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Income Taxes

12 Months Ended

Dec. 31, 2019

Note 14. Income Taxes

Selected Information Related to Income Taxes. Significant components of (Loss) Income before income taxes are as follows (in thousands):

	Year Ended December 31,
	2019			2018		2017
U.S.	$	(476,925	)	$	56,114	$	122,162
Non-U.S.		1,646			815		—
(Loss) income before income taxes	$	(475,279	)	$	56,929	$	122,162

	Year Ended December 31,
	2019			2018		2017
Current:
U.S. federal	$	1,501		$	254	$	5,966
U.S. state and local		427			953		598
Non-U.S.		448			220		—
Total current income tax expense		2,376			1,427		6,564
Deferred:
U.S. federal		(27,692	)		11,133		(110,361	)
U.S. state and local		(4,636	)		5,560		1,516
Non-U.S.		(3	)		—		—
Total deferred income tax (benefit) expense		(32,331	)		16,693		(108,845	)
Income tax (benefit) expense	$	(29,955	)	$	18,120	$	(102,281	)

The income tax provision differed from amounts computed at the statutory federal income tax rate, as follows (in thousands, except percentage):

	Year Ended December 31,
	2019							2018					2017 ^{(1) (2)}
	$			%				$		%			$			%
Income tax provision at statutory rate	$	(99,808	)		21.0		%	$	11,955		21.0	%	$	42,757			35.0		%
Tax effect of pre-Separation earnings		—			—				—		—			(16,210	)		(13.3	)
State income taxes, net of federal income tax benefit		(5,374	)		1.1				2,668		4.7			2,294			1.9
Book impairment and other permanent differences		71,650			(15.1	)			—		—			—			—
Effect of change in apportionment factors ⁽³⁾		928			(0.2	)			3,467		6.1			—			—
Write-off of permanent outside basis difference		—			—				—		—			(50,687	)		(41.5	)
Effect of U.S. federal tax rate change ⁽⁴⁾		—			—				—		—			(80,298	)		(65.7	)
Other, net		2,649			(0.5	)			30		—			(137	)		(0.1	)
Income tax (benefit) expense	$	(29,955	)		6.3		%	$	18,120		31.8	%	$	(102,281	)		(83.7	)	%

(1)

On February 3, 2017, the Company entered into a Tax Matters Agreement with TEGNA, which governs the tax relationship between the Company and TEGNA for the tax periods through the May 31, 2017 Separation of the Company from TEGNA. Under this agreement, TEGNA is responsible for all payments of federal and state income tax due with respect to pre-closing tax liabilities. Accordingly, TEGNA prepared all federal, state and local income tax returns for the pre-closing period. Pursuant to the Tax Matters Agreement, TEGNA agreed to indemnify the Company for: (1) all pre-closing taxes, including any pre-closing taxes resulting from any audit, amendment, other change or adjustment, (2) any taxes resulting from a breach by TEGNA of any covenant in the Tax Matters Agreement and (3) any stamp, sales and use, gross receipts, value-added or other transfer taxes imposed on TEGNA on the Separation of the Company from TEGNA, any refund of pre-closing taxes, or other taxes for which TEGNA is responsible are for the benefit of, and will be paid to, TEGNA. The Company agreed to indemnify TEGNA for: (1) all post-closing taxes, (2) any taxes resulting from a breach by the Company of any covenant in the Tax Matters Agreement, (3) any tax arising from the failure or breach of any representation or covenant made by the Company which failure or breach results in the intended tax consequences of the Separation transaction not being achieved and (4) any stamp, sales and use, gross receipts, value-added or other transfer tax imposed on the Company on the Separation of the Company from TEGNA.

(2)

The income tax benefit for the year ended December 31, 2017 is based upon seven months of Cars.com, LLC activity and twelve months of DealerRater activity.

(3)

This reflects changes in apportionment factors upon the finalization of the post-Spin 2017 state tax returns in the fourth quarter of 2018.

(4)

On December 22, 2017, the U.S. government enacted comprehensive tax legislation, which made broad and complex changes to the U.S. tax code, including, but not limited to, the following that impact the Company: (1) reducing the U.S. federal corporate income tax rate from 35% to 21%; (2) enhancing and extending the option to claim accelerated depreciation deductions by allowing full expensing of qualified property through 2022; (3) limiting the deductibility of certain executive compensation; and (4) limiting certain other deductions. The Company recorded net tax expense of $80.3 million in 2017 related to the revaluation of its net deferred tax liabilities, in accordance with ASC 740.

