American Home Shield 2006 Annual Report Download - page 57

Notes to the Consolidated Financial Statements
nature, the ultimate outcome of this IRS examination is not known at this time.
The reconciliation of income tax computed at the U.S. federal statutory tax rate to the Company's effective income tax rate for
continuing operations is as follows:
2005 2004 2003
Tax at U.S. federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes net of U.S. federal benefit 3.3 3.6 6.5
Adjustment relating to the IRS agreement — (55.3) —
Tax credits (1.0) (0.7) (2.2)
Impairment of non-deductible goodwill — — 71.8
Other 1.4 0.5 (6.4)
Effective rate 38.7% (16.9%) 104.7%
The effective tax rate for businesses held pending sale and discontinued operations was tax expense of 39.5% in 2005 and tax
benefits of 72.7% and 21.0% in 2004 and 2003, respectively. In 2005, the difference between these rates and the federal statutory
tax rate of 35% reflects state taxes, net of federal benefit, and permanent items.
Income tax expense from continuing operations is as follows:
(In thousands)
2005
Current Deferred Total
U.S. federal $ 12,393 $ 87,813 $ 100,206
State and local 1,723 12,208 13,931
$ 14,116 $ 100,021 $ 114,137
2004
Current Deferred Total
U.S. federal $ 129,943 $ (155,901) $ (25,958)
State and local 10,429 (30,250) (19,821)
$ 140,372 $ (186,151) $ (45,779)
2003
Current Deferred Total
U.S. federal $ (35,646) $ 84,767 $ 49,121
State and local (4,060) 9,655 5,595
$ (39,706) $ 94,422 $ 54,716
Deferred income tax expense results from timing differences in the recognition of income and expense for income tax and financial
reporting purposes. Deferred income tax balances reflect the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting and income tax purposes. The deferred tax asset primarily reflects the impact of
future tax deductions related to the Company's accruals and net operating losses. Management believes that, based upon its history
of profitable operations, it is probable that its deferred tax assets will be realized, primarily from the generation of future taxable
income. The deferred tax liability is primarily attributable to the basis differences related to intangible assets. The Company records
its deferred tax items based on the estimated value of the tax basis.
In 2002, the Company adopted SFAS 142 which eliminated the requirement to record in the financial statements amortization
expense related to goodwill and intangible assets with indefinite lives. The Company is able to continue to amortize the intangible
assets for tax purposes which will yield an average annual tax benefit of approximately $57 million through 2012. Subsequent to
2012, the benefit from the step-up in tax basis that resulted from reincorporation will be fully amortized. The Company estimates
that the divestitures of ARS and AMS will result in a reduction of approximately $4 million in the average annual cash tax benefits,
however, the cash tax benefits in the year of divestiture will increase such that the aggregate tax benefits are unchanged.
Accounting standards require that the Company recognize deferred taxes relating to the differences between the financial reporting
and tax basis of the assets. As the annual tax benefit from the amortization expense is realized, the deferred tax liability increases,
reflecting the declining tax basis compared to the non-amortized book basis. Significant components of the Company's deferred tax
balances are as follows:
(In thousands) 2005 2004
Deferred tax assets (liabilities):
Current:
Prepaid expenses $ (14,000) $ (11,300)
Receivables allowances 12,750 15,700
Accrued insurance expenses 11,500 22,900
Net operating loss and tax credit carryforwards 2,800 40,640
Other accrued expenses 22,000 40,840
Total current asset 35,050 108,780
Long-Term:
Intangible assets (1) (146,200) (88,500)
Accrued insurance expenses 6,000 3,600
Net operating loss and tax credit carryforwards 22,500 10,100
Other long-term obligations 4,400 (13,300)