Income Taxes (Notes)

12 Months Ended

Dec. 31, 2019

INCOME TAXES

The components of pretax income for domestic and foreign operations consisted of the following:


	Year Ended December 31,
	2019		2018		2017
Domestic	$	(140)	$	213	$	362
Foreign	—		—		—
Pretax (loss) income	$	(140)	$	213	$	362

The components of income tax expense (benefit) consisted of the following:


	Year Ended December 31,
	2019		2018		2017
Current:
Federal	$	3	$	(11)	$	(8)
State	7		5		4
Foreign	2		2		2
Total current	12		(4)		(2)
Deferred:
Federal	(25)		61		(73)
State	(9)		10		9
Foreign	—		—		—
Total deferred	(34)		71		(64)
Income tax (benefit) expense	$	(22)	$	67	$	(66)

The Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), which became law on December 22, 2017, reduced the U.S. Federal corporate tax rate from 35% to 21% for tax years beginning in 2018. The $66 million income tax benefit in 2017 included a tax benefit of approximately $184 million due to the re-measurement of the Company’s net deferred tax liabilities associated with the 2017 Tax Act and a $32 million reduction in the Company's reserve for uncertain tax positions, partially offset by current operating results.

A reconciliation of the Company’s effective income tax rate at the U.S. federal statutory rate of 21% to the actual expense was as follows:


	Year Ended December 31,
	2019		2018		2017
Federal statutory rate	21	%	21	%	35	%
State and local income taxes, net of federal tax benefits	6		5		4
Impact of the 2017 Tax Act	—		—		(50)
Non-deductible equity compensation	(4)		2		—
Non-deductible executive compensation	(1)		1		—
Goodwill impairment	(3)		—		—
Meals & entertainment	(2)		—		—
Other permanent differences	(1)		1		—
Uncertain tax positions	—		(1)		(9)
Net change in valuation allowance	—		2		1
Other	—		—		1
Effective tax rate	16	%	31	%	(18)	%

Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the deferred income tax assets and liabilities, as of December 31, are as follows:


	2019		2018
Deferred income tax assets:
Net operating loss carryforwards	$	173	$	236
Tax credit carryforwards	29		24
Accrued liabilities and deferred income	77		92
Operating leases	169		—
Minimum pension obligations	18		16
Provision for doubtful accounts	7		7
Liability for unrecognized tax benefits	1		1
Interest rate swaps	12		5
Total deferred tax assets	486		381
Less: valuation allowance	(14)		(14)
Total deferred income tax assets after valuation allowance	472		367
Deferred income tax liabilities:
Depreciation and amortization	704		747
Operating leases	146		—
Prepaid expenses	8		8
Basis difference in investment in joint ventures	2		1
Other	2		—
Total deferred tax liabilities	862		756
Net deferred income tax liabilities	$	(390)	$	(389)

As of December 31, 2019, the Company had gross federal and state net operating loss carryforwards of $588 million. The federal net operating loss carryforwards expire between 2030 and 2033 and the state net operating loss carryforwards expire between 2020 and 2033.

Accounting for Uncertainty in Income Taxes

The Company utilizes the FASB guidance for accounting for uncertainty in income taxes, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company reflects changes in its liability for unrecognized tax benefits as income tax expense in the Consolidated Statements of Operations. As of December 31, 2019, the Company’s gross liability for unrecognized tax benefits was $20 million, of which $17 million would affect the Company’s effective tax rate, if recognized. The Company does not expect that its unrecognized tax benefits will significantly change over the next twelve months.

The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. Tax returns for the 2006 through 2019 tax years remain subject to examination by federal and certain state tax authorities. In significant foreign jurisdictions, tax returns for the 2015 through 2019 tax years generally remain subject to examination by their respective tax authorities. The Company believes that it is reasonably possible that the total amount of its unrecognized tax benefits could decrease by $1 million in certain taxing jurisdictions where the statute of limitations is set to expire within the next twelve months.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in interest expense and operating expenses, respectively. The Company did not recognize a change of interest expense for the year ended December 31, 2019. Additionally, the Company recognized a reduction of interest expense of $1 million for the year ended December 31, 2018 and a reduction of interest expense of $2 million for the year ended December 31, 2017.

The rollforward of unrecognized tax benefits are summarized in the table below:


Unrecognized tax benefits—January 1, 2017	$	75
Gross decreases—tax positions in prior periods	(54)
Reduction due to lapse of statute of limitations	(1)
Unrecognized tax benefits—December 31, 2017	20
Reduction due to lapse of statute of limitations	(1)
Unrecognized tax benefits—December 31, 2018	19
Gross increases—tax positions in prior periods	1
Unrecognized tax benefits—December 31, 2019	$	20

The Company is subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and recording related assets and liabilities. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities whereby the outcome of the audits is uncertain. The Company believes there is appropriate support for positions taken on its tax returns. The liabilities that have been recorded represent the best estimates of the probable loss on certain positions and are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. However, the outcomes of tax audits are inherently uncertain.

Tax Sharing Agreement

Under the Tax Sharing Agreement with Cendant, Wyndham Worldwide and Travelport, the Company is generally responsible for 62.5% of payments made to settle claims with respect to tax periods ending on or prior to December 31, 2006 that relate to income taxes imposed on Cendant and certain of its subsidiaries, the operations (or former operations) of which were determined by Cendant not to relate specifically to the respective businesses of Realogy, Wyndham Worldwide, Avis Budget or Travelport. With respect to any remaining residual legacy Cendant tax liabilities, the Company and its former parent believe there is appropriate support for the positions taken on Cendant’s tax returns. However, tax audits and any related litigation, including disputes or litigation on the allocation of tax liabilities between parties under the Tax Sharing Agreement, could result in outcomes for the Company that are different from those reflected in the Company’s historical financial statements.