The Company’s effective tax rate for the year ended December 31, 2019 differed from the federal statutory rate of 21%, primarily due to the tax impact of the goodwill and intangible asset impairment and other permanent differences.

The Company’s effective tax rate for the year ended December 31, 2018 differed from the federal statutory rate of 21%, primarily due to unfavorable changes in the apportionment factors upon the finalization of the post-Spin 2017 state tax returns in the fourth quarter of 2018 and state income tax expenses.

The Company’s effective tax rate for the year ended December 31, 2017 differed from the federal statutory rate of 35%, primarily due to the non-cash income tax benefits of $16 million, $51 million and $80 million related to pre-Separation earnings, of which the payments were the responsibility of TEGNA, the write-off of the permanent outside basis difference resulting from the change in the tax status of the Cars.com, LLC flow-through entity and the reduction in the corporate federal income tax rate, respectively.

Deferred Tax Assets and Liabilities. As part of the implementation of the post-Separation legal entity structure, the Company was required to record deferred tax assets and liabilities for temporary differences between financial accounting and tax reporting. Accordingly, in 2017, the Company recorded $246 million of net deferred tax liabilities associated with the outside basis difference in the Cars.com, LLC flow-through entity, with the offset recorded in TEGNA’s investment net.

In October 2017, Cars.com, LLC prospectively changed its corporate structure to convert from being taxed as a partnership to being taxed as a C corporation. As a result of the change in corporate structure, Cars.com, LLC was also required to change its reporting of deferred tax assets and liabilities. During the period, the Company recorded a $51 million non-cash write-off of the permanent outside basis difference resulting from this reporting change.

The Company has recorded deferred tax assets related to federal and state income tax net operating loss (“NOL”) carryforwards of approximately $7.1 million and $1.5 million, respectively. The federal NOL, and the majority of the state NOLs, can be carried forward indefinitely.

The Company also has recorded deferred tax assets related to federal and Illinois research and development (“R&D”) tax credit carryforwards of $1.8 million and $0.8 million, respectively. The federal and state R&D tax credits may be carried forward 20 years and 5 years, respectively.

The Company expects to fully utilize all NOL and tax credit carryforwards before the expiration of any carryforward period.

Significant components of the deferred tax assets and liabilities are as follows (in thousands):

	December 31,
	2019			2018
Deferred income tax liabilities:
Depreciation	$	(4,459	)	$	(4,629	)
Intangibles		(150,090	)		(183,632	)
Lease obligations		(3,893	)		—
Other		(1,420	)		(1,217	)
Total deferred tax liabilities	$	(159,862	)	$	(189,478	)
Deferred income tax assets:
Accrued compensation	$	5,742		$	4,098
Right of use assets		3,793			—
Unfavorable contracts liability		—			4,739
NOL and tax credit carryforwards		11,152			—
Other		6,179			2,725
Total deferred tax assets	$	26,866		$	11,562
Less: Valuation allowance		—			—
Net deferred tax liability	$	(132,996	)	$	(177,916	)

Uncertain Tax Positions. Judgment is required in evaluating tax positions and determining the provision for income taxes. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when the Company believes that certain positions might be challenged despite the Company’s belief that the tax return positions are fully supportable. The Company adjusts these reserves in light of changing facts and circumstances. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.

A summary of the Company’s uncertain tax positions is as follows (in thousands):

	Year Ended December 31,
	2019		2018
Balance as of January 1	$	595	$	—
Additions for tax positions of prior years		906		595
Income before income taxes	$	1,501	$	595

At December 31, 2019 and 2018, there are $1.5 million and $0.6 million of unrecognized tax benefits that, if recognized, would affect the annual tax rate.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2019, 2018 and 2017, amounts paid and amounts accrued for the payment of interest and penalties accrued was immaterial.

The Company files a consolidated U.S. federal income tax return as well as income tax returns in various state and local jurisdictions. The Company's tax returns are routinely audited by federal and state tax authorities and these tax audits are at various stages of completion at any given time. Generally, the Company’s tax returns open to examination by a federal or state taxing authority are for years beginning on or after December 31, 2016.