and its subsidiaries file income tax returns with the U.S. government and various states and foreign jurisdictions. The IRS started an examination of Centrus’ 2008 through 2011 federal income tax returns during 2012 that was completed in the second quarter of 2014 with no adjustment to the reported tax. As of December 31, 2017, the federal and Maryland statutes of limitation are closed with respect to all tax years through 2013, and the Kentucky statute of limitations is closed with respect to all tax years through 2012.

Centrus recognizes accrued interest related to uncertain tax positions as a component of interest expense. Reversals of previously accrued interest for income taxes is typically offset against interest expense, but if the amount is significant, it is reclassified to interest income in the consolidated statement of operations. Centrus recognizes the increase or decrease of accrued penalties for income taxes as a component of selling, general and administrative expense in the consolidated statement of operations.

The impact of accrued interest and penalties for income taxes in the consolidated statement of operations was a reduction to expenses of $0.1 million for the years ended December 31, 2017 and 2016. Accrued interest and penalties for income taxes, included as a component of Other Long-Term Liabilities, totaled less than $0.1 million as of December 31, 2017, and $0.1 million as of December 31, 2016.