DAVEY TREE EXPERT CO - 10-K filing on 2015-03-10

Income Taxes

12 Months Ended

Dec. 31, 2014

Income before income taxes was attributable to the following sources:



	Year Ended December 31,
	2014		2013		2012
United States	$	30,380	$	29,203	$	35,414
Canada	7,920		6,362		5,244
Total	$	38,300	$	35,565	$	40,658


Q.	Income Taxes (continued)

The provision for income taxes follows:



	Year Ended December 31,
	2014			2013		2012
Currently payable:
Federal	$	13,159		$	7,089	$	15,853
State	2,524			2,183		2,239
Canadian	2,127			1,724		1,578
Total current	17,810			10,996		19,670
Deferred taxes	(2,679		)	1,716		(3,607		)
Total taxes on income	$	15,131		$	12,712	$	16,063

A reconciliation of the expected statutory U.S. federal rate to our actual effective income tax rate follows:



	Year Ended December 31,
	2014		2013		2012
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	3.9		3.6		3.9
Effect of Canadian income taxes	(1.7	)	(1.6	)	(1.0	)
Nondeductible expenses	1.9		1.9		1.4
ESOP dividend deduction	(.7	)	(.8	)	(.7	)
Audit settlements and uncertain tax adjustments	1.6		(2.2	)	1.8
All other, net	(.5	)	(.2	)	(.9	)
Effective income tax rate	39.5	%	35.7	%	39.5	%

Deferred income taxes reflect the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is recorded when it is more-likely-than-not that an income tax benefit will not be realized.

Significant components of our current net deferred tax assets and liabilities at December 31, were as follows:



	December 31,
	2014			2013
Deferred tax assets:
Accrued compensation obligations	$	3,090		$	1,883
Self-insurance accruals	8,107			7,693
Prepaid expenses	(3,160		)	(2,565		)
Other, net	1,102			908
	9,139			7,919
Less deferred tax asset valuation allowance	212			204
Net deferred income tax assets--current	$	8,927		$	7,715


Q.	Income Taxes (continued)

Significant components of our noncurrent net deferred tax assets and liabilities at December 31, were as follows:



	December 31,
	2014		2013
Deferred tax assets:
Self-insurance accruals	$	12,554	$	12,129
Accrued expenses and other liabilities	1,388		895
Accrued stock compensation	1,642		1,550
Defined benefit pension plans	4,573		1,873
Foreign tax credit carryforward	768		768
Other future deductible amounts, net	2,030		1,737
	22,955		18,952
Less deferred tax asset valuation allowance	556		564
	22,399		18,388
Deferred tax liabilities:
Intangibles	269		234
Property and equipment	20,425		20,718
	20,694		20,952
Net deferred tax assets--noncurrent	$	1,705
Net deferred tax liabilities--noncurrent			$	2,564

We treat all of our Canadian subsidiary earnings through December 31, 2014 as permanently reinvested and have not provided any U.S. federal or state tax thereon. As of December 31, 2014, approximately $30,459 of undistributed earnings attributable to our Canadian operations was considered to be indefinitely invested. Presently, our intention is to reinvest the earnings permanently.

If, in the future, these earnings are distributed to the U.S. in the form of dividends or otherwise, or if the Company determines such earnings will be remitted in the foreseeable future, the Company would be subject to U.S. income taxes and Canadian withholding taxes. It is not practicable to estimate the amount of taxes that would be payable upon remittance of these earnings given the various tax planning alternatives that we could employ should we decide to repatriate those earnings.

A deferred tax asset has been recorded for the portion of the foreign tax credit that is unavailable in the current year--the foreign tax credit carryforward arising in 2010--wherein we repatriated earnings of our Canadian operations due to capital in Canada in excess of current and future projected needs. As a result, we recognized and recorded in 2010 additional U.S. federal and state taxes that were payable as a result of the repatriation of the previously undistributed earnings. A valuation allowance is required when it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized. Because of the uncertainty regarding realization, a valuation allowance equal to the U.S. tax benefit of the foreign tax credit carryforward is recorded--$768 at December 31, 2014--which is subject to expiration in 2020, if not utilized.


Q.	Income Taxes (continued)

The amount of income taxes we pay is subject to audit by U.S. federal, state, local and Canadian tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. Uncertain tax positions are recognized only if they are more-likely-than-not to be upheld during examination based on their technical merits. The measurement of the uncertain tax position is based on the largest benefit amount that is more-likely-than-not (determined on a cumulative probability basis) to be realized upon settlement of the matter. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate settlement, a further charge to expense may result.

The balance of unrecognized benefits and the amount of related interest and penalties at December 31, were as follows:



	December 31,
	2014		2013
Unrecognized tax benefits	$	1,949	$	1,221
Portion, if recognized, would reduce tax expense and effective tax rate	1,512		942
Accrued interest on unrecognized tax benefits	77		41
Accrued penalties on unrecognized benefits	—		—

We recognize interest accrued related to unrecognized tax benefits in income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense.

The Company is routinely under audit by U.S. federal, state, local and Canadian authorities in the area of income tax. These audits include questioning the timing and the amount of income and deductions and the allocation of income and deductions among various tax jurisdictions. During the fourth quarter 2013, the U.S. Internal Revenue Service completed its audit of the Company's U.S. income tax returns for 2010 and 2011 and, during 2010, Canada Revenue Agency completed its audit of the Company's Canadian operations for 2006, 2007 and 2008. With the exception of U.S. state jurisdictions, the Company is no longer subject to examination by tax authorities for the years through 2009. As of December 31, 2014, we believe it is reasonably possible that the total amount of unrecognized tax benefits will not significantly increase or decrease.

The changes in our unrecognized tax benefits are summarized in the table below:



	Year Ended December 31,
	2014			2013			2012
Balance, beginning of year	$	1,221		$	2,638		$	1,825
Additions based on tax positions related to the current year	587			370			667
Additions for tax positions of prior years	234			133			149
Reductions for tax positions of prior years	(79		)	(1,155		)	(3		)
Reductions related to settlements with taxing authorities	—			(460		)	—
Lapses in statutes of limitations	(14		)	(305		)	—
Balance, end of year	$	1,949		$	1,221		$	2,638