Waste Management 2007 Annual Report Download - page 75

Section 45K credits generated during 2007 could further impact the equity in losses of the facilities we recognized
for 2007. Any subsequent adjustment to the amount of realizable Section 45K credits and related equity losses will
be reflected in our 2008 Consolidated Financial Statements.
As of December 31, 2006, we had estimated that 36% of Section 45K tax credits generated during 2006 would
be phased out. On April 4, 2007, the IRS established the final phase-out of Section 45K credits generated during
2006 at approximately 33%. We did not experience any phase-out of Section 45K tax credits in 2005.
In addition, the facilities temporarily suspended operations in May 2006, reducing our obligations associated
with funding the facilities’ losses for the year ended December 31, 2006. During the second quarter of 2006, we also
recognized a cumulative adjustment necessary to appropriately reflect our life-to-date obligations to fund the costs
of operating the facilities and the value of our investment.
Minority Interest
On December 31, 2003, we consolidated two limited liability companies that own three waste-to-energy
facilities operated by our Wheelabrator Group as a result of our implementation of FIN 46(R). Our minority interest
expense for 2007, 2006 and 2005 is primarily related to the other members’ equity interest in the earnings of these
entities. Additional information related to these investments is included in Note 19 to the Consolidated Financial
Statements.
Provision for (Benefit from) Income Taxes
We recorded a provision for income taxes of $540 million in 2007 and $325 million in 2006, and a benefit from
income taxes of $90 million in 2005. These tax provisions resulted in an effective income tax rate of approximately
31.7%, 22.1% and (8.2)% for each of the three years, respectively. The comparability of our reported income taxes
for the years ended December 31, 2007, 2006 and 2005 is primarily affected by (i) increases in our income before
taxes and (ii) differences in the impacts of tax audit settlements and non-conventional fuel tax credits, which are
discussed in more detail below. Other items that have affected our reported income taxes during the reported periods
include the following:
• Canadian tax rate changes and the related revaluation of deferred tax balances resulted in a $30 million tax
benefit during 2007 compared with a $20 million tax benefit in 2006 and $4 million of additional income tax
expense in 2005.
• We recorded reductions to income tax expense of $9 million in 2007, $20 million in 2006 and $16 million in
2005 due to state-related tax items. These impacts were generally due to either (i) the revaluation of net
accumulated deferred tax liabilities as a result of a decrease in our effective state tax rate or (ii) reductions in
our valuation allowance related to the expected utilization of state net operating loss and credit
carryforwards.
• In 2005, we recognized $34 million of tax expense for the repatriation of net accumulated earnings and
capital from certain of our Canadian subsidiaries in accordance with the American Jobs Creation Act of
2004.
The impacts of tax audit settlements and non-conventional fuel tax credits, which are the items that had the
most significant impacts on the comparability of our effective tax rate during the years ended December 31, 2007,
2006 and 2005, are summarized below:
•Tax audit settlements — When excluding the effect of interest income, the settlement of various federal and
state tax audits resulted in a reduction in income tax expense of $40 million for the year ended December 31,
2007 (representing a 2.3 percentage point reduction in our effective tax rate), $149 million for the year ended
December 31, 2006 (representing a 10.1 percentage point reduction in our effective tax rate) and
$398 million for the year ended December 31, 2005 (representing a 36.4 percentage point reduction in
our effective tax rate).
•Non-conventional fuel tax credits — Non-conventional fuel tax credits are derived from our landfills and our
investments in the two coal-based, synthetic fuel production facilities discussed in the Equity in net losses of
unconsolidated entities section above. Pursuant to Section 45K of the Internal Revenue Code, these tax
credits are phased-out if the price of oil exceeds an annual average as determined by the IRS. Based on an
40